FORM 10-K
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2008
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number 1-584
FERRO CORPORATION
(Exact name of registrant as
specified in its charter)
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Ohio
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34-0217820
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(State of Corporation)
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(IRS Employer Identification
No.)
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1000 Lakeside Avenue
Cleveland, OH
(Address of principal
executive offices)
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44114
(Zip
Code)
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Registrants telephone number, including area code:
216-641-8580
Securities Registered Pursuant to section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value $1.00
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New York Stock Exchange
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Securities Registered Pursuant to Section 12(g) of the
Act:
6.50% Convertible Senior Notes due August 15,
2013
Series A ESOP Convertible Preferred Stock, without
Par Value
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. YES
þ NO
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Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. YES o NO
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Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. YES þ NO o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained here, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, 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
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). YES o NO þ
The aggregate market value of Ferro Corporation Common Stock,
par value $1.00, held by non-affiliates and based on the closing
sale price as of June 30, 2008, was approximately
$790,430,000.
On February 27, 2009, there were 44,668,093 shares of
Ferro Corporation Common Stock, par value $1.00 outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Ferro Corporations
2009 Annual Meeting of Shareholders are incorporated into
Part III of this Annual Report on
Form 10-K.
PART I
History,
Organization and Products
Ferro Corporation was incorporated in Ohio in 1919 as an
enameling company. When we use the terms Ferro,
we, us or the Company, we
are referring to Ferro Corporation and its consolidated
subsidiaries unless we indicate otherwise. Today, we are a
leading producer of specialty materials and chemicals that are
sold to a broad range of manufacturers who, in turn, make
products for many end-use markets. In approximately 50
manufacturing sites around the world, we produce the following
types of products:
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Inorganic specialty products High-quality glazes,
frits, enamels, pigments, dinnerware decoration colors and other
performance materials;
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Organic specialty products Polymer specialty
materials, engineered plastic compounds, pigment dispersions,
and high-potency pharmaceutical active ingredients; and
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Electronic materials High-performance dielectrics,
conductive pastes, metal powders and polishing materials.
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We refer to our products as performance materials and chemicals
because we formulate them to perform specific functions in the
manufacturing processes and end products of our customers. The
products we develop often are delivered to our customers in
combination with customized technical service. The value of our
products stems from the benefits they deliver in actual use. We
develop and deliver innovative products to our customers through
our key strengths in:
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Particle Engineering Our ability to design and
produce very small particles made of a broad variety of
materials, with precisely controlled characteristics of shape,
size and size distribution. We understand how to disperse these
particles within liquid, paste and gel formulations.
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Color and Glass Science Our understanding of the
chemistry required to develop and produce pigments that provide
color characteristics ideally suited to customers
applications. We have a demonstrated ability to provide
glass-based coatings with properties that precisely meet
customers needs in a broad variety of applications.
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Surface Chemistry and Surface Application Technology
Our understanding of chemicals and materials used to develop
products and processes that involve the interface between layers
and the surface properties of materials.
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Product Formulation Our ability to develop and
manufacture combinations of materials that deliver specific
performance characteristics designed to work within
customers particular manufacturing processes.
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We deliver these key technical strengths to our customers in a
way that creates additional value through our integrated
applications support. Our applications support personnel are
involved in our customers material specification and
evaluation, product design and manufacturing process
characterization in order to help customers optimize the
efficient and cost-effective application of our products.
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We divide our operations into seven business units, which
comprise six reportable business segments. We have grouped these
units by their product group below:
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Inorganic Specialties
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Organic Specialties
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Electronic Material Systems
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Tile Coating Systems(1)
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Polymer Additives
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Electronic Materials
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Porcelain Enamel(1)
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Specialty Plastics
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Color and Glass
Performance Materials
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Pharmaceuticals
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Tile Coating Systems and Porcelain Enamel are combined into one
reportable business segment, Performance Coatings, for financial
reporting purposes. |
In past years, our Other Businesses segment reported the
combined results of operations from Ferros Pharmaceuticals
and Fine Chemicals businesses. The Fine Chemicals business was
sold during the fourth quarter of 2008, and the financial
results from this business are now included in discontinued
operations.
Markets
and Customers
Ferros products are used in a variety of product
applications in markets including:
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Appliances
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Transportation
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Building and renovation
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Electronics
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Household furnishings
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Industrial products
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Packaging
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Pharmaceuticals
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Many of our products are used as coatings on our customers
products, such as glazes and decorations on tile, glass and
dinnerware. Other products are applied as films in products such
as solar cells and other electronic components. Still other
products are added to other ingredients during our
customers manufacturing processes to provide desirable
properties to the end product. Often, our products are a small
portion of the total cost of our customers products, but
they can be critical to the appearance or functionality of those
products.
Our leading customers include manufacturers of tile, major
appliances, construction materials, automobile parts, glass,
bottles, vinyl flooring and wall coverings, solar cells,
multi-layer capacitors, and pharmaceuticals. Many of our
customers, including makers of major appliances and automobile
parts, purchase materials from more than one of our business
units. Our customer base is well diversified both geographically
and by end market.
We generally sell our products directly to our customers.
However, a portion of our business uses indirect sales channels,
such as agents and distributors, to deliver products to market.
In 2008, no single customer or related group of customers
represented more than 10% of net sales. In addition, none of our
reportable segments is dependent on any single customer or
related group of customers.
Backlog
of Orders and Seasonality
Generally, there is no significant lead time between customer
orders and delivery in any of our business segments. As a
result, we do not consider that the dollar amount of backlogged
orders believed to be firm is material information for an
understanding of our business. We also do not regard any
material part of our business to be seasonal. However, customer
demand has historically been higher in the second quarter when
building and renovation markets are particularly active, and
this quarter is normally the strongest for sales and operating
profit.
Competition
In most of our markets, we have a substantial number of
competitors, none of which is dominant. Due to the diverse
nature of our product lines, no single competitor directly
matches all of our product offerings. Our competition varies by
product and by region, and is based primarily on price, product
quality and performance,
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customer service and technical support, and our ability to
develop custom products to meet specific customer requirements.
We are a worldwide leader in the production of glass enamels,
porcelain enamels and ceramic glaze coatings. There is strong
competition in our markets, ranging from large multinational
corporations to local producers. While many of our customers
purchase custom products and formulations from us, our customers
could generally buy from other sources, if necessary.
Raw
Materials and Supplier Relations
Raw materials widely used in our operations include:
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Metal
Oxides:(1)
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Precious and Non-precious
Metals:(3)
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Zinc oxide
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Gold
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Cobalt oxide
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Platinum
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Lead oxide
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Palladium
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Aluminum oxide
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Silver
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Nickel oxide
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Titanium
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Chromium
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Polymers:(2)
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Copper
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Polypropylene
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Bismuth
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Unsaturated polyester
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Lithium
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Polystyrene
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Zinc
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Other Inorganic Materials:
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Other Organic Materials: (4)
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Zircon(1)
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Phthalic anhydride
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Feldspar(1)
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Toluene
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Silica(1)
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Butanol
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Titanium dioxide(2)
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Tallow
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Fiberglass(2)
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Soybean oil
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Boron(3)
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(1) |
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Primarily used by Color and Glass Performance Materials, Tile
Coating Systems and Porcelain Enamel. |
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Primarily used by Specialty Plastics. |
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Primarily used by Electronic Materials and Color and Glass
Performance Materials. |
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Primarily used by Polymer Additives. |
These raw materials make up a large portion of our product costs
in certain of our product lines, and fluctuations in the cost of
raw materials may have a significant impact on the financial
performance of the related businesses. We attempt to pass
through to our customers raw material cost increases, including
those related to precious metals.
We have a broad supplier base and, in many instances, multiple
sources of essential raw materials are available worldwide if
problems arise with a particular supplier. We maintain many
comprehensive supplier agreements for strategic and critical raw
materials. We did not encounter raw material shortages in 2008,
but we are subject to volatile raw material costs that can
affect our results of operations.
Environmental
Matters
As part of the production of some of our products, we handle,
process, use and store hazardous materials. As a result, we
operate manufacturing facilities that are subject to a broad
array of environmental laws and regulations in the countries in
which they operate, particularly for plant wastes and emissions.
In addition, some of our products are subject to restrictions
under laws or regulations such as California Proposition 65 or
the European Unions
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(EU) hazardous substances directive. The costs to
comply with complex environmental laws and regulations are
significant and will continue for the industry and us for the
foreseeable future. These routine costs are expensed as they are
incurred. While these costs may increase in the future, they are
not expected to have a material impact on our financial
position, liquidity or results of operations. We believe that we
are in compliance with the environmental regulations to which
our operations are subject and that, to the extent we may not be
in compliance with such regulations, non-compliance will not
have a materially adverse effect on our financial position,
liquidity or results of operations.
Our policy is to operate our plants and facilities in a manner
that protects the environment and the health and safety of our
employees and the public. We intend to continue to make
expenditures for environmental protection and improvements in a
timely manner consistent with available technology. Capital
expenditures for environmental, health and safety were
$14.7 million in 2008, $11.6 million in 2007, and
$6.2 million in 2006. Although we cannot precisely predict
future environmental, health and safety capital spending, we do
not expect the costs to have a material impact on our financial
position, liquidity or results of operations.
We also accrue for environmental remediation costs when it is
probable that a liability has been incurred and we can
reasonably estimate the amount. We determine the timing and
amount of any liability based upon assumptions regarding future
events, and inherent uncertainties exist in such evaluations
primarily due to unknown conditions, changing governmental
regulations and legal standards regarding liability, and
evolving technologies. We adjust these liabilities periodically
as remediation efforts progress, the nature and extent of
contamination becomes more certain, or as additional technical
or legal information becomes available.
Research
and Development
We are involved worldwide in research and development activities
relating to new and existing products, services and technologies
required by our customers continually changing markets.
Our research and development resources are organized into
centers of excellence that support our regional and worldwide
major business units. We also conduct research and development
activities at our Posnick Center for Innovative Technology in
Independence, Ohio. These centers are augmented by local
laboratories, which provide technical service and support to
meet customer and market needs of particular geographic areas.
Expenditures for research and development activities for
continuing operations were approximately $33.6 million in
2008, $36.9 million in 2007, and $42.6 million in
2006. Expenditures for individual customer requests for research
and development were not material.
Patents,
Trademarks and Licenses
We own a substantial number of patents and patent applications
relating to our various products and their uses. While these
patents are of importance to us, we do not believe that the
invalidity or expiration of any single patent or group of
patents would have a material adverse effect on our businesses.
Our patents will expire at various dates through the year 2028.
We also use a number of trademarks that are important to our
businesses as a whole or to a particular segment. We believe
that these trademarks are adequately protected.
Employees
At December 31, 2008, we employed 5,638 full-time
employees, including 3,863 employees in our foreign
consolidated subsidiaries and 1,775 in the United States
(U.S.). Total employment decreased 365 in our
foreign subsidiaries and 272 in the U.S. from the prior
year end due to the sale of our Fine Chemicals business and our
various restructuring and cost reduction programs, including the
closure of plants in Rotterdam, Netherlands, and Toccoa, Georgia.
Collective bargaining agreements cover approximately 18% of our
U.S. workforce. Approximately 2% of the U.S. employees
are affected by labor agreements that expire in 2009, and we
expect to complete renewals of these agreements with no
significant disruption to the related businesses. We consider
our relations with our employees, including those covered by
collective bargaining agreements, to be good.
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Our employees in Europe have protections afforded them by local
laws and regulations through unions and works councils. Some of
these laws and regulations may affect the timing, amount and
nature of restructuring and cost reduction programs in that
region.
Domestic
and Foreign Operations
Financial information about our domestic and foreign operations
by segment is included herein in Note 17 to the
consolidated financial statements under Item 8 of this
Annual Report on
Form 10-K.
More than 50% of our net sales are outside of the U.S. Our
customers represent more than 30 industries and operate in
approximately 100 countries.
We began international operations in 1927. Our products are
produced and distributed through our consolidated subsidiaries
and unconsolidated affiliates in the following countries:
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Consolidated subsidiaries:
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Argentina
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France
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Mexico
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Thailand
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Australia
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Germany
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Netherlands
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United Kingdom
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Belgium
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Indonesia
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Portugal
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Venezuela
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Brazil
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Italy
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Spain
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China
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Japan
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Taiwan
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Unconsolidated affiliates:
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Italy
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Spain
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South Korea
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Thailand
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Our U.S. parent company receives technical service fees
and/or
royalties from many of its foreign subsidiaries. As a matter of
corporate policy, the foreign subsidiaries have historically
been expected to remit a portion of their annual earnings to the
U.S. parent company as dividends. To the extent earnings of
foreign subsidiaries are not remitted to the U.S. parent
company, those earnings are indefinitely re-invested in those
subsidiaries.
Available
Information
Our Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
and Current Reports on
Form 8-K,
including any amendments, will be made available free of charge
on our Web site, www.ferro.com, as soon as reasonably practical,
following the filing of the reports with the
U.S. Securities and Exchange Commission (SEC).
Our Corporate Governance Principles, Legal and Ethical Policies,
Guidelines for Determining Director Independence, and charters
for our Audit Committee, Compensation Committee, Finance
Committee, and Governance and Nomination Committee are available
free of charge on our Web site or to any shareholder who
requests them from the Ferro Corporation Investor Relations
Department located at 1000 Lakeside Avenue, Cleveland, Ohio,
44114-1147.
Forward-looking
Statements
Certain statements contained here and in future filings with the
SEC reflect our expectations with respect to future performance
and constitute forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of
1934, as amended. These statements are subject to a variety of
uncertainties, unknown risks and other factors concerning our
operations and the business environment, which are difficult to
predict and are beyond our control.
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Many factors could cause our actual results to differ materially
from those suggested by statements contained in this filing and
could adversely affect our future financial performance. Such
factors include the following:
We
sell our products into industries where demand has been
unpredictable, cyclical or heavily influenced by consumer
spending, and such demand and our results of operations may be
further impacted by the recent macro-economic circumstances and
uncertainty in credit markets.
We sell our products to a wide variety of customers who supply
many different market segments. Many of these market segments,
such as building and renovation, major appliances,
transportation, and electronics, are cyclical or closely tied to
consumer demand, which is difficult to predict. Incorrect
forecasts of demand or unforeseen reductions in demand can
adversely affect costs and profitability due to factors such as
underused manufacturing capacity, excess inventory, or working
capital needs. These factors can result in lower profitability.
Our results of operations are materially affected by conditions
in the global capital markets and the economy generally, both in
the U.S. and elsewhere around the world. The stress
experienced by global capital markets that began in the second
half of 2008 has substantially increased. Recently, concerns
over fluctuating prices, energy costs, geopolitical issues, the
availability and cost of credit, the U.S. mortgage market
and a declining real estate market have contributed to increased
volatility and diminished expectations for the global economy
and the markets going forward. These factors, combined with
declining business and consumer confidence, increased
unemployment, and volatile raw materials costs, have
precipitated an economic slowdown and recession in a number of
markets around the world. As a result of these conditions, our
customers may experience cash flow problems and may modify,
delay or cancel plans to purchase our products. Additionally, if
customers are not successful in generating sufficient revenue or
are precluded from securing financing, they may not be able to
pay, or may delay payment of, accounts receivable that are owed
to us. Any reduction in demand or inability of our current
and/or
potential customers to pay us for our products may adversely
affect our earnings and cash flow.
We are
subject to a number of restrictive covenants under our credit
facilities, which could affect our
flexibility to fund ongoing operations and strategic
initiatives, and, if we are unable to maintain compliance with
such covenants, could lead to significant challenges in meeting
our liquidity requirements.
Our credit facilities contain a number of restrictive covenants,
including those described in more detail in Note 5 to the
consolidated financial statements under Item 8 of this
Annual Report on
Form 10-K.
These covenants include customary operating restrictions that
limit our ability to engage in certain activities, including
additional loans and investments; prepayments, redemptions and
repurchases of debt; and mergers, acquisitions and asset sales.
We are also subject to customary financial covenants, including
a leverage ratio and a fixed charge coverage ratio and certain
creditworthiness tests. These covenants restrict the amount of
our borrowings, reducing our flexibility to fund ongoing
operations and strategic initiatives. These facilities are
described in more detail in Capital Resources and
Liquidity under Item 7 and in Note 5 to the
consolidated financial statements under Item 8 of this
Annual Report on Form 10-K.
Breaches of these covenants could become defaults under our
credit facilities and cause the acceleration of debt payments
beyond our ability to pay. Compliance with some of these
covenants is based on financial measures derived from our
operating results. If economic conditions in key markets
deteriorate, we may experience material adverse impacts to our
business and operating results, such as through reduced customer
demand and inflation. A decline in our business could make us
unable to maintain compliance with these financial covenants, in
which case, our lenders could demand immediate payment of
outstanding amounts and we would need to seek alternate
financing sources to pay off such debts and to fund our ongoing
operations. Such financing may not be available on favorable
terms, if at all.
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We
depend on external financial resources, and the current economic
environment and credit market uncertainty could interrupt our
access to capital markets, borrowings, or financial transactions
to hedge certain risks, which could adversely affect our
financial condition.
As of December 31, 2008, we had approximately
$589.5 million of short-term and long-term debt with
varying maturities and approximately $134.8 million of off
balance sheet arrangements, including consignment and customer
arrangements for precious metals, international receivables
sales programs, bank guarantees, and standby letters of credit.
These arrangements have allowed us to make investments in growth
opportunities and fund working capital requirements. In
addition, we enter into financial transactions to hedge certain
risks, including foreign exchange, commodity pricing, and
sourcing of certain raw materials. Our continued access to
capital markets, the stability of our lenders, customers and
financial partners and their willingness to support our needs
are essential to our liquidity and our ability to meet our
current obligations, fund operations, and fund our strategic
initiatives. An interruption in our access to external financing
or financial transactions to hedge risk could adversely affect
our business prospects and financial condition. See further
information regarding our liquidity in Capital Resources
and Liquidity under Item 7 and in Note 5 to the
consolidated financial statements under Item 8 of this
Annual Report on
Form 10-K.
Interest
rates on some of our borrowings are variable, and our borrowing
costs could be affected adversely by interest rate
increases.
Portions of our debt obligations have variable interest rates.
Generally, when interest rates rise, our cost of borrowings
increases. We estimate, based on the debt obligations
outstanding at December 31, 2008, that a one percent
increase in interest rates would cause interest expense to
increase by approximately $2.7 million annually. Continued
interest rate increases could raise the cost of borrowings and
adversely affect our financial performance. See further
information regarding our interest rates on our debt obligations
in Quantitative and Qualitative Disclosures about Market
Risk under Item 7A and in Note 5 to the
consolidated financial statements under Item 8 of this
Annual Report on
Form 10-K.
Many
of our assets are encumbered by liens that have been granted to
lenders, and those liens affect our flexibility to dispose of
property and businesses.
Our debt obligations are secured by substantially all of our
assets. These liens could reduce our ability
and/or
extend the time to dispose of property and businesses, as these
liens must be cleared or waived by the lenders prior to any
disposition. These security interests are described in more
detail in Note 5 to the consolidated financial statements
under Item 8 of this Annual Report on
Form 10-K.
We
have significant deferred tax assets, and our ability to utilize
these assets will depend on our future
performance.
To fully realize the carrying value of our net deferred tax
assets, we will have to generate adequate taxable profits in
various tax jurisdictions. As of December 31, 2008, we had
$147.3 million of net deferred tax assets, after valuation
allowances. If we do not generate adequate profits within the
time periods required by applicable tax statutes, the carrying
value of the tax assets will not be realized. If it becomes
unlikely that the carrying value of our net deferred tax assets
will be realized, the valuation allowances may need to be
increased in our consolidated financial statements, adversely
affecting results of operations. Further information on our
deferred tax assets is presented in Note 7 to the
consolidated financial statements under Item 8 of this
Annual Report on
Form 10-K.
Noncompliance
with NYSE rules could result in the delisting of our common
stock from the NYSE.
If we cannot meet the New York Stock Exchange (NYSE)
continued listing requirements, the NYSE may delist our common
stock, which could have an adverse impact on us and the
liquidity and market price of our stock.
Our business has been and may continue to be affected by
worldwide macroeconomic factors, which include uncertainties in
the credit and capital markets. External factors that affect our
stock price, such as liquidity requirements of our investors, as
well as our performance, could impact our market capitalization,
revenue and operating results, which, in turn, affect our
ability to comply with the NYSEs listing standards. These
listing
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standards include: (1) the average closing price of our
common stock over a 30 trading-day period must not fall
below $1.00 (although this requirement has been temporarily
suspended by the NYSE until June 30, 2009), (2) our
market capitalization must not fall below $75 million if at
the same time our shareholders equity is less than
$75 million, and (3) irrespective of our level of
shareholders equity, our market capitalization must not
fall below $25 million (this standard was temporarily
lowered by the NYSE from $25 million to $15 million
until June 30, 2009).
Our closing stock price on February 27, 2009, was $1.47 and
our market capitalization was approximately $66 million. As
of December 31, 2008, our shareholders equity was
approximately $324 million. If our stock price declines to
the point where our compliance with the listing standards is in
jeopardy, we will consider taking such actions as we deem
appropriate under the circumstances to regain compliance. If we
were to fail to meet the continued listing requirements, NYSE
rules provide a six-month period, with respect to the minimum
stock price standard, and an 18-month period, with respect to
the market capitalization and shareholders equity
standard, to regain compliance. If we are unable to satisfy the
NYSE criteria for continued listing and unable to regain
compliance during the specified periods, our common stock would
be subject to delisting. A delisting of our common stock could
negatively impact us by, among other things, reducing the
liquidity and market price of our common stock and reducing the
number of investors willing to hold or acquire our common stock,
which could negatively impact our ability to raise equity
financing. In addition, delisting from the NYSE might negatively
impact our reputation and, as a consequence, our business.
We
depend on reliable sources of energy and raw materials,
including petroleum-based materials and other supplies, at a
reasonable cost, but the availability of these materials and
supplies could be interrupted and/or their prices could escalate
and adversely affect our sales and profitability.
We purchase energy and many raw materials, including
petroleum-based materials and other supplies, which we use to
manufacture our products. Changes in their availability or price
could affect our ability to manufacture enough products to meet
customers demands or to manufacture products profitably.
We try to maintain multiple sources of raw materials and
supplies where practical, but this may not prevent unanticipated
changes in their availability or cost. We may not be able to
pass cost increases through to our customers. Significant
disruptions in availability or cost increases could adversely
affect our manufacturing volume or costs, which could negatively
affect product sales or profitability of our operations.
The
markets for our products are highly competitive and subject to
intense price competition, and that could adversely affect our
sales and earnings performance.
Our customers typically have multiple suppliers from which to
choose. If we are unwilling or unable to provide products at
competitive prices, and if other factors, such as product
performance and value-added services do not provide an
offsetting competitive advantage, customers may reduce,
discontinue, or decide not to purchase our products. If we could
not secure alternate customers for lost business, our sales and
earnings performance could be adversely affected.
We
strive to improve operating margins through sales growth, price
increases, productivity gains, improved purchasing techniques
and restructuring activities, but we may not achieve the desired
improvements.
We work to improve operating profit margins through activities
such as growing sales to achieve increased economies of scale,
increasing prices, improving manufacturing processes, adopting
purchasing techniques that lower costs or provide increased cost
predictability, and restructuring businesses to realize cost
savings. However, these activities depend on a combination of
improved product design and engineering, effective manufacturing
process control initiatives, cost-effective redistribution of
production, and other efforts that may not be as successful as
anticipated. The success of sales growth and price increases
depends not only on our actions but also the strength of
customer demand and competitors pricing responses, which
are not fully predictable. Failure to successfully implement
actions to improve operating margins could adversely affect our
financial performance.
10
The
global scope of our operations exposes us to risks related to
currency conversion rates and changing economic, social and
political conditions around the world.
More than 50% of our net sales during 2008 were outside of the
U.S. In order to support global customers, access regional
markets and compete effectively, our operations are located
around the world. As a result, our operations have additional
complexity from changing economic, social and political
conditions in multiple locations and we are subject to risks
relating to currency conversion rates. Other risks inherent in
international operations include the following:
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|
|
|
|
New and different legal and regulatory requirements and
enforcement mechanisms in local jurisdictions;
|
|
|
|
U.S. export licenses may be difficult to obtain and we may
be subject to export duties or import quotas or other trade
barriers;
|
|
|
|
Increased costs of, and decreased availability of,
transportation or shipping;
|
|
|
|
Credit risk and financial conditions of local customers and
distributors;
|
|
|
|
Risk of nationalization of private enterprises by foreign
governments or restrictions on investments;
|
|
|
|
Potentially adverse tax consequences, including imposition or
increase of withholding and other taxes on remittances and other
payments by subsidiaries; and
|
|
|
|
Local political, economic and social conditions, including the
possibility of hyperinflationary conditions and political
instability in certain countries.
|
While we attempt to anticipate these changes and manage our
business appropriately in each location where we do business,
these changes are often beyond our control and difficult to
forecast. The consequences of these risks may have significant
adverse effects on our results of operations or financial
position.
We
have a growing presence in the Asia-Pacific region where it can
be difficult for a
U.S.-based
company, such as Ferro, to compete lawfully with local
competitors.
Many of our most promising growth opportunities are in the
Asia-Pacific region, especially the Peoples Republic of
China. Although we have been able to compete successfully in
those markets to date, local laws and customs can make it
difficult for a
U.S.-based
company to compete on a level playing field with
local competitors without engaging in conduct that would be
illegal under U.S. law. Our strict policy of observing the
highest standards of legal and ethical conduct may cause us to
lose some otherwise attractive business opportunities to local
competition in the region.
Regulatory
authorities in the U.S., European Union and elsewhere are taking
a much more aggressive approach to regulating hazardous
materials, and those regulations could affect sales of our
products.
Hazardous material legislation and regulations can restrict the
sale of products
and/or
increase the cost of producing them. Some of our products are
subject to restrictions under laws or regulations such as
California Proposition 65 or the European Unions
(EU) hazardous substances directive. The EU
REACH registration system became effective
June 1, 2007, and requires us to perform toxicity studies
of the components of some of our products and to register the
information in a central database, increasing the cost of these
products. As a result of these hazardous material regulations,
customers may avoid purchasing some products in favor of
perceived greener, less hazardous or less costly
alternatives. This factor could adversely affect our sales and
operating profits.
Our
operations are subject to operating hazards and, as a result, to
stringent environmental, health and safety regulations, and
compliance with those regulations could require us to make
significant investments.
Our production facilities are subject to hazards associated with
the manufacture, handling, storage and transportation of
chemical materials and products. These hazards can cause
personal injury and loss of life, severe
11
damage to, or destruction of, property and equipment and
environmental contamination and other environmental damage and
could have an adverse effect on our business, financial
condition or results of operations.
We strive to conduct our manufacturing operations in a manner
that is safe and in compliance with all applicable
environmental, health and safety regulations. Compliance with
changing regulations may require us to make significant capital
investments, incur training costs, make changes in manufacturing
processes or product formulations, or incur costs that could
adversely affect our profitability, and violations of these laws
could lead to substantial fines and penalties. These costs may
not affect competitors in the same way due to differences in
product formulations, manufacturing locations or other factors,
and we could be at a competitive disadvantage, which might
adversely affect financial performance.
We are
a defendant in several lawsuits that could have an adverse
effect on our financial condition and/or financial performance,
unless they are successfully resolved.
We are routinely involved in litigation brought by suppliers,
customers, employees, governmental agencies and others.
Litigation is an inherently unpredictable process and
unanticipated negative outcomes are possible. The most
significant pending litigation is described in
Item 3 Legal Proceedings of this Annual Report
on
Form 10-K.
Our
businesses depend on a continuous stream of new products, and
failure to introduce new products could affect our sales and
profitability.
One way that we remain competitive in our markets is by
developing and introducing new and improved products on an
ongoing basis. Customers continually evaluate our products in
comparison to those offered by our competitors. A failure to
introduce new products at the right time that are price
competitive and that provide the features and performance
required by customers could adversely affect our sales, or could
require us to compensate by lowering prices. The result could be
lower sales
and/or lower
profitability.
We are
subject to stringent labor and employment laws in certain
jurisdictions in which we operate, we are party to various
collective bargaining arrangements, and our relationship with
our employees could deteriorate, which could adversely impact
our operations.
A majority of our full-time employees are employed outside the
United States. In certain jurisdictions where we operate, labor
and employment laws are relatively stringent and, in many cases,
grant significant job protection to certain employees, including
rights on termination of employment. In addition, in certain
countries where we operate, our employees are members of unions
or are represented by a works council as required by law. We are
often required to consult and seek the consent or advice of
these unions
and/or
respective works councils. These regulations and laws, coupled
with the requirement to consult with the relevant unions or
works councils, could have a significant impact on our
flexibility in managing costs and responding to market changes.
Furthermore, with respect to our employees who are subject to
collective bargaining arrangements or similar arrangements
(approximately 18% of our U.S. workforce as of
December 31, 2008), there can be no assurance that we will
be able to negotiate labor agreements on satisfactory terms or
that actions by our employees will not disrupt our business. If
these workers were to engage in a strike, work stoppage or other
slowdown or if other employees were to become unionized, we
could experience a significant disruption of our operations
and/or
higher ongoing labor costs, which could adversely affect our
business, financial condition and results of operations.
Employee
benefit costs, especially postretirement costs, constitute a
significant element of our annual expenses, and funding these
costs could adversely affect our financial
condition.
Employee benefit costs are a significant element of our cost
structure. Certain expenses, particularly postretirement costs
under defined benefit pension plans and healthcare costs for
employees and retirees, may increase significantly at a rate
that is difficult to forecast and may adversely affect our
financial results, financial condition or cash flows. The recent
declines in global capital markets have caused a reduction in
the value of our pension plan assets. This reduction could have
an adverse effect on future pension expense and funding
12
requirements. Further information regarding our retirement
benefits is presented in Note 9 to the consolidated
financial statements under Item 8 of this Annual Report on
Form 10-K.
Our
restructuring initiatives may not provide sufficient cost
savings to justify their expense.
We have undertaken and may continue to undertake productivity
initiatives, including organizational restructurings, to improve
performance and generate cost savings. We developed, initiated,
and continue to implement 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 focused on North America and Europe. We can make no
assurances that these restructuring initiatives will be
completed or beneficial to us. Also, we cannot assure you that
any estimated cost savings from such activities will be realized.
We are
exposed to intangible asset risk.
We have recorded intangible assets, including goodwill, in
connection with business acquisitions. We are required to
perform goodwill impairment tests at least on an annual basis
and whenever events or circumstances indicate that the carrying
value may not be recoverable from estimated future cash flows.
As a result of our annual and other periodic evaluations, we may
determine that the intangible asset values need to be written
down to their fair values, which could result in material
charges that could be adverse to our operating results and
financial position.
We
have in the past identified material weaknesses in our internal
controls, and the identification of any material weaknesses in
the future could affect our ability to ensure timely and
reliable financial reports.
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, which is a
process designed by our management to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in
accordance with U.S. generally accepted accounting
principles. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to risk that
controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures
may deteriorate.
We conducted an assessment of our internal controls over
financial reporting as of December 31, 2008 and concluded
that the internal controls over financial reporting were
effective as of December 31, 2008. Previously, we had
concluded that we had material weaknesses in our internal
controls as of December 31, 2004, 2005, 2006 and 2007. A
material weakness is a deficiency, or combination of
deficiencies, in internal control over financial reporting, such
that, there is a reasonable possibility that a material
misstatement of the companys annual or interim financial
statements will not be prevented or detected on a timely basis.
Accordingly, while we have taken actions to address the past
material weaknesses and continued activities that materially
improved, or are reasonably likely to materially improve, our
internal control over financial reporting, these measures may
not be sufficient to ensure that our internal controls are
effective in the future. If we are unable to correct future
weaknesses in internal controls in a timely manner, our ability
to record, process, summarize and report reliable financial
information within the time periods specified in the rules and
forms of the SEC will be adversely affected. This failure could
materially and adversely impact our business, our financial
condition and the market value of our securities.
We are
exposed to risks associated with acts of God, terrorists and
others, as well as fires, explosions, wars, riots, accidents,
embargoes, natural disasters, strikes and other work stoppages,
quarantines and other governmental actions, and other events or
circumstances that are beyond our control.
Ferro Corporation is exposed to risks from various events that
are beyond our control, which may have significant effects on
our results of operations. While we attempt to mitigate these
risks through appropriate insurance, contingency planning and
other means, we may not be able to anticipate all risks or to
reasonably or cost-
13
effectively manage those risks that we do anticipate. As a
result, our results of operations could be adversely affected by
circumstances or events in ways that are significant
and/or long
lasting.
The risks and uncertainties identified above are not the only
risks that we face. Additional risks and uncertainties not
presently known to us or that we currently believe to be
immaterial also may adversely affect us. If any known or unknown
risks and uncertainties develop into actual events, these
developments could have material adverse effects on our
financial position, results of operations, and cash flows.
|
|
Item 1B
|
Unresolved
Staff Comments
|
None.
Our corporate headquarters offices are located at 1000 Lakeside
Avenue, Cleveland, Ohio. The Company also owns other corporate
facilities, including a centralized research and development
facility, which are located in Independence, Ohio. We own
principal manufacturing plants that range in size from
17,000 sq. ft. to over 500,000 sq. ft.
Plants we own with more than 250,000 sq. ft. are
located in: Germany; Spain; Penn Yan, New York; and France. The
locations of these principal manufacturing plants by reportable
business segment are as follows:
Performance Coatings U.S.: Cleveland, Ohio. Outside
the U.S.: Argentina, Australia, Brazil, China, France,
Indonesia, Italy, Mexico, the Netherlands, Spain, Thailand and
Venezuela.
Electronic Materials U.S.: Penn Yan, New York; and
South Plainfield, New Jersey. Outside the U.S.: the Netherlands.
Color and Glass Performance Materials U.S.:
Orrville, Ohio; and Washington, Pennsylvania. Outside the U.S.:
Australia, Brazil, China, France, Germany, Mexico, the United
Kingdom and Venezuela.
Polymer Additives U.S.: Bridgeport, New Jersey;
Cleveland, Ohio; Walton Hills, Ohio; and Fort Worth, Texas.
Outside the U.S.: Belgium and the United Kingdom.
Specialty Plastics U.S.: Evansville, Indiana;
Plymouth, Indiana; Edison, New Jersey; and Stryker, Ohio.
Outside the U.S.: the Netherlands and Spain.
Pharmaceuticals U.S.: Waukegan, Illinois.
In October 2005, the Dutch government placed a lien on one of
our facilities in the Netherlands as collateral for any future
payment relating to an unresolved environmental claim.
Ferros revolving credit and term loan facility, which was
established in June 2006, has a security interest in the
Companys and its domestic material subsidiaries real
estate.
In addition, we lease manufacturing facilities for the
Performance Coatings segment in Italy; for the Electronic
Materials segment in Vista, California, Germany and Japan; for
the Color and Glass Performance Materials segment in Japan,
Portugal and Italy; and for the Specialty Plastics segment in
Carpentersville, Illinois. In some instances, the manufacturing
facilities are used for two or more business segments. Leased
facilities range in size from 23,000 sq. ft. to over
300,000 sq. ft. at a plant located in Portugal.
|
|
Item 3
|
Legal
Proceedings
|
As previously disclosed, in February 2003, we produced 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. Before closing its investigation, the Department
of Justice took no action against the Company or any of its
current or former employees. In 2003, the Company was named as a
defendant in several lawsuits alleging civil damages and
requesting injunctive relief relating to the conduct the
Government was investigating, and, in June 2008, the Company was
named in four more indirect purchaser lawsuits related to an
existing lawsuit in the Eastern District of Pennsylvania. In
July 2007, we entered into a definitive written settlement
agreement in the class action lawsuit involving direct
purchasers. The settlement agreement was approved by the United
States District Court for the
14
Eastern District of Pennsylvania in December 2007. Although the
Company decided to bring this matter to a close through
settlement, the Company did not admit to any of the alleged
violations and continues to deny any wrongdoing. The Company is
vigorously defending the remaining six civil actions alleging
antitrust violations in the heat stabilizer industry. These
actions are in their early 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. 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 United States Court of
Appeals for the Sixth Circuit.
As previously disclosed, for the year ended December 31,
2007, we submitted deviation reports required by the
Title V air emission permit issued under the New Jersey Air
Pollution Control Act (the Title V Air Permit),
which contained numerous deviations from the standards required
by the Title V Air Permit at our South Plainfield, New
Jersey, facility. While no penalty has been assessed at this
time, we are in the process of negotiating an administrative
consent order and a compliance schedule to settle these issues
with the New Jersey Department of Environmental Protection
(NJDEP). We cannot determine the outcome of these
settlement negotiations at this time.
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.
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|
Item 4
|
Submission
of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of Ferros security
holders during the fourth quarter of 2008.
Executive
Officers of the Registrant
The executive officers of the Company as of March 11, 2009,
are listed below, along with their ages and positions held
during the past five years. The year indicates when the
individual was named to the indicated position. No family
relationship exists between any of Ferros executive
officers.
James F. Kirsch 51
Chairman, President and Chief Executive Officer, 2006
President and Chief Executive Officer, 2005
President and Chief Operating Officer, 2004
Sallie B. Bailey 49
Vice President and Chief Financial Officer, 2007
Senior Vice President-Finance and Controller, The Timken
Company, an international manufacturer of highly engineered
bearings and alloy steels and provider of related products and
services, 2003
Mark H. Duesenberg 47
Vice President, General Counsel & Secretary, 2008
Executive Director, Legal and Government Affairs, Lenovo Group
Ltd., a global manufacturer of personal computers and electronic
devices, 2008
Legal Director Europe, Middle East &
Africa, Lenovo Group Ltd., 2005
Vice President, Group Legal, Invensys plc, a global
manufacturing, technology, and services company in the fields of
control systems, industrial automation, and power generation,
2002
Ann E. Killian 54
Vice President, Human Resources, 2005
Vice President, Human Resources, W. W. Holdings, LLC, a
manufacturer and distributor of doors, frames and hardware
products for the commercial construction industry, 2003
Michael J. Murry 57
Vice President, Inorganic Specialties, 2006
Vice President, Performance Coatings, 2005
15
President, Chief Executive Officer, and Director, Catalytica
Energy Systems, Inc., a provider of products that reduce
nitrogen oxides (NOx) emissions for the transportation and power
generation industries, 2003
Barry D. Russell 44
Vice President, Electronic Material Systems, 2006
Group Vice President and General Manager, Electronic Materials,
Honeywell International, a provider of aerospace products and
services; control technologies for buildings, homes, and
industry; turbo chargers; automotive products; and specialty
materials, 2004
Peter T. Thomas 53
Vice President, Organic Specialties, 2006
Vice President, Pharmaceuticals and Fine Chemicals and Polymer
Additives, 2004
16
PART II
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Item 5
|
Market
for Registrants Common Equity, Related Stockholder
Matters, and Issuer Purchases of Equity Securities
|
Our common stock is listed on the New York Stock Exchange under
the ticker symbol FOE. At February 27, 2009, we had
1,458 shareholders of record for our common stock. The
closing price of the common stock on February 27, 2009, was
$1.47 per share.
The chart below compares Ferros cumulative total
shareholder return for the five years ended December 31,
2008, to that of the Standard & Poors 500 Index
and the Standard & Poors MidCap Specialty
Chemicals Index. In all cases, the information is presented on a
dividend-reinvested basis and assumes investment of $100.00 on
December 31, 2003.
COMPARISON
OF FIVE-YEAR
CUMULATIVE TOTAL RETURNS
The quarterly high and low
intra-day
sales prices and dividends declared per share for our common
stock during 2008 and 2007 were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
High
|
|
|
Low
|
|
|
Dividends
|
|
|
High
|
|
|
Low
|
|
|
Dividends
|
|
|
First Quarter
|
|
$
|
20.65
|
|
|
$
|
13.77
|
|
|
$
|
0.145
|
|
|
$
|
22.95
|
|
|
$
|
19.30
|
|
|
$
|
0.145
|
|
Second Quarter
|
|
|
21.10
|
|
|
|
13.52
|
|
|
|
0.145
|
|
|
|
25.48
|
|
|
|
19.98
|
|
|
|
0.145
|
|
Third Quarter
|
|
|
24.13
|
|
|
|
17.28
|
|
|
|
0.145
|
|
|
|
26.03
|
|
|
|
17.37
|
|
|
|
0.145
|
|
Fourth Quarter
|
|
|
20.97
|
|
|
|
5.54
|
|
|
|
0.145
|
|
|
|
23.21
|
|
|
|
19.28
|
|
|
|
0.145
|
|
If we pay cash dividends in excess of a base dividend amount in
any single quarterly period, the conversion rate on our
6.50% Convertible Senior Notes will be increased by
formula. The base dividend amount is $0.145 per share, subject
to adjustment in certain events.
On January 29, 2009, Ferros Board of Directors
declared a quarterly dividend of $0.01 per share on the
Companys common stock. On March 11, 2009, we entered
into an amendment to our senior credit facility which
effectively prohibits us from paying dividends on our common
stock. For further discussion, see Managements Discussion
and Analysis of Financial Condition and Results of Operations
under Item 7 of this Annual Report on
Form 10-K.
17
We did not repurchase any of our common stock during the fourth
quarter of 2008.
|
|
Item 6
|
Selected
Financial Data
|
The following table presents selected financial data for the
last five years ended December 31st:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
Net sales
|
|
$
|
2,245,152
|
|
|
$
|
2,147,904
|
|
|
$
|
1,987,606
|
|
|
$
|
1,833,064
|
|
|
$
|
1,797,707
|
|
(Loss) income from continuing operations
|
|
|
(53,746
|
)
|
|
|
(99,566
|
)
|
|
|
15,422
|
|
|
|
15,558
|
|
|
|
26,008
|
|
Basic (loss) earnings per share from continuing operations
|
|
|
(1.26
|
)
|
|
|
(2.34
|
)
|
|
|
0.33
|
|
|
|
0.33
|
|
|
|
0.58
|
|
Diluted (loss) earnings per share from continuing operations
|
|
|
(1.26
|
)
|
|
|
(2.34
|
)
|
|
|
0.33
|
|
|
|
0.33
|
|
|
|
0.58
|
|
Cash dividends declared per common share
|
|
|
0.58
|
|
|
|
0.58
|
|
|
|
0.58
|
|
|
|
0.58
|
|
|
|
0.58
|
|
Total assets
|
|
|
1,544,500
|
|
|
|
1,638,260
|
|
|
|
1,741,602
|
|
|
|
1,676,598
|
|
|
|
1,739,885
|
|
Long-term debt, including current portion, and redeemable
preferred stock
|
|
|
596,339
|
|
|
|
538,758
|
|
|
|
601,765
|
|
|
|
568,325
|
|
|
|
521,658
|
|
In 2008, we sold our Fine Chemicals business. In 2002 and 2003,
we sold our Powder Coatings, Petroleum Additives, and Specialty
Ceramics businesses. For all periods presented, we report those
businesses as discontinued operations. These divestitures are
further discussed in Note 15 to the consolidated financial
statements under Item 8 of this Annual Report on
Form 10-K.
|
|
Item 7
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
Market conditions became more difficult as 2008 progressed. Some
markets that were relatively strong through the first three
quarters of the year weakened in the fourth quarter. Other
markets, including those related to construction and appliances
exhibited reduced demand throughout the year compared with 2007,
but demand from customers serving these markets also slowed
sharply in the final three months of the year.
Net sales increased 4.5% during 2008. Sales growth was
relatively strong in the first nine months of the year, driven
by a combination of increased product prices, including
pass-throughs of higher precious metals costs, and favorable
changes in foreign currency exchange rates. Sales declined in
the final three months of the year, compared with the fourth
quarter of 2007, due to lower sales volumes resulting from
global economic weakness and the effects of difficult credit
markets. Lower precious metal prices and unfavorable changes in
foreign currency exchange rates also contributed to the decline
in sales during the fourth quarter of 2008. For the full year,
sales growth was strongest in our Electronic Materials segment.
Sales also increased in Performance Coatings, Polymer Additives
and Color and Glass Performance Materials. Sales declined in
Specialty Plastics, primarily as a result of weak customer
demand from customers serving the construction, automotive and
appliance markets.
Beyond fundamental product demand, the factors that most
influenced 2008 results included the following:
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|
|
Cost control initiatives, including costs associated with our
restructuring programs,
|
|
|
|
Charges for the impairment of goodwill and other assets,
resulting from reduced expectations for future cash flows from
several of our businesses, and
|
|
|
|
Volatile raw material costs.
|
18
Prices for many raw materials used in our products were volatile
throughout the year. Raw material cost generally increased
during the first nine months of 2008, then began to decline from
their peaks as commodity prices fell late in the year. On
aggregate, raw material costs increased during the year compared
with 2007.
Selling, general and administrative (SG&A)
expenses declined during the year. The decline was primarily the
result of expense reduction efforts in the last three months of
2008, as we took actions to respond to reduced customer demand
for our products. For the year, SG&A expense declined as a
percentage of sales.
Impairment charges of $80.2 million related to goodwill and
other long-lived assets were recorded in our Performance
Coatings, Specialty Plastics and Electronic Materials
businesses. Goodwill was impaired related to tile coatings
products in the Performance Coatings segment, and goodwill and
property, plant and equipment were impaired related to plastics
products in our Specialty Plastics segment. The impairments were
due to lower forecasted cash flows in the businesses resulting
from significant reductions in demand from customers due to the
current worldwide economic downturn. In addition, we recorded an
impairment of property, plant and equipment in our Electronic
Materials facility in the Netherlands. This asset impairment was
the result of a decline in the operating results and reduced
future sales projections for our dielectric material products
that are produced at the Netherlands facility.
Restructuring charges increased in 2008, related to our
manufacturing rationalization programs in our inorganic
materials manufacturing operations in Europe, additional
manufacturing rationalization in the United States and Latin
America, and other restructuring activity to reduce worldwide
costs and expenses.
Interest expense declined in 2008, primarily as a result of
lower interest rates on our debt. During the year, we issued new
convertible bonds. The proceeds from the new bonds, along with
additional borrowings under our revolving credit facility, were
used to repay our
91/8%
coupon senior notes, due January 2009. The repayment of the
senior notes resulted in a loss on extinguishment of debt of
$5.5 million during the year.
Loss from continuing operations declined in 2008 compared with
2007, primarily as a result of lower impairment charges, lower
SG&A expense and reduced interest expense. These benefits
were partially offset by higher restructuring charges and the
loss on extinguishment of debt.
During 2008, we sold the Fine Chemicals business that was
previously part of our Other Businesses segment. As a
consequence of the sale, the results from Fine Chemicals are now
included in discontinued operations for all periods. As a result
of the sale of Fine Chemicals, we recorded a gain on disposal of
discontinued operations during 2008.
Outlook
General economic conditions deteriorated sharply during the last
three months of 2008, as major regional economies around the
world experienced reduced activity and were negatively affected
by weak global credit markets. Demand from our customers who
serve markets such as construction, automobiles and appliances,
which had been weak through most of 2008, contracted more
quickly in the fourth quarter as consumer buying was curtailed.
This weakness is expected to continue at least through the first
half of 2009, and will negatively affect sales across our
product lines.
We expect to continue to record charges associated with our
current and future restructuring programs, as we proceed with
our initiatives to rationalize manufacturing operations in
Europe, and as we adjust our worldwide operations to be in line
with reduced customer demand.
Factors that could adversely affect our future financial
performance are contained within Risk Factors
included under Item 1A.
19
Results
of Operations
Comparison
of the years ended December 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
|
|
|
Net sales
|
|
$
|
2,245,152
|
|
|
$
|
2,147,904
|
|
|
$
|
97,248
|
|
|
|
4.5
|
%
|
Cost of sales
|
|
|
1,841,485
|
|
|
|
1,745,445
|
|
|
|
96,040
|
|
|
|
5.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
403,667
|
|
|
|
402,459
|
|
|
|
1,208
|
|
|
|
0.3
|
%
|
Gross margin percentage
|
|
|
18.0
|
%
|
|
|
18.7
|
%
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
297,119
|
|
|
|
314,878
|
|
|
|
(17,759
|
)
|
|
|
(5.6
|
)%
|
Impairment charges
|
|
|
80,205
|
|
|
|
128,737
|
|
|
|
(48,532
|
)
|
|
|
(37.7
|
)%
|
Restructuring charges
|
|
|
25,937
|
|
|
|
16,852
|
|
|
|
9,085
|
|
|
|
53.9
|
%
|
Other expense (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
50,145
|
|
|
|
57,837
|
|
|
|
(7,692
|
)
|
|
|
(13.3
|
)%
|
Interest earned
|
|
|
(714
|
)
|
|
|
(1,505
|
)
|
|
|
791
|
|
|
|
(52.6
|
)%
|
Loss on extinguishment of debt
|
|
|
5,531
|
|
|
|
|
|
|
|
5,531
|
|
|
|
|
|
Foreign currency losses, net
|
|
|
742
|
|
|
|
1,254
|
|
|
|
(512
|
)
|
|
|
(40.8
|
)%
|
Loss (gain) on sale of businesses
|
|
|
|
|
|
|
1,348
|
|
|
|
(1,348
|
)
|
|
|
(100.0
|
)%
|
Miscellaneous expense (income), net
|
|
|
1,239
|
|
|
|
576
|
|
|
|
663
|
|
|
|
115.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(56,537
|
)
|
|
|
(117,518
|
)
|
|
|
60,981
|
|
|
|
(51.9
|
)%
|
Income tax (benefit) expense
|
|
|
(2,791
|
)
|
|
|
(17,952
|
)
|
|
|
15,161
|
|
|
|
(84.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
(53,746
|
)
|
|
|
(99,566
|
)
|
|
|
45,820
|
|
|
|
(46.0
|
)%
|
Income from discontinued operations, net of income taxes
|
|
|
5,014
|
|
|
|
5,312
|
|
|
|
(298
|
)
|
|
|
(5.6
|
)%
|
Gain (loss) on disposal of discontinued operations, net of
income taxes
|
|
|
9,034
|
|
|
|
(225
|
)
|
|
|
9,259
|
|
|
|
(4,115.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(39,698
|
)
|
|
$
|
(94,479
|
)
|
|
$
|
54,781
|
|
|
|
(58.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share
|
|
$
|
(0.94
|
)
|
|
$
|
(2.23
|
)
|
|
$
|
1.29
|
|
|
|
(57.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales grew by 4.5% in 2008, driven by improved product
prices and favorable changes in foreign currency exchange rates.
The increase in product prices included higher costs for
precious metals, which are generally passed through to customers
with minimal contribution to gross profit. Changes in exchange
rates contributed approximately 3.5 percentage points to
the rate of growth in sales. Lower sales volume, particularly in
the last three months of the year, partially offset the positive
effects of product pricing and exchange rate changes. Sales
increased in all regions.
Gross profit was nearly flat in 2008 compared with 2007 as
increased net sales were offset by an increase in the cost of
sales. As a result, gross margin percentage declined during the
year. Gross profit was reduced by $3.1 million in 2008 as a
result of charges for asset write-offs and costs associated with
our manufacturing rationalization programs. Gross profit was
also reduced by costs of approximately $3.3 million to
clean up an accidental discharge of product into the wastewater
treatment facility at our Bridgeport, New Jersey, manufacturing
location. Gross profit percentage was negatively impacted by
higher raw materials costs, including costs of precious metals.
Precious metal costs generally are passed through to customers
with minimal gross profit contribution. Gross profit was reduced
by $7.9 million in 2007, primarily related to accelerated
depreciation and other costs associated with our manufacturing
rationalization programs.
Selling, general and administrative (SG&A)
expenses declined by $17.8 million in 2008. SG&A
expense as a percent of sales declined to 13.2% of sales in 2008
from 14.7% of sales in 2007. SG&A expense declined
primarily as a result of expense reduction efforts during the
last three months of the year that were taken in response to
slowing economic conditions and reduced sales. SG&A
expenses in 2008 included net charges of $3.9 million
20
primarily related to charges for corporate development
activities, asset write-offs and employee severance expenses,
partially offset by benefits from litigation settlements and
insurance proceeds. SG&A expense in 2007 included charges
of $12.2 million primarily related to litigation
settlements and corporate development activities.
Impairment charges of $58.4 million related to goodwill and
$21.8 million related to long-lived assets in the Tile
Coating Systems business within the Performance Coatings
segment, the Specialty Plastics segment, and the Electronic
Materials segment were recorded in 2008. The goodwill impairment
of $41.4 million in tile coatings products of the Tile
Coating Systems business was triggered by lower forecasted cash
flows resulting from the negative effect on operating results of
the significant downturn in demand in U.S. and European
housing and construction markets during the fourth quarter of
2008. The goodwill impairment of $17.0 million and asset
impairment of $1.9 million in the Specialty Plastics
business was the result of the downturn in demand from
automotive, appliance and container applications, primarily
driven by reduced demand in the fourth quarter of 2008. The
decline in auto sales and U.S. home construction negatively
impacted the business and the extended time forecasted for
recovery in these markets and triggered an indicator of
impairment. In addition, the 2008 impairment charge included a
$19.9 million impairment of property, plant and equipment
in our Electronic Materials facility in Uden, Netherlands. The
impairment was the result of a decline in the operating results
and reduced future sales projections for our dielectric material
products that are produced in the Uden facility. During 2007, an
impairment charge of $105.7 million related to goodwill and
$23.0 million related to long-lived assets was recorded in
our Polymer Additives and Pharmaceuticals businesses.
Restructuring charges of $25.9 million were recorded in
2008, primarily associated with the rationalization of our
manufacturing operations in the Performance Coatings and Color
and Glass Performance Materials segments, and other
restructuring activities to reduce costs and expenses throughout
all of our businesses. Restructuring charges of
$16.9 million in 2007 were primarily related to
manufacturing rationalization activities in the Performance
Coatings, Color and Glass Performance Materials, and Electronic
Materials segments.
Interest expense declined in 2008 as a result of lower interest
rates on our borrowings, partially offset by higher average
borrowing levels. During 2007, a $2.0 million write-off of
unamortized fees associated with an unused portion of our term
loan arrangements was included in our interest expense. During
2008, we refinanced our
91/8%
coupon senior notes using the proceeds of a new convertible bond
offering and additional borrowing from our revolving credit
facility. The repayment of the senior notes resulted in a loss
on extinguishment of debt of $5.5 million during the year.
Net foreign currency transaction losses were $0.7 million
in 2008, compared with $1.3 million in 2007. We manage
foreign currency risks in a wide variety of foreign currencies
principally by entering into forward contracts to mitigate the
impact of currency fluctuations on transactions arising from
international trade. The carrying values of these contracts are
adjusted to market value and the resulting gains or losses are
charged to income or expense in the period.
Miscellaneous expense increased in 2008 primarily as a result of
an increased provision for an environmental contingency in Latin
America related to a previously closed manufacturing site, a
loss on forward contracts in the current period, and lower gains
on the disposal of assets. The increased expense was partially
offset by benefits related primarily to reductions of accruals
for contingencies.
During 2008, there was a tax benefit of $2.8 million, or
4.9% of the loss before income taxes, compared to a benefit of
$18.0 million, or 15.3% of the loss before income taxes in
2007. The primary reasons for the change were a favorable
U.S. tax impact on foreign dividends and a decrease in the
reserve for uncertain tax positions. These favorable adjustments
were offset by a goodwill impairment charge in 2008 with only a
partial tax benefit, a net increase in our valuation allowance
due to a determination that it is more likely than not that
certain deferred tax assets will not be realized, and an
effective tax rate on foreign losses that is less than the
statutory U.S. tax rate.
The 2008 loss from continuing operations was reduced from the
loss recorded in 2007 as a result of lower impairment charges,
reduced SG&A expense and lower interest expense. Partially
offsetting these reduced expenses were higher restructuring
charges in 2008 compared with 2007.
21
During 2008, we sold the Fine Chemicals business that was
previously part of our Other Businesses segment. As a
consequence of the sale, the results from Fine Chemicals are now
included in discontinued operations for all periods. In
addition, primarily as a result of the sale of Fine Chemicals
during 2008, we recorded a gain of $9.0 million, net of
taxes, on the disposal of discontinued operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Segment Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Coatings
|
|
$
|
627,918
|
|
|
$
|
609,285
|
|
|
$
|
18,633
|
|
|
|
3.1
|
%
|
Electronic Materials
|
|
|
558,313
|
|
|
|
469,885
|
|
|
|
88,428
|
|
|
|
18.8
|
%
|
Color & Glass Performance Materials
|
|
|
456,644
|
|
|
|
445,709
|
|
|
|
10,935
|
|
|
|
2.5
|
%
|
Polymer Additives
|
|
|
349,902
|
|
|
|
334,492
|
|
|
|
15,410
|
|
|
|
4.6
|
%
|
Specialty Plastics
|
|
|
225,856
|
|
|
|
261,956
|
|
|
|
(36,100
|
)
|
|
|
(13.8
|
)%
|
Pharmaceuticals
|
|
|
26,519
|
|
|
|
26,577
|
|
|
|
(58
|
)
|
|
|
(0.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment sales
|
|
$
|
2,245,152
|
|
|
$
|
2,147,904
|
|
|
$
|
97,248
|
|
|
|
4.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Coatings
|
|
$
|
36,935
|
|
|
$
|
37,965
|
|
|
$
|
(1,030
|
)
|
|
|
(2.7
|
)%
|
Electronic Materials
|
|
|
52,868
|
|
|
|
32,785
|
|
|
|
20,083
|
|
|
|
61.3
|
%
|
Color & Glass Performance Materials
|
|
|
39,112
|
|
|
|
48,222
|
|
|
|
(9,110
|
)
|
|
|
(18.9
|
)%
|
Polymer Additives
|
|
|
6,086
|
|
|
|
10,755
|
|
|
|
(4,669
|
)
|
|
|
(43.4
|
)%
|
Specialty Plastics
|
|
|
5,385
|
|
|
|
15,116
|
|
|
|
(9,731
|
)
|
|
|
(64.4
|
)%
|
Pharmaceuticals
|
|
|
3,524
|
|
|
|
1,947
|
|
|
|
1,577
|
|
|
|
81.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income
|
|
$
|
143,910
|
|
|
$
|
146,790
|
|
|
$
|
(2,880
|
)
|
|
|
(2.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Coatings Segment Results. Sales
increased in Performance Coatings as a result of growth in sales
of tile products, which offset a decline in sales of porcelain
enamel products. The primary drivers of the overall increase
were favorable changes in foreign currency exchange rates and
increased prices. Partially offsetting these factors was a
decline in volume in our porcelain enamel products. Sales
increased in Europe, Latin America and Asia, and declined in the
United States. Operating income declined as a result of higher
raw material costs and the negative effects of lower
manufacturing volumes, partially offset by increased product
selling prices and reductions in selling, general and
administrative expenses.
Electronic Materials Segment Results. Sales
grew in Electronic Materials as a result of improved customer
demand for our advanced materials products, particularly
conductive pastes used in the manufacture of solar cells, and
our surface finishing products. The sales increase was driven by
higher product pricing, including increased precious metal costs
which generally are passed through to our customers with minimal
gross profit contribution. Favorable foreign currency exchange
rates and increased product sales volume also contributed to the
increased sales. Sales grew primarily as a result of higher
product shipments from our manufacturing facilities in the
United States, although much of this product volume is used
by customers in other regions. Operating income increased as a
result of increased sales volume of higher-margin products,
increased product pricing and manufacturing productivity
improvements, partially offset by higher raw material costs and
increased SG&A expense.
Color and Glass Performance Materials Segment
Results. Sales increased in Color and Glass
Performance Materials as a result of favorable changes in
foreign currency exchange rates and improved product pricing,
partially offset by lower sales volume. Sales increased in all
regions, led by increased sales in Europe. Operating income
declined compared with the prior year as a result of lower sales
volumes and higher raw material costs, partially offset by
higher product pricing and lower SG&A expenses.
Polymer Additives Segment Results. Sales
increased in Polymer Additives primarily as a result of
increased product prices and favorable changes in foreign
currency exchange rates, which more than offset lower sales
volumes. Sales increased in the United States, Europe and Asia.
Operating income declined, primarily as a result of higher raw
material costs and lower sales volumes, partially offset by
higher product pricing. In addition during
22
2008, the business incurred costs of approximately
$3.3 million to clean up an accidental discharge of product
into the wastewater treatment facility at our Bridgeport, New
Jersey, manufacturing plant.
Specialty Plastics Segment Results. Sales
declined in Specialty Plastics as a result of lower sales
volume, partially offset by higher product pricing and favorable
changes in foreign currency exchange rates. Sales were lower in
the United States and Europe as a result of weak customer
demand. Operating income declined due to lower sales volume and
higher raw material costs that were not fully offset by higher
product prices and reduced SG&A expense.
Pharmaceuticals Segment Results. Sales were
nearly flat in Pharmaceuticals compared with the prior year.
Operating profit improved primarily as a result of improved
manufacturing efficiency and lower SG&A expense, partially
offset by a less favorable combination of sales volume and
product mix. Results related to our Fine Chemicals business,
which had previously been combined with the results from our
Pharmaceuticals business and reported as Other
Businesses, are now reported as discontinued operations
following the sale of the Fine Chemicals business during 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Geographic Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
973,717
|
|
|
$
|
900,146
|
|
|
$
|
73,571
|
|
|
|
8.2
|
%
|
International
|
|
|
1,271,435
|
|
|
|
1,247,758
|
|
|
|
23,677
|
|
|
|
1.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total geographic revenues
|
|
$
|
2,245,152
|
|
|
$
|
2,147,904
|
|
|
$
|
97,248
|
|
|
|
4.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales increased in the United States primarily driven by higher
shipments of Electronic Materials products from our
U.S. manufacturing facilities. U.S. sales of Polymer
Additive products also increased. The sales increase was
partially offset by lower U.S. sales of our Specialty
Plastics and Performance Coatings products. Sales increased
slightly in international regions, driven primarily by increased
sales of tile products in our Performance Coatings business.
23
Comparison
of the years ended December 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
|
|
|
Net sales
|
|
$
|
2,147,904
|
|
|
$
|
1,987,606
|
|
|
$
|
160,298
|
|
|
|
8.1
|
%
|
Cost of sales
|
|
|
1,745,445
|
|
|
|
1,585,081
|
|
|
|
160,364
|
|
|
|
10.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
402,459
|
|
|
|
402,525
|
|
|
|
(66
|
)
|
|
|
|
%
|
Gross margin percentage
|
|
|
18.7
|
%
|
|
|
20.3
|
%
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
314,878
|
|
|
|
302,442
|
|
|
|
12,436
|
|
|
|
4.1
|
%
|
Impairment charges
|
|
|
128,737
|
|
|
|
|
|
|
|
128,737
|
|
|
|
|
|
Restructuring charges
|
|
|
16,852
|
|
|
|
23,146
|
|
|
|
(6,294
|
)
|
|
|
(27.2
|
)%
|
Other expense (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
57,837
|
|
|
|
62,714
|
|
|
|
(4,877
|
)
|
|
|
(7.8
|
)%
|
Interest earned
|
|
|
(1,505
|
)
|
|
|
(4,466
|
)
|
|
|
2,961
|
|
|
|
(66.3
|
)%
|
Foreign currency losses, net
|
|
|
1,254
|
|
|
|
1,040
|
|
|
|
214
|
|
|
|
20.6
|
%
|
Loss (gain) on sale of businesses
|
|
|
1,348
|
|
|
|
(67
|
)
|
|
|
1,415
|
|
|
|
(2,111.9
|
)%
|
Miscellaneous expense (income), net
|
|
|
576
|
|
|
|
(87
|
)
|
|
|
663
|
|
|
|
(762.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(117,518
|
)
|
|
|
17,803
|
|
|
|
(135,321
|
)
|
|
|
(760.1
|
)%
|
Income tax (benefit) expense
|
|
|
(17,952
|
)
|
|
|
2,381
|
|
|
|
(20,333
|
)
|
|
|
(854.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
(99,566
|
)
|
|
|
15,422
|
|
|
|
(114,988
|
)
|
|
|
(745.6
|
)%
|
Income from discontinued operations, net of income taxes
|
|
|
5,312
|
|
|
|
5,670
|
|
|
|
(358
|
)
|
|
|
(6.3
|
)%
|
Gain (loss) on disposal of discontinued operations, net of
income taxes
|
|
|
(225
|
)
|
|
|
(472
|
)
|
|
|
247
|
|
|
|
(52.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(94,479
|
)
|
|
$
|
20,620
|
|
|
$
|
(115,099
|
)
|
|
|
(558.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share
|
|
$
|
(2.23
|
)
|
|
$
|
0.46
|
|
|
$
|
(2.69
|
)
|
|
|
(584.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales from continuing operations grew by 8.1% in 2007, driven by
improved pricing and favorable changes in foreign currency
exchange rates. Changes in exchange rates contributed slightly
less than half of the increase in sales. Sales growth in Europe,
Asia and Latin America was partially offset by a decline of less
than one percent in sales in the United States.
Gross profit was essentially flat in 2007 compared with 2006.
The change in gross profit was limited by increased cost of
sales, which grew at a faster rate than sales primarily due to
increased raw material costs. As a result, gross margin
percentage declined for the year. Gross profit was reduced by
$7.9 million in 2007 primarily as a result of charges for
accelerated depreciation and other costs associated with our
manufacturing rationalization programs. In addition, gross
profit was negatively impacted by unplanned manufacturing costs
due to temporary interruptions in operations at our
manufacturing facilities in South Plainfield, New Jersey, and
Bridgeport, New Jersey, and increased costs required to
address product specification requirements at our Evansville,
Indiana, Specialty Plastics manufacturing location. Higher
precious metal prices during 2007 reduced our gross margin
percentage, because increases in precious metal prices are
generally passed through to customers with minimal gross profit
contribution. Gross profit was reduced by $4.6 million in
2006 primarily as a result of charges for manufacturing
rationalization activities.
Selling, general and administrative (SG&A)
expenses increased by 4.1% in 2007. SG&A expense as a
percent of sales declined to 14.7% of sales in 2007 from 15.2%
of sales in 2006. Charges of $12.2 million were included in
the 2007 SG&A expense, primarily related to settlement
agreements with plaintiffs in civil lawsuits related to the
alleged antitrust violations in the heat stabilizer industry
(see Note 8 to the consolidated financial statements),
other legal settlements and divestment activities. During 2006,
SG&A expense included $8.1 million for charges
primarily related to accounting investigation and restatement
activities, and a settlement loss that
24
resulted in a lump sum payment to the beneficiary of
Ferros deceased former Chief Executive Officer, partially
offset by benefits from changes to our postretirement benefit
programs.
An impairment charge of $128.7 million related to goodwill
and other long-lived assets was recorded in 2007 related to our
Polymer Additives and Pharmaceuticals businesses. The impairment
in the Polymer Additives business was primarily the result of
the cumulative negative effect on earnings of a cyclical
downturn in certain of the business primary
U.S.-based
end markets, including housing and automobiles; anticipated
additional product costs related to recent hazardous material
legislation and regulations, such as the newly enacted European
Union REACH registration system, which requires
chemical suppliers to perform toxicity studies on the components
of their products and to register certain information; and
higher forecasted capital expenditures related to the business.
The impairment charge in the Pharmaceuticals business was
primarily the result of the longer time necessary to transition
the business from a supplier of food supplements and additives
to a supplier of high-value pharmaceutical products and
services. There were no impairment charges in 2006.
Restructuring charges of $16.9 million were recorded in
2007, primarily associated with our manufacturing
rationalization activities in the Performance Coatings and Color
and Glass Performance Materials segments in Europe and our
Electronic Materials segment in the United States. Restructuring
charges of $23.1 million in 2006 were primarily related to
the same manufacturing rationalization activities.
Interest expense declined in 2007 primarily as a result of lower
debt levels and lower interest rates resulting from the
renegotiation of our credit facilities and accounts receivables
securitization program during the second quarter. The lower debt
levels were driven by the elimination of cash deposits for
precious metals, which occurred during the first half of the
year. The 2007 interest expense included a $2.0 million
write-off of unamortized fees associated with an unused portion
of our term loan arrangements. Interest expense in 2006 included
a $2.5 million write-off of fees and discounts related to
certain of our debentures that were repaid in July and August
2006 and previously unamortized fees related to our former
revolving credit facility. Interest earned declined in 2007 as a
result of lower cash deposits for precious metals.
Net foreign currency transaction losses were $1.3 million
in 2007, up $0.2 million from 2006. We manage foreign
currency risks in a wide variety of foreign currencies
principally by entering into forward contracts to mitigate the
impact of currency fluctuations on transactions arising from
international trade. The carrying values of these contracts are
adjusted to market value and the resulting gains or losses are
charged to income or expense in the period.
During 2007, we recognized a loss of $1.3 million on the
sale of businesses related to an industrial ceramics business
that operated in our Niagara Falls, New York, manufacturing
facility.
During 2007, net taxes were a benefit of $18.0 million, or
15.3% of the loss before income taxes, compared to an expense of
$2.4 million or 13.4% of income before taxes in 2006. The
change was driven by: a loss before income taxes in 2007
compared to income in 2006; an impairment charge in 2007 where a
partial tax benefit was recorded on the charge; a net increase
in our valuation allowance due to a determination that it is
more likely than not certain deferred tax assets will not be
realized; an additional allowance for unremitted earnings from
foreign subsidiaries no longer considered indefinitely
reinvested; and a statutory change to a lower tax rate in
Germany affecting our deferred tax assets.
25
We recorded income of $5.3 million, net of taxes, in 2007
related to discontinued operations. The income from discontinued
operations was primarily related to our Fine Chemicals business,
which was sold in 2008. The results from the Fine Chemicals
business are recorded in discontinued operations for all periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Segment Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Coatings
|
|
$
|
609,285
|
|
|
$
|
538,385
|
|
|
$
|
70,900
|
|
|
|
13.2
|
%
|
Electronic Materials
|
|
|
469,885
|
|
|
|
444,463
|
|
|
|
25,422
|
|
|
|
5.7
|
%
|
Color & Glass Performance Materials
|
|
|
445,709
|
|
|
|
387,540
|
|
|
|
58,169
|
|
|
|
15.0
|
%
|
Polymer Additives
|
|
|
334,492
|
|
|
|
313,500
|
|
|
|
20,992
|
|
|
|
6.7
|
%
|
Specialty Plastics
|
|
|
261,956
|
|
|
|
271,307
|
|
|
|
(9,351
|
)
|
|
|
(3.4
|
)%
|
Pharmaceuticals
|
|
|
26,577
|
|
|
|
32,411
|
|
|
|
(5,834
|
)
|
|
|
(18.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment sales
|
|
$
|
2,147,904
|
|
|
$
|
1,987,606
|
|
|
$
|
160,298
|
|
|
|
8.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Coatings
|
|
$
|
37,965
|
|
|
$
|
42,718
|
|
|
$
|
(4,753
|
)
|
|
|
(11.1
|
)%
|
Electronic Materials
|
|
|
32,785
|
|
|
|
35,136
|
|
|
|
(2,351
|
)
|
|
|
(6.7
|
)%
|
Color & Glass Performance Materials
|
|
|
48,222
|
|
|
|
43,512
|
|
|
|
4,710
|
|
|
|
10.8
|
%
|
Polymer Additives
|
|
|
10,755
|
|
|
|
10,947
|
|
|
|
(192
|
)
|
|
|
(1.8
|
)%
|
Specialty Plastics
|
|
|
15,116
|
|
|
|
14,629
|
|
|
|
487
|
|
|
|
3.3
|
%
|
Pharmaceuticals
|
|
|
1,947
|
|
|
|
(1,219
|
)
|
|
|
3,166
|
|
|
|
(259.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income
|
|
$
|
146,790
|
|
|
$
|
145,723
|
|
|
$
|
1,067
|
|
|
|
0.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Coatings Segment Results. Sales
increased in Performance Coatings as a result of growth in sales
of tile and porcelain enamel products. The increased sales were
due to higher prices and favorable changes in foreign currency
exchange rates. Sales increased in all regions, led by growth in
Europe. Operating income declined primarily as a result of
higher raw material costs, including cobalt, lithium carbonate,
nickel, and zinc, as well as higher manufacturing costs and
lower manufacturing volumes that were not fully recovered
through improved pricing.
Electronic Materials Segment Results. Sales
grew in Electronic Materials as a result of improved customer
demand in the second half of the year. Demand for dielectric
materials, which had been weak in the first half of the year,
recovered in the second half. Demand for conductive pastes used
by customers who manufacture solar cells was particularly strong
in the second half of the year. The primary drivers for the
increased sales were increased market demand, higher precious
metal prices and favorable changes in foreign currency exchange
rates. Sales increases were primarily in Asia and Europe, while
sales in the United States were slightly lower. Operating income
declined as a result of higher raw material costs that were not
fully offset by the positive effects of increased manufacturing
volume. In addition, in April 2007, production was temporarily
interrupted at our South Plainfield, New Jersey, manufacturing
plant to address operational and safety concerns. This
production interruption added approximately $3.0 million to
manufacturing costs for the year.
Color and Glass Performance Materials Segment
Results. Sales increased as a result of growth in
glass coatings and performance pigment materials. The positive
effects of higher product pricing and favorable changes in
foreign currency exchange rates were the primary drivers of the
sale growth. Sales increased in all regions, led by growth in
Europe. Operating income increased mainly as a result of higher
prices, partially offset by higher raw material costs, including
bismuth, chrome oxide, cobalt and lead oxide.
Polymer Additives Segment Results. Sales grew
during 2007 despite the negative effects of weakness in demand
from North American residential housing, appliance and
automotive markets. Sales increased in both the United States
and Europe, the segments two primary sales regions.
Increased product pricing and favorable changes in foreign
currency exchange rates more than offset the effects of lower
manufacturing volumes during the year. Operating income declined
slightly, primarily as a result of higher raw material costs and
costs associated with
26
an unplanned manufacturing interruption, largely offset by
improved prices and cost and expense reduction programs.
Polypropylene, tallow and soybean oil were among the raw
materials that increased sharply in price during 2007. Operating
income was negatively affected by an unexpected operational
issue at our Bridgeport, New Jersey, manufacturing plant.
Because of an accidental discharge of product into the
plants
on-site
watewater treatment facility, we incurred unplanned costs of
approximately $2.3 million during the 2007 fourth quarter,
including the costs of scrapped product and added wastewater
treatment.
Specialty Plastics Segment Results. Sales
declined primarily as a result of weak demand from customers who
make products used in residential housing, automotive and
appliance markets in the United States. This weak demand
resulted in lower sales in the United States, which were
partially offset by sales growth in Europe. Partially offsetting
the effects of lower volumes were increased product pricing and
favorable changes in foreign currency exchange rates. Sales of
plastic colorants increased during 2007, while sales of filled
and reinforced plastics declined. Operating income increased as
a result of improved pricing and lower selling, general and
administrative expenses, partially offset by higher raw material
costs and the negative effects of lower manufacturing volume.
Operating income was also reduced by costs incurred to address
product specification issues at our Evansville, Indiana, plant.
Pharmaceuticals Segment Results. Sales
declined as the result of lower sales volume. Sales were lower
in the United States, which is the primary market for these
products. The segment recorded operating income for the year
compared to a loss in the prior period, primarily due to a
product mix change to higher value pharmaceutical products.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Geographic Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
900,146
|
|
|
$
|
908,497
|
|
|
$
|
(8,351
|
)
|
|
|
(0.9
|
)%
|
International
|
|
|
1,247,758
|
|
|
|
1,079,109
|
|
|
|
168,649
|
|
|
|
15.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total geographic revenues
|
|
$
|
2,147,904
|
|
|
$
|
1,987,606
|
|
|
$
|
160,298
|
|
|
|
8.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales declined slightly in the United States, driven by lower
regional sales in the Specialty Plastics and Electronic
Materials segments. These declines were partially offset by
increased U.S. sales in Color and Glass Performance
Materials and Performance Coatings. International sales
increased in Europe, Asia and Latin America and in all segments.
Summary
of Cash Flows for the years ended December 31, 2008, 2007
and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Net cash (used for) provided by operating activities
|
|
$
|
(9,096
|
)
|
|
$
|
144,579
|
|
|
$
|
70,944
|
|
Net cash used for investing activities
|
|
|
(17,050
|
)
|
|
|
(62,033
|
)
|
|
|
(68,718
|
)
|
Net cash provided by (used for) financing activities
|
|
|
23,854
|
|
|
|
(88,717
|
)
|
|
|
(3,035
|
)
|
Effect of exchange rate changes on cash
|
|
|
458
|
|
|
|
1,211
|
|
|
|
381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
$
|
(1,834
|
)
|
|
$
|
(4,960
|
)
|
|
$
|
(428
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities. Cash flows from
operating activities decreased $153.7 million from 2007 to
2008 primarily as a result of the absence of a return of cash
deposits related to our precious metals consignment program, a
decrease in accounts payable, and the absence of cash inflows
from inventory reductions. Cash flows from operations in 2008
also includes cash payments of $27.3 million used for
restructuring programs, an increase of $14.7 million from
2007. Prior to 2008, Ferro Finance Corporation
(FFC), a wholly-owned subsidiary, was a qualified
special purpose entity and therefore unconsolidated. In 2008, in
connection with an amendment of our U.S. asset
securitization program, FFC ceased to be a qualified special
purpose entity and was included in our consolidated balance
sheet. The consolidation of FFC was a non-cash event and,
therefore, is not reflected in our cash flows. Upon
consolidation of FFC, accounts receivable increased $105.9
million, the note receivable from FFC decreased $75.9 million,
and other non-current assets decreased $30.0 million, with no
change in cash.
27
Cash flows from operating activities increased by
$73.6 million from 2006 to 2007 primarily as a result of
the elimination of deposit requirements related to our precious
metal consignment programs and lower working capital
requirements, partially offset by reduced proceeds from the
domestic asset securitization program.
Investing activities. Capital expenditures
increased $5.4 million from 2007 to 2008 and
$17.0 million from 2006 to 2007. The primary reasons for
the increase in capital spending included the construction of a
freestanding, state-of-the-art plant in Spain that produces
colors for the European tile market, increased investment in the
Companys manufacturing facilities in the Asia-Pacific
region, projects related to our manufacturing rationalization
programs in the United States and Europe, and investments to
support current and anticipated sales growth. In 2008, we sold
our fine chemicals business and received proceeds, net of
transactional costs, of $56.5 million. In 2006, in
connection with an amendment to the asset securitization
program, the Company invested an additional $25.0 million
in FFC, which at that time was unconsolidated.
Financing activities. In 2006, we entered into
an agreement with a group of lenders for a $700 million
credit facility, which replaced a revolving credit facility that
would have expired later that year. In 2007, we canceled the
unused portion of the term loan facility and amended the credit
facility. At December 31, 2008, it consisted of a
five-year, $300.0 million multi-currency senior revolving
credit facility and a six-year senior term loan facility with an
outstanding principal balance of $292.5 million. In 2008,
Ferro issued $172.5 million of 6.50% Convertible
Senior Notes due 2013. The proceeds from the offering, along
with available cash, including borrowings under our revolving
credit facility, were used to purchase all of Ferros
outstanding
91/8% Senior
Notes that would have matured in 2009. In 2008, we had net
borrowings from all of these facilities of $61.0 million,
while in 2007, we had net repayments of $62.1 million, for
a net increase in our borrowings between years of
$123.1 million. In 2006, we had net borrowings of
$36.9 million from these facilities, so the net decrease in
2007 in our rate of borrowing was $99.0 million. We paid
call premiums and tender costs of $5.3 million in 2008 to
extinguish the
91/8% Senior
Notes. In addition, we paid debt issuance costs of
$5.6 million in 2008 to issue the 6.50% Convertible
Senior Notes, $1.8 million in 2007 to amend the 2006 credit
facility and $16.2 million in 2006 to establish and use
that facility. We also paid dividends on our common stock at the
quarterly rate of $0.145 per share, which along with dividends
on our preferred stock totaled $26.1 million in 2008,
$26.1 million in 2007, and $25.9 million in 2006. In
the first quarter of 2009, Ferros Board of Directors
declared a quarterly dividend of $0.01 per share.
Capital
Resources and Liquidity
6.50% Convertible
Senior Notes
In August 2008, Ferro issued $172.5 million of
6.50% Convertible Senior Notes due 2013 (the
Convertible Notes). The proceeds from the offering,
along with available cash, including borrowings under
Ferros revolving credit facility, were used to purchase
all of Ferros outstanding
91/8% Senior
Notes. The Convertible Notes bear interest at a rate of 6.5% per
year, payable semi-annually in arrears on February 15 and August
15 of each year, beginning on February 15, 2009. The
Convertible Notes mature on August 15, 2013. At
December 31, 2008, we were in compliance with the covenants
under the Convertible Notes indentures.
91/8% Senior
Notes
In June 2008, Ferro commenced a cash tender offer to purchase
any and all of its outstanding $200 million aggregate
principal amount of
91/8% Senior
Notes due 2009 (the
91/8% Notes).
In August and September, we purchased all of the
91/8% Notes
for $205.3 million, including call premiums and tender
costs, and recorded a loss of $5.5 million, including
unamortized discounts and fees. We financed the purchase of the
91/8% Notes
and related costs from the issuance of the Convertible Notes,
along with available cash, including borrowings under
Ferros revolving credit facility.
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, which replaced a former revolving credit
facility that would have expired later that year. In 2007, we
cancelled the unused portion of the term loan facility and
amended the credit facility (the 2007 Amended Credit
Facility) primarily to increase the size of the
28
revolving credit facility, reduce interest rates, and increase
operating flexibility. At December 31, 2008, the 2007
Amended Credit Facility consisted of a $300.0 million
revolving credit facility, which matures in 2011, and a term
loan facility with an outstanding principal balance of
$292.5 million, which matures in 2012. The Company is
required to make periodic principal payments to the term loan
investors with a corresponding reduction in the commitment
amount under the term loan facility.
At December 31, 2008, we had borrowed $111.8 million
of the revolver and had $180.0 million available, after
reductions for standby letters of credit secured by this
facility. At December 31, 2008, we had borrowed
$292.5 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 January 2009 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 an additional
principal payment of $6.4 million.
At December 31, 2008, we were in compliance with the
covenants of the 2007 Amended Credit Facility.
At February 28, 2009, we had borrowed $197.8 million
of the revolver and had $96.0 million available, after
reductions for standby letters of credit secured by this
facility. The February 28, 2009, borrowings represent an
increase of $86.0 million since December 31, 2008, of
which $46.4 million is attributable to our decision to cash
collateralize certain of our precious metals consignment
arrangements. For further discussion of our precious metals
program, see Consignment and Customer Arrangements for
Precious Metals under Item 7 of this Annual Report on
Form 10-K.
On March 11, 2009, we amended the 2007 Amended Credit
Facility (the 2009 Amended Credit Facility)
primarily to provide additional operating flexibility and to
change pricing to more accurately reflect current market
interest rates. The primary effects of the 2009 Amended Credit
Facility are to:
|
|
|
|
|
Increase the interest rates and commitment fees payable
thereunder pursuant to a grid structure based on our leverage
ratio,
|
|
|
|
Increase the maximum permitted leverage ratio and decrease the
minimum permitted fixed charge coverage ratio,
|
|
|
|
Add a minimum quarterly EBITDA requirement for fiscal year 2009,
|
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|
|
Restrict the Companys ability to engage in acquisitions
and make investments,
|
|
|
|
Limit the amount of cash and cash equivalent collateral the
Company is permitted to deliver to participants in our precious
metals program to secure our obligations arising under the
precious metals consignment agreements,
|
|
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|
Require additional financial reporting by the Company to the
lenders,
|
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|
|
Increase the amount of the annual excess cash flow required to
be used to repay term loans,
|
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|
Require application of the net proceeds of certain dispositions,
but excluding the first $20 million of such net proceeds,
to be applied to repay debt outstanding under the revolving
credit facility and term loans and to permanently reduce
availability under the revolving loan facility on a dollar for
dollar basis, provided that we are not required to reduce the
commitments under the revolving credit facility to below
$150 million,
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|
Eliminate our ability to request an increase of $50 million
in the revolving credit facility,
|
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|
|
Add provisions governing the obligations of the Company and the
lenders if one or more lenders under the revolving credit
facility fails to satisfy its funding obligations or otherwise
becomes a defaulting lender, and
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|
Restrict our ability to make payments with respect to our
capital securities. The 2009 Amended Credit Facility effectively
prohibits us from paying dividends on our common stock.
|
29
The specific covenants and related definitions can be found in
the applicable debt agreements, each of which we have previously
filed with the Securities and Exchange Commission.
Domestic
Receivable Sales Program
We have an asset securitization program for substantially all of
Ferros U.S. trade accounts receivable. This program
accelerates cash collections at favorable financing costs and
helps us manage the Companys liquidity requirements. We
legally sell these trade accounts receivable to FFC, which
finances its acquisition of trade receivable assets by issuing
beneficial interests in (securitizing) the receivables to
multi-seller receivables securitization companies (the
conduits). 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. FFC is a wholly-owned
subsidiary, which until December 2008 was a qualified special
purpose entity (QSPE) and, therefore, was not
consolidated. In December 2008, we amended the program so that
FFC is no longer a QSPE, FFC is included in our consolidated
financial statements, and this program is no longer accounted
for as an off balance sheet arrangement.
In June 2008, we amended the facility to reduce the
programs size from $100 million to $75 million.
After reductions for non-qualifying receivables, we had
$56.8 million at December 31, 2008, and
$52.5 million at February 28, 2009, available under
this program. At December 31, 2008 and February 28,
2009, FFC had not issued any beneficial interests in its trade
accounts receivable, therefore there was no debt outstanding
under the asset securitization program. The Company intends to
renew or replace the asset securitization program prior to its
scheduled expiration in June 2009, however there can be no
assurance that the Company will be able to do so.
Off
Balance Sheet Arrangements
International Receivables Sales Programs. We
maintain several international programs to sell trade accounts
receivable, primarily without recourse. The commitments
supporting this program can be withdrawn at any time and totaled
$81.7 million at December 31, 2008. The amount of
outstanding receivables sold under the international programs
was $16.7 million at December 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
(generally referred to as our precious metals program). The
financial institutions retain ownership of the precious metals
and charge us fees based on the amounts we consign. These fees
were $4.6 million for 2008. At December 31, 2008, we
had on hand $104.2 million of precious metals, measured at
fair value, owned by participants in our precious metals
program. We also process precious metals owned by our customers.
The consignment agreements involve short-term commitments that
typically mature within 30 to 180 days of each transaction
and are typically renewed on an ongoing basis. As a result, the
Company relies on the continued willingness of financial
institutions to participate in these arrangements to maintain
this source of liquidity. During February and March 2009,
several participants in our precious metals program required
Ferro to deliver cash collateral to secure Ferros
obligations arising under the consignment agreements. Ferro
delivered the cash collateral to induce those financial
institutions to continue participating in Ferros precious
metals program.
If participants in our precious metals program require cash
collateral to secure our obligations, Ferro may choose to
provide such collateral or purchase the precious metal outright
as an alternative to continuing the consignment arrangements.
This would require us to borrow under our revolving credit
facility or raise funds from other financing sources. Such
borrowings would reduce our liquidity and increase our borrowing
costs. The 2009 Amended Credit Facility prohibits Ferro from
delivering cash and cash equivalent collateral in excess of
$120 million to participants in our precious metals
program. Accordingly, Ferro would be required to purchase
precious metals outright if these participants were unwilling to
deliver metals in quantities sufficient to meet the
Companys operating requirements without exceeding the cash
collateral limits set forth in the credit facility. Ferro is
currently pursuing a variety of initiatives intended to reduce
the amount of precious metals required to support our
manufacturing operations and reduce our dependence on
consignment agreements.
30
Bank Guarantees and Standby Letters of
Credit. At December 31, 2008, the Company
had bank guarantees and standby letters of credit issued by
financial institutions, which totaled $13.9 million. These
agreements primarily relate to Ferros insurance programs
and foreign tax payments.
Other
Financing Arrangement
We maintain other lines of credit to provide global flexibility
for Ferros short-term liquidity requirements. These
facilities are uncommitted lines for our international
operations and totaled $24.9 million at December 31,
2008. The unused portions of these lines provided
$22.0 million of additional liquidity at December 31,
2008.
Liquidity
Requirement
Our liquidity requirements primarily include debt service,
purchase commitments, working capital requirements, capital
investments and postretirement obligations. We expect to meet
these requirements through cash provided by operating activities
and availability under existing or replacement credit facilities
or other financing arrangements. Ferros level of debt and
debt service requirements could have important consequences to
its business operations and uses of cash flows.
The Companys aggregate amount of obligations for the next
five years and thereafter is set forth below:
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
|
Totals
|
|
|
|
(Dollars in thousands)
|
|
|
Loans payable to banks
|
|
$
|
4,754
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,754
|
|
Convertible notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
172,500
|
|
|
|
|
|
|
|
172,500
|
|
Revolving credit facility
|
|
|
|
|
|
|
|
|
|
|
111,803
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111,803
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|
Term loan facility
|
|
|
3,050
|
|
|
|
3,050
|
|
|
|
73,315
|
|
|
|
213,083
|
|
|
|
|
|
|
|
|
|
|
|
292,498
|
|
Other long-term notes
|
|
|
268
|
|
|
|
255
|
|
|
|
209
|
|
|
|
188
|
|
|
|
104
|
|
|
|
519
|
|
|
|
1,543
|
|
Obligations under capital leases
|
|
|
1,392
|
|
|
|
1,360
|
|
|
|
958
|
|
|
|
958
|
|
|
|
909
|
|
|
|
4,701
|
|
|
|
10,278
|
|
Obligations under operating leases
|
|
|
13,105
|
|
|
|
8,817
|
|
|
|
6,167
|
|
|
|
4,518
|
|
|
|
4,166
|
|
|
|
12,623
|
|
|
|
49,396
|
|
Purchase commitments
|
|
|
34,431
|
|
|
|
4,043
|
|
|
|
783
|
|
|
|
153
|
|
|
|
38
|
|
|
|
|
|
|
|
39,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
57,000
|
|
|
$
|
17,525
|
|
|
$
|
193,235
|
|
|
$
|
218,900
|
|
|
$
|
177,717
|
|
|
$
|
17,843
|
|
|
$
|
682,220
|
|
|
|
|
|
|
|
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|
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|
|
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
Obligations for interest costs, cash collateralization
requirements, income taxes, and contributions to our
post-employment benefit plans are not included in the table
above, but are discussed below.
Cash required for interest costs in 2008 was $52.7 million.
We expect that the amount for 2009 will be substantially higher
due to the terms of our 2009 Amended Credit Facility, but the
actual amount depends on the underlying interest rates on our
variable-rate debt and our overall debt levels during the year.
As described in Consignment and Customer Arrangements for
Precious Metals above, we recently were required to
provide cash collateral deposits to secure our obligations under
our precious metals program.
We pay taxes as part of our normal operations as a profitable
company. The amount of taxes we pay depends on a variety of
factors described in more detail in Critical Accounting Policies
below. However, the principal factors are the level of our
profitability and the countries in which we earn our taxable
income. We have paid and expect to continue to pay taxes for the
foreseeable future. Under Financial Accounting Standards Board
(FASB) Interpretation No. 48, Accounting for
Uncertainty in Income Taxes,
(FIN No. 48), we anticipate that between
$5.0 and $6.0 million of liabilities for unrecognized tax
benefits may be reversed within the next 12 months. These
liabilities relate to
non-U.S. tax
issues and are expected to reverse due to the expiration of the
applicable statute of limitations periods. Due to the high
degree of uncertainty regarding the timing of potential future
cash flows with these liabilities, we are unable to make a
reasonably reliable estimate of the amount and period in which
these liabilities might be paid or reversed in years beyond 2009.
31
We expect to contribute approximately $33.8 million in 2009
and $60.4 million in 2010 to our post-employment benefit
plans. We have not projected contributions past 2010 due to the
current economic uncertainty and volatility in the global
capital markets. We determined these funding amounts based on
the minimum contributions required under various applicable
regulations in each respective country. The Pension Protection
Act of 2006 was enacted in August 2006. While this act has had
some effect on specific plan provisions in our
U.S. retirement programs, its primary effect has been to
change the minimum funding requirements. Until final regulations
are issued by the United States Treasury Department, the
financial effect can only be estimated. Actual contributions
also depend on the future funded status of the plans and on the
amount of employee contributions.
Critical
Accounting Policies
When we prepare our consolidated financial statements we are
required to make estimates and assumptions that affect the
amounts we report in the consolidated financial statements and
footnotes. We consider the policies discussed below to be more
critical than other policies because their application requires
our most subjective or complex judgments. These estimates and
judgments arise because of the inherent uncertainty in
predicting future events. Management has discussed the
development, selection and disclosure of these policies with the
Audit Committee of the Board of Directors.
Inventories
We value inventory at the lower of cost or market, with cost
determined utilizing the
first-in,
first-out (FIFO) method. We periodically evaluate the net
realizable value of inventories based primarily upon their age,
but also upon assumptions of future usage in production,
customer demand and market conditions. Inventories have been
reduced to the lower of cost or realizable value by allowances
for slow moving or obsolete goods. If actual circumstances are
less favorable than those projected by management in its
evaluation of the net realizable value of inventories,
additional write-downs may be required. Slow moving, excess or
obsolete materials are specifically identified and may be
physically separated from other materials, and we rework or
dispose of these materials as time and manpower permit.
Environmental
Liabilities
Our manufacturing facilities are subject to a broad array of
environmental laws and regulations in the countries in which
they operate. The costs to comply with complex environmental
laws and regulations are significant and will continue for the
foreseeable future. We expense these recurring costs as they are
incurred. While these costs may increase in the future, they are
not expected to have a material impact on our financial
position, liquidity or results of operations.
We also accrue for environmental remediation costs when it is
probable that a liability has been incurred and we can
reasonably estimate the amount. We determine the timing and
amount of any liability based upon assumptions regarding future
events. Inherent uncertainties exist in such evaluations
primarily due to unknown conditions, changing governmental
regulations and legal standards regarding liability, and
evolving technologies. We adjust these liabilities periodically
as remediation efforts progress or as additional technical or
legal information becomes available.
Income
Taxes
The breadth of our operations and complexity of income tax
regulations require us to assess uncertainties and make
judgments in estimating the ultimate amount of income taxes we
will pay. The final income taxes we pay are based upon many
factors, including existing income tax laws and regulations,
negotiations with taxing authorities in various jurisdictions,
outcomes of tax litigation, and resolution of disputes arising
from federal, state, and international income tax audits. The
resolution of these uncertainties may result in adjustments to
our income tax assets and liabilities in the future.
Deferred income taxes result from differences between the
financial and tax basis of our assets and liabilities and we
adjust our deferred income tax assets and liabilities for
changes in income tax rates and income tax laws when changes are
enacted. We record valuation allowances to reduce deferred
income tax assets when it is more
32
likely than not that a tax benefit will not be realized.
Significant judgment is required in evaluating the need for and
the magnitude of appropriate valuation allowances against
deferred income tax assets. The realization of these assets is
dependent on generating future taxable income, our ability to
carry back or carry forward net operating losses and credits to
offset taxable income in a prior year, as well as successful
implementation of various tax strategies to generate taxable
income where net operating losses or credit carryforwards exist.
In evaluating our ability to realize the deferred income tax
assets, we rely principally on the reversal of existing
temporary differences, the availability of tax planning
strategies, and forecasted taxable income using historical and
projected future operating results.
We earn a significant portion of our pre-tax income outside the
U.S. Many of these
non-U.S. tax
jurisdictions have statutory income tax rates that are lower
than that in the U.S. Because we carry a majority of our
debt in the U.S., we also have significant cash needs in the
U.S. to service this debt. As a result, it is necessary for
us to perform significant tax and treasury planning and analysis
to determine the best actions to achieve the goals of meeting
our U.S. cash needs, while also reducing our worldwide
taxable income. In this tax and treasury planning, we consider
future taxable income in the U.S. and
non-U.S. jurisdictions,
future cash needs in the U.S., and the timing and amount of
dividend repatriations. Our ability to balance future taxable
income and cash flows between the U.S. and foreign
locations depends on various strategies, such as the charging of
management fees for intercompany services, transfer pricing,
intercompany royalties, intercompany sales of technologies and
intellectual property, and choosing between allowable tax
methods.
The amount of income taxes we pay is subject to ongoing audits
by federal, state and foreign tax authorities. Our estimate of
the potential outcome of any uncertain tax issue is subject to
managements assessment of relevant risks, facts, and
circumstances existing at that time. We record a liability for
the difference between the benefit recognized and measured based
on a more-likely than-not threshold and the tax position taken
or expected to be taken on the tax return. To the extent that
our assessment of such tax positions changes, the change in
estimate is recorded in the period in which the determination is
made. We report tax-related interest and penalties as a
component of income tax expense.
Pension
and Other Postretirement Benefits
We sponsor defined benefit plans in the U.S. and many
countries outside the U.S., and we also sponsor retiree medical
benefits for a segment of our salaried and hourly work force
within the U.S. The U.S. pension plans represent
approximately 60% of pension plan assets, 63% of benefit
obligations and 12% of net periodic pension cost.
The assumptions we use in actuarial calculations for these plans
have a significant impact on benefit obligations and annual net
periodic benefit costs. We meet with our actuaries annually to
discuss key economic assumptions used to develop these benefit
obligations and net periodic costs. In accordance with
U.S. GAAP, actual results that differ from the assumptions
are accumulated and amortized over future periods and,
therefore, affect expense recognized and obligations recorded in
future periods.
We determine the discount rate for the U.S. pension and
retiree medical plans based on a bond model. Using the pension
plans projected cash flows, the bond model considers all
possible bond portfolios that produce matching cash flows and
selects the portfolio with the highest possible yield. These
portfolios are based on bonds with a quality rating of AA or
better under either Moodys or S&P, but exclude
certain bonds, such as callable bonds, bonds with small amounts
outstanding, and bonds with unusually high or low yields. The
discount rates for the
non-U.S. plans
are based on a yield curve method, using AA-rated bonds
applicable in respective capital markets. The duration of each
plans liabilities is used to select the rate from the
yield curve corresponding to the same duration.
For the market-related value of plan assets, we use fair value,
rather than a calculated value that recognizes changes in fair
value in a systematic and rational manner over several years. We
calculate the expected return on assets at the beginning of the
year for defined benefit plans as the weighted-average of the
expected return for the target allocation of the principal asset
classes held by each of the plans. In determining the expected
returns, we consider both historical performance and an estimate
of future long-term rates of return. Our target asset allocation
percentages are 30% bonds and 70% equity securities for
U.S. plans and 63% bonds, 30% equity securities, and 7%
33
other investments for
non-U.S. plans.
In 2008, our pension plan assets incurred losses of 31.7% within
U.S. plans and 7.8% within
non-U.S. plans.
Future actual pension expense will depend on future investment
allocation and performance, changes in future discount rates and
various other factors related to the population of participants
in the Companys pension plans.
All other assumptions are reviewed periodically by our actuaries
and us and may be adjusted based on current trends and
expectations as well as past experience in the plans.
The following table provides the sensitivity of net annual
periodic benefit costs for our pension plans, including a
U.S. nonqualified retirement plan, and the retiree medical
plan to a 25-basis-point decrease in both the discount rate and
asset return assumption:
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|
|
|
|
|
|
|
|
|
|
|
25-Basis-Point Decrease
|
|
|
|
25-Basis-Point Decrease
|
|
|
in Asset Return
|
|
|
|
in Discount Rate
|
|
|
Assumption
|
|
|
|
(Dollars in thousands)
|
|
|
U.S. pension plans
|
|
$
|
922
|
|
|
$
|
502
|
|
U.S. retiree medical plan
|
|
|
(59
|
)
|
|
|
|
|
Non-U.S.
pension plans
|
|
|
760
|
|
|
|
328
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,623
|
|
|
$
|
830
|
|
|
|
|
|
|
|
|
|
|
The following table provides the rates used in the assumptions
and the changes between 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
Discount rate used to measure benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. pension plans
|
|
|
6.49
|
%
|
|
|
6.05
|
%
|
|
|
0.44
|
%
|
U.S. retiree medical plan
|
|
|
6.10
|
%
|
|
|
5.90
|
%
|
|
|
0.20
|
%
|
Non-U.S.
pension plans
|
|
|
5.56
|
%
|
|
|
4.69
|
%
|
|
|
0.87
|
%
|
Discount rate used to measure benefit obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. pension plans
|
|
|
6.74
|
%
|
|
|
6.49
|
%
|
|
|
0.25
|
%
|
U.S. retiree medical plan
|
|
|
6.45
|
%
|
|
|
6.10
|
%
|
|
|
0.35
|
%
|
Non-U.S.
pension plans
|
|
|
5.85
|
%
|
|
|
5.56
|
%
|
|
|
0.29
|
%
|
Expected return on plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. pension plans
|
|
|
8.50
|
%
|
|
|
8.50
|
%
|
|
|
|
%
|
Non-U.S.
pension plans
|
|
|
5.25
|
%
|
|
|
4.95
|
%
|
|
|
0.30
|
%
|
Changes in the rates used in these assumptions reflect changes
in the underlying bond and equity yields.
Our overall net periodic benefit cost for all defined benefit
plans decreased $6.9 million to $10.7 million in 2008
from $17.6 million in 2007. In 2008, service costs declined
by $2.5 million primarily because we froze pension benefit
accruals and limited eligibility for retiree medical coverage
for a limited number of U.S. employees. We also benefited
by $2.9 million from higher expected returns on plan assets
primarily due to higher asset balances resulting from actual
returns, company contribution, and currency effects in total
exceeding benefit payments in 2007. Another component of net
periodic cost is the amortization of net actuarial unrecognized
gains or losses. These unrecognized gains or losses arise from
differences between actual and assumed results and from changes
in actuarial assumptions and are recognized in future periods.
In 2008, we benefited by $3.7 million from lower
amortization of net actuarial losses, which declined in 2007.
Partially offsetting these benefits were higher interest costs
of $2.0 million driven by higher discount rates.
In 2008, we recorded settlement losses of $0.3 million
related to retirements in the U.S., settlement gains of
$0.8 million related to retirements and terminations in
Mexico, Italy and Japan, a curtailment gain of $0.1 million
related to the closing of the Rotterdam, Netherlands,
manufacturing facility, a settlement loss of $0.2 million
related to a required settlement of a plan in France, and
special termination benefits of $0.1 million related to
terminations in the Netherlands and Indonesia.
34
For 2009, we expect our overall net periodic benefit cost to
increase to approximately $31 million, an increase of
$21 million. The substantial decline through December 2008
in the valuation of investments in the global capital markets
increased our actuarial losses, which must be amortized in
future periods. At December 31, 2008, our unrecognized net
actuarial losses totaled $164.1 million, with an estimated
$16.4 million to be recognized in 2009. In addition, the
amount of our expected return on plan assets for 2009 will be
based on their lower valuation at December 31, 2008.
We changed the measurement date for our U.S. plans from
September 30th to December 31st when we
adopted 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). Our
non-U.S. plans
already used a December 31st measurement date. Expense
for the gap period from September 30th to
December 31st was recognized as an adjustment to
retained earnings as of January 1, 2008.
Restructuring
and Cost Reduction Programs
During 2006 through 2008, we developed and initiated several
restructuring programs across a number of our business segments
with the objectives of leveraging our global scale, realigning
and lowering our cost structure, and optimizing capacity
utilization. The programs are primarily associated with North
America and Europe. Management continues to evaluate our
businesses, and therefore, there may be supplemental provisions
for new plan initiatives as well as changes in estimates to
amounts previously recorded, as payments are made, or actions
are completed. Significant restructuring programs are described
below. Certain programs that were initiated in 2006 and 2007
continued in 2008.
In total, we recorded $25.9 million, $16.9 million and
$23.1 million of pre-tax restructuring charges in 2008,
2007 and 2006, respectively. These charges included both
termination benefits and asset writedowns. We estimated accruals
for termination benefits based on various factors including
length of service, contract provisions, local legal
requirements, projected final service dates, and salary levels.
We also analyzed the carrying value of long-lived assets and
recorded estimated accelerated depreciation through the
anticipated end of the useful life of the assets affected by the
restructuring or recorded an asset impairment. In all
likelihood, this accelerated depreciation will result in
reducing the net book value of those assets to zero at the date
operations cease. While we believe that changes to our estimates
are unlikely, the accuracy of our estimates depends on the
successful completion of numerous actions. Delays in moving
continuing operations to other facilities or increased cash
outlays will increase our restructuring costs to such an extent
that it could have a material impact on the Companys
results of operations, financial position, or cash flows. Other
events, for example, a delay in completion of construction of
new facilities, may also delay the resulting cost savings.
Revenue
Recognition
We recognize sales typically when we ship goods to our customers
and when all of the following criteria are met:
|
|
|
|
|
Persuasive evidence of an arrangement exists;
|
|
|
|
The selling price is fixed and determinable;
|
|
|
|
Collection is reasonably assured; and
|
|
|
|
Title and risk of loss has passed to our customers.
|
In order to ensure the revenue recognition in the proper period,
we review material sales contracts for proper cut-off based upon
the business practices and legal requirements of each country.
For sales of products containing precious metals, we report
gross revenues with a separate display of cost of sales to
arrive at gross profit. We record revenues this way because we
act as the principal in the transactions we enter into and take
title and the risks and rewards of ownership of the inventory we
process, although the timing of when we take title to the
inventory during the production process may vary.
35
Valuation
of Goodwill and Other
Non-amortizing
Intangibles
While goodwill and intangible assets with indefinite useful
lives recorded on our balance sheet are no longer amortized, we
review these assets for impairment each year on a measurement
date of October 31st. We estimate the fair value of the
reporting unit associated with these assets using the weighted
average of both the income approach and the market approach,
which we believe provides a reasonable estimate of the reporting
units fair value, unless facts and circumstances exist
which indicate a more representative fair value. The income
approach uses projected cash flows attributable to the reporting
unit over its useful life and allocates certain corporate
expenses to the reporting unit in the process. We use historical
results and trends and our projections of market growth,
internal sales efforts, input cost movements, and cost reduction
opportunities to estimate future cash flows. Using a risk
adjusted, weighted average cost-of-capital, we discount the cash
flow projections to the measurement date. The market approach
estimates a price reasonably expected to be realized from the
sale of similar businesses, including offers from potential
acquirers. If the fair value of any of the units were determined
to be less than its carrying value, we would proceed to the
second step and obtain comparable market values or independent
appraisals of its assets to determine the amount of any
impairment.
Our estimates of fair value can be affected by a variety of
factors. Reductions in actual or projected growth or
profitability due to unfavorable market conditions in our
business units, or significant increases in previous levels of
capital spending, could lead to the impairment of any related
goodwill. Additionally, an increase in inflation, interest rates
or the risk adjusted weighted-average cost of capital could also
lead to a reduction in the value of one or more of our business
units and therefore lead to the impairment of goodwill. We
believe the 2008 impairments of goodwill are our best estimates
based upon the available evidence and analysis performed to date.
Assessment
of Long-Lived Assets
Our long-lived assets include property, plant, equipment, and
amortizing intangible assets. We depreciate property, plant and
equipment and amortize amortizable intangible assets on a
straight-line basis over the estimated useful lives of the
assets. We continually assess long-lived assets for the
appropriateness of their estimated useful lives. When
circumstances indicate that there has been a reduction in the
economic useful life of an asset or an asset group, we revise
our estimates.
We also review property, plant and equipment and intangibles for
impairment at the asset group level whenever events or
circumstances indicate that the undiscounted net cash flows to
be generated by their use and eventual disposition are less than
the asset groups recorded value. In the event of
impairment, we recognize a loss for the excess of the recorded
value of the asset group over its fair value. The long-term
nature of these assets requires that we estimate cash inflows
and outflows for several years into the future and only take
into consideration technological advances known at the time of
impairment.
Derivative
Financial Instruments
We use derivative financial instruments in the normal course of
business to manage our exposure to fluctuations in interest
rates, foreign currency exchange rates, commodity prices, and
precious metal prices. The accounting for derivative financial
instruments can be complex and require significant judgments.
Generally, the derivative financial instruments that we use are
not complex, and observable market-based inputs are available to
measure their fair value. We do not engage in speculative
transactions for trading purposes. Financial instruments,
including derivative financial instruments, expose us to
counterparty credit risk for non-performance. We manage our
exposure to counterparty credit risk through minimum credit
standards and procedures to monitor concentrations of credit
risk. We enter into these derivative financial instruments with
major reputable multinational financial institutions.
Accordingly, we do not anticipate counter-party default. We
continuously evaluate the effectiveness of derivative financial
instruments designated as hedges to ensure that they are highly
effective. In the event the hedge becomes ineffective, we
discontinue hedge treatment. Except as noted below, we do not
expect any changes in our risk policies or in the nature of the
transactions we enter into to mitigate those risks.
Our exposure to interest rate changes arises from our debt
agreements with variable market interest rates. We hedge a
portion of this exposure by entering into interest rate swap
agreements. These swaps are settled quarterly in cash, and the
net interest paid or received is effectively recognized as
interest expense. We mark these swaps to fair
36
value and recognize the resulting gains or losses as other
comprehensive income. 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.
We manage foreign currency risks in a wide variety of foreign
currencies principally by entering into forward contracts to
mitigate the impact of currency fluctuations on transactions
arising from international trade. Our objective in entering into
these forward contracts is to preserve the economic value of
non-functional currency cash flows. Our principal foreign
currency exposures relate to the Euro, the British Pound
Sterling, the Japanese Yen, and the Chinese Yuan. We mark these
forward contracts to fair value based on market prices for
comparable contracts and recognize the resulting gains or losses
as other income or expense from foreign currency transactions.
We also manage a portion of our exposure to market risk for
changes in the pricing of certain raw material commodities using
swap arrangements that allow us to fix the price of the
commodities for future purchases. These swap arrangements are
settled in cash at their maturities. 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. After the contracts mature and the materials are sold,
the gains and losses are recognized as a part of cost of sales.
Precious metals (primarily silver, gold, platinum and palladium)
represent a significant portion of raw material costs in our
Electronic Materials products. We also use precious metals in
our Color and Glass Performance Materials products. When we
enter into a fixed price sales contract at the customers
request to establish the price for the precious metals content
of the order, we also enter into a forward purchase arrangement
with a precious metals supplier to completely cover the value of
the precious metals content. Prior to 2008, most precious metal
contracts were marked to fair value based on market prices for
comparable contracts and the resulting gains or losses were
recognized as miscellaneous income or expense, respectively. In
2008, most precious metal contracts were designated as normal
purchase contracts, which are not marked to market.
We also purchase portions of our energy requirements, including
natural gas and electricity, under fixed price contracts to
reduce the volatility of cost changes. Our current energy
contracts are designated as normal purchase contracts, which are
not marked to market.
Impact
of Newly Issued Accounting Pronouncements
In December 2007, the FASB issued Statement No. 141(R),
Business Combinations,
(FAS No. 141(R)). This statement requires
more acquired assets and assumed liabilities to be measured at
fair value as of the acquisition date, liabilities related to
contingent consideration to be remeasured at fair value in each
subsequent reporting period, and all acquisition-related costs
in preacquisition periods to be expensed. We are required to
apply this standard prospectively beginning in our fiscal year
2009.
In December 2007, the FASB issued Statement No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51,
(FAS No. 160). Under this statement,
noncontrolling interests (e.g., minority interests) in
subsidiaries are measured initially at fair value and classified
as a separate component of equity and the amount of net income
attributable to noncontrolling interests is included in
consolidated net income. FAS No. 160 requires entities
to apply the measurement requirements prospectively and to apply
the presentation and disclosure requirements retrospectively to
comparative financial statements. We are required to apply this
standard beginning in our fiscal year 2009. If
FAS No. 160 had been applied, minority interests in
consolidated subsidiaries of $9.8 million at
December 31, 2008, would have been reclassified to equity,
and net income attributable to minority interests of
$1.6 million for 2008 would have been included in
consolidated net income.
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 and encourages, but does not
require, comparative disclosures for earlier periods at initial
adoption. We are required to apply this standard beginning in
our fiscal year 2009. We do not expect the adoption of
FAS No. 161 to have a material impact on our
consolidated financial statements.
37
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. We are required to apply this standard prospectively
beginning in our fiscal year 2009. We are currently evaluating
the impact of the adoption of FSP
No. FAS 142-3;
at this time, we are uncertain as to the impact on our results
of operations and financial position.
In May 2008, the FASB issued Staff Position No. APB
14-1,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement), (FSP No. APB
14-1).
This pronouncement specifies that issuers of such instruments
should separately account for the liability and equity
components in a manner that will reflect the entitys
nonconvertible debt borrowing rate when interest cost is
recognized in subsequent periods. We are required to apply this
standard retrospectively beginning in our fiscal year 2009. If
FSP No. APB
14-1 had
been applied at December 31, 2008, the carrying value of
the liability component of our 6.50% Convertible Senior
Notes would have been approximately $153.5 million,
including $1.2 million of imputed interest; the carrying
value of the equity component would have been approximately
$19.6 million, net of $0.6 million of allocated
third-party transaction costs; and net income would have been
approximately $0.8 million lower due primarily to imputed
interest, net of tax.
In June 2008, the FASB ratified Emerging Issues Task Force
(EITF) Issue
No. 07-5,
Determining Whether an Instrument (or an Embedded Feature) Is
Indexed to an Entitys Own Stock, (EITF
No. 07-5),
which supersedes EITF
No. 01-6,
The Meaning of Indexed to a Companys Own
Stock. FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities,
(FAS No. 133) specifies that a contract
issued or held by a company that is both indexed to its own
stock and classified in stockholders equity is not
considered a derivative instrument for purposes of applying
FAS No. 133. EITF
No. 07-5
provides further guidance in requiring that both an
instruments contingency exercise provisions and its
settlement provisions be evaluated for determining whether the
instrument (or embedded feature) is indexed solely to an
entitys own stock. We are required to apply this standard
beginning in our fiscal year 2009 and recognize the cumulative
effect, if any, of the change in accounting principle in the
opening balance of retained earnings. We are currently
evaluating the impact of the adoption of EITF
No. 07-5;
at this time, we are uncertain as to the impact on our results
of operations and financial position.
In November 2008, the FASB ratified EITF Issue
No. 08-6,
Equity Method Investment Accounting Considerations,
(EITF
No. 08-6).
This pronouncement changes the way a company accounts for equity
method investments. Among other things, it requires a company to
determine the initial carrying value of an equity method
investment by applying the cost accumulation model and to
account for share issuances by the investee as a proportionate
sale of its investment. We are required to apply this standard
prospectively beginning in our fiscal year 2009. We are
currently evaluating the impact of the adoption of EITF
No. 08-6;
at this time, we are uncertain as to the impact on our results
of operations and financial position.
In November 2008, the FASB ratified EITF Issue
No. 08-7,
Accounting for Defensive Intangible Assets, (EITF
No. 08-7).
This pronouncement requires a company to account for an acquired
defensive asset as a separate unit of accounting and assign it a
useful life based on the period during which the asset would
diminish in value. We are required to apply this standard
prospectively beginning in our fiscal year 2009. We are
currently evaluating the impact of the adoption of EITF
No. 08-7;
at this time, we are uncertain as to the impact on our results
of operations and financial position.
In December 2008, the FASB issued FSP
No. FAS 132(R)-1, Employers Disclosures About
Postretirement Benefit Plan Assets. This pronouncement
requires more detailed disclosures about employers plan
assets, including employers investment strategies, major
categories of plan assets, concentrations of risk within plan
assets, and valuation techniques used to measure the fair value
of plan assets. We are required to apply this standard beginning
in our fiscal year 2009. We do not expect the adoption of this
FASB Staff Position to have a material impact on our
consolidated financial statements.
38
Item 7A Quantitative
and Qualitative Disclosures about Market Risk
The primary objective of the following information is to provide
forward-looking quantitative and qualitative information about
our exposure to instruments that are sensitive to fluctuations
in interest rates, foreign currency exchange rates, and costs of
raw materials and energy.
Our exposure to interest rate risk arises from our debt
portfolio. We manage this risk by controlling the mix of fixed
versus variable-rate debt after considering the interest rate
environment and expected future cash flows. To reduce our
exposure to interest rate changes on variable-rate debt, we
entered into interest rate swap agreements. These swaps
effectively convert a portion of our variable-rate debt to a
fixed rate. Our overall objective is to limit variability in
earnings, cash flows and overall borrowing costs caused by
changes in interest rates, while preserving operating
flexibility.
We operate internationally and enter into transactions
denominated in foreign currencies. These transactions expose us
to gains and losses arising from exchange rate movements between
the dates foreign currencies are recorded and the dates they are
settled. We manage this risk by entering into forward currency
contracts that offset these gains and losses.
We are subject to cost changes with respect to our raw materials
and energy purchases. We attempt to mitigate raw materials cost
increases through product reformulations, price increases, and
other productivity improvements. We hedge a portion of our
exposure to changes in the pricing of certain raw material
commodities through swap arrangements that allow us to fix the
pricing of the commodities for future purchases. We also enter
into forward purchase arrangements with precious metals
suppliers to completely cover the value of the precious metals
content of fixed price sales contracts. Prior to 2008, most
precious metal contracts were marked to fair value, and the
resulting gains or losses were recognized as miscellaneous
income or expense, respectively. In 2008, most precious metal
contracts were designated as normal purchase contracts, which
are not marked to market, and had purchase commitments totaling
$5.5 million at December 31, 2008. In addition, we
purchase portions of our natural gas and electricity
requirements under fixed price contracts to reduce the
volatility of these costs. Our current energy contracts are
designated as normal purchase contracts, which are not marked to
market. Our purchase commitments for energy under normal
purchase contracts at December 31, 2008, were
$22.7 million.
39
The notional amounts, carrying amounts of assets (liabilities),
and fair values associated with our exposure to these market
risks and sensitivity analyses about potential gains (losses)
resulting from hypothetical changes in market rates are
presented below:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Variable-rate debt and utilization of asset securitization
program:
|
|
|
|
|
|
|
|
|
Change in annual interest expense from 1% change in interest
rates
|
|
$
|
2,742
|
|
|
$
|
2,636
|
|
Fixed-rate debt:
|
|
|
|
|
|
|
|
|
Carrying amount
|
|
$
|
174,043
|
|
|
$
|
200,404
|
|
Fair value
|
|
$
|
85,700
|
|
|
$
|
205,705
|
|
Change in fair value from 1% increase in interest rate
|
|
$
|
(2,877
|
)
|
|
$
|
(1,929
|
)
|
Change in fair value from 1% decrease in interest rate
|
|
$
|
3,003
|
|
|
$
|
1,957
|
|
Interest rate swaps:
|
|
|
|
|
|
|
|
|
Notional amount
|
|
$
|
150,000
|
|
|
$
|
150,000
|
|
Carrying amount and fair value
|
|
$
|
(12,724
|
)
|
|
$
|
(8,109
|
)
|
Change in fair value from 1% increase in interest rate
|
|
$
|
3,322
|
|
|
$
|
5,000
|
|
Change in fair value from 1% decrease in interest rate
|
|
$
|
(3,401
|
)
|
|
$
|
(5,181
|
)
|
Foreign currency forward contracts:
|
|
|
|
|
|
|
|
|
Notional amount
|
|
$
|
156,840
|
|
|
$
|
142,638
|
|
Carrying amount and fair value
|
|
$
|
(96
|
)
|
|
$
|
(268
|
)
|
Change in fair value from 10% appreciation of U.S. dollar
|
|
$
|
2,523
|
|
|
$
|
(1,402
|
)
|
Change in fair value from 10% depreciation of U.S. dollar
|
|
$
|
(3,084
|
)
|
|
$
|
1,714
|
|
Raw material commodity swaps:
|
|
|
|
|
|
|
|
|
Notional amount (in metric tons of base metals)
|
|
|
330
|
|
|
|
1,171
|
|
Carrying amount and fair value
|
|
$
|
(576
|
)
|
|
$
|
(1,499
|
)
|
Change in fair value from 10% change in forward prices
|
|
$
|
71
|
|
|
$
|
507
|
|
Precious metals forward contracts:
|
|
|
|
|
|
|
|
|
Notional amount (in troy ounces)
|
|
|
129
|
|
|
|
159,648
|
|
Carrying amount and fair value
|
|
$
|
8
|
|
|
$
|
755
|
|
Change in fair value from 10% change in forward prices
|
|
$
|
11
|
|
|
$
|
612
|
|
40
|
|
Item 8
|
Financial
Statements and Supplementary Data
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Ferro Corporation
Cleveland, Ohio
We have audited the accompanying consolidated balance sheets of
Ferro Corporation and subsidiaries (the Company) as
of December 31, 2008 and 2007, and the related consolidated
statements of operations, shareholders equity and
comprehensive income (loss), and cash flows for each of the
three years in the period ended December 31, 2008. Our
audits also included the financial statement schedule listed in
the index at Item 15. These consolidated financial
statements and financial statement schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on the consolidated
financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Ferro Corporation and subsidiaries as of December 31, 2008
and 2007, and the results of their operations and their cash
flows for each of the three years in the period ended
December 31, 2008, in conformity with accounting principles
generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in
relation to the basic consolidated statements taken as a whole,
presents fairly, in all material respects, the information set
forth therein.
As discussed in Note 1 to the consolidated financial
statements, effective in 2007, the Company adopted FASB
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, and, effective in 2006, the Company adopted
SFAS No. 123(R), Share-Based Payment, and the
recognition and disclosure provisions of SFAS No. 158,
Employers Accounting for Defined Pension and Other
Postretirement Plans.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
December 31, 2008, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated March 11, 2009, expressed
an unqualified opinion on the Companys internal control
over financial reporting.
/s/ Deloitte &
Touche LLP
Cleveland, Ohio
March 11, 2009
41
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net sales
|
|
$
|
2,245,152
|
|
|
$
|
2,147,904
|
|
|
$
|
1,987,606
|
|
Cost of sales
|
|
|
1,841,485
|
|
|
|
1,745,445
|
|
|
|
1,585,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
403,667
|
|
|
|
402,459
|
|
|
|
402,525
|
|
Selling, general and administrative expenses
|
|
|
297,119
|
|
|
|
314,878
|
|
|
|
302,442
|
|
Impairment charges
|
|
|
80,205
|
|
|
|
128,737
|
|
|
|
|
|
Restructuring charges
|
|
|
25,937
|
|
|
|
16,852
|
|
|
|
23,146
|
|
Other expense (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
50,145
|
|
|
|
57,837
|
|
|
|
62,714
|
|
Interest earned
|
|
|
(714
|
)
|
|
|
(1,505
|
)
|
|
|
(4,466
|
)
|
Loss on extinguishment of debt
|
|
|
5,531
|
|
|
|
|
|
|
|
|
|
Foreign currency losses, net
|
|
|
742
|
|
|
|
1,254
|
|
|
|
1,040
|
|
Loss (gain) on sale of businesses
|
|
|
|
|
|
|
1,348
|
|
|
|
(67
|
)
|
Miscellaneous expense (income), net
|
|
|
1,239
|
|
|
|
576
|
|
|
|
(87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(56,537
|
)
|
|
|
(117,518
|
)
|
|
|
17,803
|
|
Income tax (benefit) expense
|
|
|
(2,791
|
)
|
|
|
(17,952
|
)
|
|
|
2,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
(53,746
|
)
|
|
|
(99,566
|
)
|
|
|
15,422
|
|
Income from discontinued operations, net of income taxes
|
|
|
5,014
|
|
|
|
5,312
|
|
|
|
5,670
|
|
Gain (loss) on disposal of discontinued operations, net of
income taxes
|
|
|
9,034
|
|
|
|
(225
|
)
|
|
|
(472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(39,698
|
)
|
|
|
(94,479
|
)
|
|
|
20,620
|
|
Dividends on preferred stock
|
|
|
(877
|
)
|
|
|
(1,035
|
)
|
|
|
(1,252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common shareholders
|
|
$
|
(40,575
|
)
|
|
$
|
(95,514
|
)
|
|
$
|
19,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
43,261
|
|
|
|
42,926
|
|
|
|
42,394
|
|
Incremental common shares attributable to convertible preferred
stock, performance shares, deferred stock units, and stock
options
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average diluted shares outstanding
|
|
|
43,261
|
|
|
|
42,926
|
|
|
|
42,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share data
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(1.26
|
)
|
|
$
|
(2.34
|
)
|
|
$
|
0.33
|
|
From discontinued operations
|
|
|
0.32
|
|
|
|
0.11
|
|
|
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.94
|
)
|
|
$
|
(2.23
|
)
|
|
$
|
0.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(1.26
|
)
|
|
$
|
(2.34
|
)
|
|
$
|
0.33
|
|
From discontinued operations
|
|
|
0.32
|
|
|
|
0.11
|
|
|
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.94
|
)
|
|
$
|
(2.23
|
)
|
|
$
|
0.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
42
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10,191
|
|
|
$
|
12,025
|
|
Accounts and trade notes receivable, net
|
|
|
296,423
|
|
|
|
242,039
|
|
Note receivable from Ferro Finance Corporation
|
|
|
|
|
|
|
29,577
|
|
Inventories
|
|
|
256,411
|
|
|
|
256,019
|
|
Deferred income taxes
|
|
|
19,167
|
|
|
|
14,773
|
|
Other receivables
|
|
|
58,391
|
|
|
|
33,338
|
|
Other current assets
|
|
|
8,306
|
|
|
|
8,218
|
|
Current assets of discontinued operations
|
|
|
|
|
|
|
11,203
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
648,889
|
|
|
|
607,192
|
|
Other assets
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
456,549
|
|
|
|
495,599
|
|
Goodwill
|
|
|
229,665
|
|
|
|
290,698
|
|
Amortizable intangible assets, net
|
|
|
11,753
|
|
|
|
9,071
|
|
Deferred income taxes
|
|
|
134,139
|
|
|
|
100,935
|
|
Other non-current assets
|
|
|
63,505
|
|
|
|
110,033
|
|
Other assets of discontinued operations
|
|
|
|
|
|
|
24,732
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,544,500
|
|
|
$
|
1,638,260
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES and SHAREHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Loans payable and current portion of long-term debt
|
|
$
|
8,883
|
|
|
$
|
5,444
|
|
Accounts payable
|
|
|
232,113
|
|
|
|
265,323
|
|
Income taxes
|
|
|
14,361
|
|
|
|
|
|
Accrued payrolls
|
|
|
18,695
|
|
|
|
26,105
|
|
Accrued expenses and other current liabilities
|
|
|
82,995
|
|
|
|
108,004
|
|
Current liabilities of discontinued operations
|
|
|
|
|
|
|
5,456
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
357,047
|
|
|
|
410,332
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
Long-term debt, less current portion
|
|
|
580,662
|
|
|
|
520,645
|
|
Postretirement and pension liabilities
|
|
|
221,110
|
|
|
|
140,988
|
|
Deferred income taxes
|
|
|
6,039
|
|
|
|
8,857
|
|
Other non-current liabilities
|
|
|
34,047
|
|
|
|
56,644
|
|
Other liabilities of discontinued operations
|
|
|
|
|
|
|
991
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,198,905
|
|
|
|
1,138,457
|
|
Minority interests
|
|
|
9,755
|
|
|
|
9,896
|
|
Series A convertible preferred stock (approximates
redemption value)
|
|
|
11,548
|
|
|
|
13,623
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
52,323
|
|
|
|
52,323
|
|
Paid-in capital
|
|
|
166,011
|
|
|
|
166,391
|
|
Retained earnings
|
|
|
401,918
|
|
|
|
468,190
|
|
Accumulated other comprehensive loss
|
|
|
(98,436
|
)
|
|
|
(7,765
|
)
|
Common shares in treasury, at cost
|
|
|
(197,524
|
)
|
|
|
(202,855
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
324,292
|
|
|
|
476,284
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
1,544,500
|
|
|
$
|
1,638,260
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
43
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY AND
COMPREHENSIVE
INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Total
|
|
|
|
Common Shares
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Share-
|
|
|
|
In Treasury
|
|
|
Common
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Unearned
|
|
|
holders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)(a)
|
|
|
Compensation
|
|
|
Equity
|
|
|
|
(In thousands, except per share data)
|
|
|
Balances at December 31, 2005
|
|
|
9,970
|
|
|
$
|
(221,095
|
)
|
|
$
|
52,323
|
|
|
$
|
163,074
|
|
|
$
|
605,874
|
|
|
$
|
(115,990
|
)
|
|
$
|
(6,123
|
)
|
|
$
|
478,063
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,620
|
|
|
|
|
|
|
|
|
|
|
|
20,620
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,468
|
|
|
|
|
|
|
|
33,468
|
|
Mimimum pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,858
|
|
|
|
|
|
|
|
15,858
|
|
Other adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
502
|
|
|
|
|
|
|
|
502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,448
|
|
Cash dividends(b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,649
|
)
|
|
|
|
|
|
|
|
|
|
|
(24,649
|
)
|
Preferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,252
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,252
|
)
|
Income tax benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
Stock-based compensation transactions
|
|
|
(512
|
)
|
|
|
9,819
|
|
|
|
|
|
|
|
1,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,372
|
|
Reclassification to initially apply FAS No. 123R as of
January 1, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,123
|
)
|
|
|
|
|
|
|
|
|
|
|
6,123
|
|
|
|
|
|
Adjustment to apply FAS No. 158 as of
December 31, 2006, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,024
|
|
|
|
|
|
|
|
1,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2006
|
|
|
9,458
|
|
|
|
(211,276
|
)
|
|
|
52,323
|
|
|
|
158,504
|
|
|
|
600,638
|
|
|
|
(65,138
|
)
|
|
|
|
|
|
|
535,051
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(94,479
|
)
|
|
|
|
|
|
|
|
|
|
|
(94,479
|
)
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,167
|
|
|
|
|
|
|
|
39,167
|
|
Postretirement benefit liability adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,589
|
|
|
|
|
|
|
|
25,589
|
|
Raw material commodity swap adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,161
|
)
|
|
|
|
|
|
|
(2,161
|
)
|
Interest rate swap adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,222
|
)
|
|
|
|
|
|
|
(5,222
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37,106
|
)
|
Cash dividends(b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,051
|
)
|
|
|
|
|
|
|
|
|
|
|
(25,051
|
)
|
Preferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,035
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,035
|
)
|
Income tax benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
Stock-based compensation transactions
|
|
|
(705
|
)
|
|
|
8,421
|
|
|
|
|
|
|
|
7,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,308
|
|
Adjustment to initially apply FIN No. 48 as of
January 1, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,933
|
)
|
|
|
|
|
|
|
|
|
|
|
(11,933
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2007
|
|
|
8,753
|
|
|
|
(202,855
|
)
|
|
|
52,323
|
|
|
|
166,391
|
|
|
|
468,190
|
|
|
|
(7,765
|
)
|
|
|
|
|
|
|
476,284
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,698
|
)
|
|
|
|
|
|
|
|
|
|
|
(39,698
|
)
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,490
|
)
|
|
|
|
|
|
|
(23,490
|
)
|
Postretirement benefit liability adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(65,235
|
)
|
|
|
|
|
|
|
(65,235
|
)
|
Raw material commodity swap adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
713
|
|
|
|
|
|
|
|
713
|
|
Interest rate swap adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,973
|
)
|
|
|
|
|
|
|
(2,973
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(52
|
)
|
|
|
|
|
|
|
(52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(130,735
|
)
|
Cash dividends(b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,192
|
)
|
|
|
|
|
|
|
|
|
|
|
(25,192
|
)
|
Preferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(877
|
)
|
|
|
|
|
|
|
|
|
|
|
(877
|
)
|
Income tax benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
Stock-based compensation transactions
|
|
|
(321
|
)
|
|
|
5,331
|
|
|
|
|
|
|
|
(423
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,908
|
|
Adjustment to apply FAS No. 158 as of January 1,
2008, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(505
|
)
|
|
|
366
|
|
|
|
|
|
|
|
(139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2008
|
|
|
8,432
|
|
|
$
|
(197,524
|
)
|
|
$
|
52,323
|
|
|
$
|
166,011
|
|
|
$
|
401,918
|
|
|
$
|
(98,436
|
)
|
|
$
|
|
|
|
$
|
324,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Accumulated translation adjustments
were $12,020, $35,510, and $(3,657), accumulated postretirement
benefit liability adjustments were $(101,738), $(36,869), and
$(62,458), accumulated raw material commodity swap adjustments
were $(471), $(1,184), and $977, and accumulated interest rate
swap adjustments were $(8,195), $(5,222), and $-0- at
December 31, 2008, 2007 and 2006, respectively, all net of
tax.
|
|
(b)
|
|
Dividends were $0.58 per share of
common stock and $3.25 per share of convertible preferred stock
for 2008, 2007, and 2006.
|
See accompanying notes to consolidated financial statements.
44
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(39,698
|
)
|
|
$
|
(94,479
|
)
|
|
$
|
20,620
|
|
Adjustments to reconcile net income to net cash (used for)
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) loss from discontinued operations, net of tax
|
|
|
(14,048
|
)
|
|
|
(5,087
|
)
|
|
|
(5,198
|
)
|
Loss (gain) on sale of assets and businesses
|
|
|
2,598
|
|
|
|
1,175
|
|
|
|
(1,626
|
)
|
Depreciation and amortization
|
|
|
73,450
|
|
|
|
84,048
|
|
|
|
76,484
|
|
Impairment charges
|
|
|
80,205
|
|
|
|
128,737
|
|
|
|
|
|
Noncash restructuring charges
|
|
|
351
|
|
|
|
3,259
|
|
|
|
15,795
|
|
Provision for allowance for doubtful accounts
|
|
|
5,843
|
|
|
|
603
|
|
|
|
1,444
|
|
Retirement benefits
|
|
|
(15,254
|
)
|
|
|
(16,533
|
)
|
|
|
(13,826
|
)
|
Deferred income taxes
|
|
|
(13,692
|
)
|
|
|
(30,468
|
)
|
|
|
(13,391
|
)
|
Changes in current assets and liabilities, net of effects of
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts and trade notes receivable
|
|
|
30,455
|
|
|
|
(5,396
|
)
|
|
|
(24,793
|
)
|
Note receivable from Ferro Finance Corporation
|
|
|
(46,344
|
)
|
|
|
(13,494
|
)
|
|
|
95,842
|
|
Inventories
|
|
|
(6,462
|
)
|
|
|
22,687
|
|
|
|
(30,716
|
)
|
Deposits for precious metals
|
|
|
|
|
|
|
70,073
|
|
|
|
(51,073
|
)
|
Other receivables and other current assets
|
|
|
(23,137
|
)
|
|
|
(13,423
|
)
|
|
|
250
|
|
Accounts payable
|
|
|
(27,185
|
)
|
|
|
9,636
|
|
|
|
(13,222
|
)
|
Accrued expenses and other current liabilities
|
|
|
(23,898
|
)
|
|
|
(2,131
|
)
|
|
|
10,557
|
|
Other operating activities
|
|
|
4,435
|
|
|
|
(2,582
|
)
|
|
|
(481
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used for) provided by continuing operations
|
|
|
(12,381
|
)
|
|
|
136,625
|
|
|
|
66,666
|
|
Net cash provided by (used for) discontinued operations
|
|
|
3,285
|
|
|
|
7,954
|
|
|
|
4,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used for) provided by operating activities
|
|
|
(9,096
|
)
|
|
|
144,579
|
|
|
|
70,944
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures for plant and equipment of continuing
operations
|
|
|
(70,751
|
)
|
|
|
(62,782
|
)
|
|
|
(46,011
|
)
|
Capital expenditures for plant and equipment of discontinued
operations
|
|
|
(2,317
|
)
|
|
|
(4,852
|
)
|
|
|
(4,604
|
)
|
Expenditures for other assets
|
|
|
(3,400
|
)
|
|
|
|
|
|
|
|
|
Cash adjustments to purchase price of prior acquisition
|
|
|
|
|
|
|
|
|
|
|
1,790
|
|
Net proceeds from sale of discontinued operations
|
|
|
56,484
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of assets and businesses
|
|
|
2,360
|
|
|
|
4,850
|
|
|
|
5,130
|
|
Investment in Ferro Finance Corporation
|
|
|
|
|
|
|
|
|
|
|
(25,000
|
)
|
Other investing activities
|
|
|
574
|
|
|
|
751
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(17,050
|
)
|
|
|
(62,033
|
)
|
|
|
(68,718
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings (repayments) under short-term loans payable to
banks
|
|
|
3,687
|
|
|
|
(6,857
|
)
|
|
|
1,334
|
|
Proceeds from convertible notes
|
|
|
172,500
|
|
|
|
|
|
|
|
|
|
Proceeds from revolving credit facility
|
|
|
1,024,174
|
|
|
|
779,630
|
|
|
|
697,929
|
|
Proceeds from term loan facility
|
|
|
|
|
|
|
55,000
|
|
|
|
250,000
|
|
Proceeds from former revolving credit facility
|
|
|
|
|
|
|
|
|
|
|
461,900
|
|
Principal payments on revolving credit facility
|
|
|
(926,228
|
)
|
|
|
(893,726
|
)
|
|
|
(569,976
|
)
|
Principal payments on term loan facility
|
|
|
(9,452
|
)
|
|
|
(3,050
|
)
|
|
|
|
|
Principal payments on former revolving credit facility
|
|
|
|
|
|
|
|
|
|
|
(648,000
|
)
|
Extinguishment of debt
|
|
|
(205,269
|
)
|
|
|
|
|
|
|
(155,000
|
)
|
Debt issue costs
|
|
|
(5,570
|
)
|
|
|
(1,783
|
)
|
|
|
(16,234
|
)
|
Cash dividends
|
|
|
(26,069
|
)
|
|
|
(26,086
|
)
|
|
|
(25,901
|
)
|
Proceeds from exercise of stock options
|
|
|
58
|
|
|
|
9,843
|
|
|
|
4,168
|
|
Other financing activities
|
|
|
(3,977
|
)
|
|
|
(1,688
|
)
|
|
|
(3,255
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) financing activities
|
|
|
23,854
|
|
|
|
(88,717
|
)
|
|
|
(3,035
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
458
|
|
|
|
1,211
|
|
|
|
381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
|
(1,834
|
)
|
|
|
(4,960
|
)
|
|
|
(428
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
12,025
|
|
|
|
16,985
|
|
|
|
17,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
10,191
|
|
|
$
|
12,025
|
|
|
$
|
16,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
52,670
|
|
|
$
|
56,911
|
|
|
$
|
62,980
|
|
Income taxes
|
|
$
|
10,308
|
|
|
$
|
15,721
|
|
|
$
|
10,687
|
|
See accompanying notes to consolidated financial statements.
45
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2008, 2007 and 2006
|
|
1.
|
Our
Business and Summary of Significant Accounting
Policies
|
Our
Business
Ferro Corporation (Ferro, we,
us or the Company) produces performance
materials for a broad range of manufacturers in diversified
industries throughout the world. Our products are classified as
performance materials, rather than commodities, because they are
formulated to perform specific and important functions both in
the manufacturing processes and in the finished products of our
customers. We use inorganic chemical processes, polymer science
and materials science to develop and produce these performance
materials. Performance materials require a high degree of
technical service on an individual customer basis. The value of
our products stems from the results and performance they achieve
in actual use. We manage our diverse businesses through seven
business units that are differentiated from one another by
product type. We have grouped these units by their product group
below:
|
|
|
|
|
Inorganic Specialties
|
|
Organic Specialties
|
|
Electronic Material Systems
|
|
|
|
|
|
|
Tile Coating Systems
|
|
Polymer Additives
|
|
Electronic Materials
|
|
|
|
|
|
Porcelain Enamel
|
|
Specialty Plastics
|
|
|
|
|
|
|
|
Color and Glass
|
|
Pharmaceuticals
|
|
|
Performance Materials
|
|
|
|
|
We sold our Fine Chemicals business in the fourth quarter of
2008, and the financial results from this business are reported
as discontinued operations for all periods presented.
We produce our products principally in the United States
(U.S.) and Europe, but we also operate manufacturing
plants in Latin America and the Asia-Pacific region.
Ferro sells its products directly to customers or through the
use of agents or distributors throughout the world. A large
portion of our products are sold in the U.S. and Europe,
however, we also sell to customers in strategically important
Latin America and Asia-Pacific regions. Our customers use our
products to manufacture building and renovation, automotive,
household appliance and furnishing, transportation, electronic,
and industrial products.
Principles
of Consolidation
Our consolidated financial statements include the accounts of
the parent company and the accounts of subsidiary businesses in
which we own majority and controlling interests. When we
consolidate our financial statements we eliminate investments,
common stock and paid-in capital accounts, and intercompany
transactions, accounts and profits. When we exert significant
influence over an investee but do not control it, we account for
the investment and the investment income using the equity
method. These investments are reported in the other non-current
assets section of our balance sheet. When we acquire a
subsidiary that is consolidated, its financial results are
included in our consolidated financial statements from the date
of the acquisition. When we dispose of a subsidiary that was
consolidated, its financial results are included in our
consolidated financial statements to the date of the disposition.
We legally sell substantially all of our domestic trade accounts
receivable to Ferro Finance Corporation (FFC) under
an asset securitization program. Since FFC is a wholly-owned
subsidiary and purchases receivables only from Ferro
Corporation, we are FFCs primary beneficiary. However,
until December 2008, FFC was a qualified special purpose entity
(QSPE) and, therefore, was not consolidated. In
December 2008, we amended the program to include an option that,
if exercised, would terminate the program. As a result, FFC is
no longer a QSPE and is included in our consolidated financial
statements.
46
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
Use of
Estimates and Assumptions in the Preparation of Financial
Statements
We prepare our consolidated financial statements in conformity
with United States Generally Accepted Accounting Principles,
which requires us to make estimates and to use judgments and
assumptions that affect the timing and amount of assets,
liabilities, equity, revenues and expenses recorded and
disclosed. The more significant estimates and judgments relate
to accounts receivable and inventory allowances, environmental
and other contingent liabilities, income taxes, pension and
other postretirement benefits, inventories, restructuring and
cost reduction programs, revenue recognition, valuation of
goodwill and other intangibles, assessment of long-lived assets,
and derivative financial instruments. Actual outcomes could
differ from our estimates, resulting in changes in revenues or
costs that could have a material impact on the Companys
results of operations, financial position, or cash flows.
Foreign
Currency Translation
The financial results of our operations outside of the
U.S. are recorded in local currencies, which generally are
also the functional currencies for financial reporting purposes.
The results of operations outside of the U.S. are
translated from these local currencies into U.S. dollars
using the average monthly currency exchange rates. We use the
average currency exchange rate for these results of operations
as a reasonable approximation of the results had specific
currency exchange rates been used for each individual
transaction. Assets and liabilities are translated into
U.S. dollars using exchange rates at the balance sheet
dates, and we record the resulting foreign currency translation
adjustment as a separate component of accumulated other
comprehensive loss in shareholders equity.
Foreign currency transaction gains and losses are recorded as
incurred as other expense (income) in the consolidated
statements of operations.
Cash
Equivalents
We consider all highly liquid instruments with original
maturities of three months or less when purchased to be cash
equivalents. These instruments are carried at cost.
Accounts
Receivable and the Allowance for Doubtful Accounts
Ferro sells its products to customers in diversified industries
throughout the world. No customer or related group of customers
represents greater than 10% of net sales or accounts receivable.
We perform ongoing credit evaluations of our customers and
generally do not require collateral. We provide for
uncollectible accounts based on historical experience and
specific circumstances, as appropriate. Customer accounts we
deem to be uncollectible or to require excessive collection
costs are written off against the allowance for doubtful
accounts. Historically, write-offs of uncollectible accounts
have been within our expectations. When FFC was consolidated in
December 2008, the valuation allowance on Ferros note
receivable from FFC was combined with the valuation allowance on
accounts and trade notes receivable. Detailed information about
the allowance for doubtful accounts is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Allowance for doubtful accounts
|
|
$
|
11,668
|
|
|
$
|
6,396
|
|
|
$
|
7,524
|
|
Bad debt (credit) expense
|
|
|
4,472
|
|
|
|
(345
|
)
|
|
|
836
|
|
47
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
Note
Receivable from Ferro Finance Corporation
Before FFC was consolidated in December 2008, we reported a note
receivable from FFC, representing proceeds from the sale of
trade accounts receivable to FFC that had not yet been received
in cash by Ferro. We measured the fair value of the note
receivable on a monthly basis using our best estimate of
FFCs ability to pay based on the undiscounted expected
future cash collections on the outstanding accounts receivable
sold. Detailed information about the valuation allowance for the
note receivable is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Valuation allowance
|
|
$
|
|
|
|
$
|
3,015
|
|
|
$
|
2,702
|
|
Bad debt expense
|
|
|
1,371
|
|
|
|
948
|
|
|
|
608
|
|
Inventories
We value inventory at the lower of cost or market, with cost
determined utilizing the
first-in,
first-out (FIFO) method. We periodically evaluate the net
realizable value of inventories based primarily upon their age,
but also upon assumptions of future usage in production,
customer demand and market conditions. Inventories have been
reduced to the lower of cost or realizable value by allowances
for slow moving or obsolete goods. If actual circumstances are
less favorable than those projected by management in its
evaluation of the net realizable value of inventories,
additional write-downs may be required. Slow moving, excess or
obsolete materials are specifically identified and may be
physically separated from other materials, and we rework or
dispose of these materials as time and manpower permit.
We maintain raw material on our premises that we do not own,
including precious metals consigned from financial institutions
and customers, and raw materials consigned from vendors.
Although we have physical possession of the goods, their value
is not reflected on our balance sheet because we do not have
title.
We also obtain precious metals under consignment agreements with
financial institutions for periods of one year or less. These
precious metals are primarily silver, gold, platinum and
palladium and are used in the production of certain products for
our customers. Under these arrangements, the financial
institutions own the precious metals, and accordingly, we do not
report these precious metals as inventory on our consolidated
balance sheet although they physically are in our possession.
These agreements are cancelable by either party at the end of
each consignment period, however, because we have access to a
number of consignment arrangements with available capacity, our
consignment needs can be shifted among the other participating
institutions in order to ensure our supply. In certain cases,
these financial institutions have required cash deposits to
provide additional collateral beyond the value of the underlying
precious metals. The financial institutions charge us fees for
these consignment arrangements, and these fees are recorded as
cost of sales.
Property,
Plant and Equipment
We record property, plant and equipment at historical cost. In
addition to the original purchased cost, including
transportation, installation and taxes, we capitalize
expenditures that increase the utility or useful life of
existing assets. For constructed assets, we capitalize interest
costs incurred during the period of construction. We depreciate
property, plant and equipment using the straight-line basis for
financial reporting purposes, generally over the following
estimated useful lives of the assets:
|
|
|
Buildings
|
|
20 to 40 years
|
Machinery and equipment
|
|
5 to 15 years
|
We expense repair and maintenance costs, including the costs of
major planned overhauls of equipment, as incurred.
48
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
We capitalize the costs of computer software developed or
obtained for internal use after the preliminary project stage
has been completed and management, with the relevant authority,
authorizes and commits to funding a computer software project,
and it is probable that the project will be completed and the
software will be used to perform the function intended. External
direct costs of materials and services consumed in developing or
obtaining internal-use computer software, payroll and
payroll-related costs for employees who are directly associated
with the project, and interest costs incurred when developing
computer software for internal use are capitalized.
Capitalization ceases when the project is substantially
complete, generally after all substantial testing is completed.
Training costs and data conversion costs are expensed as
incurred. After capitalization, the software is amortized on a
straight-line basis and is subject to impairment in accordance
with the provisions of Financial Accounting Standards Boards
(FASB) Statement No. 144, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of.
We record asset retirement obligations (AROs) as
they are incurred. We record an asset and a liability equal to
the present value of the estimated costs associated with the
retirement of long-lived assets where a legal or contractual
obligation exists and the future costs can be reasonably
estimated. We depreciate the asset over its remaining estimated
useful life and the liability is accreted over time as an
operating expense. We estimate the AROs based on judgment,
taking into consideration the Companys historical
practices, current business intentions, and other relevant
information. In determining the amount of the estimated AROs, we
use an expected value technique based upon potential settlement
dates and related probabilities of settlement.
If we were to abandon or close certain of our facilities,
existing legal obligations would be triggered. Although we have
no current plans to do so, if we close certain operating
facilities, changes to or settlements of the related conditional
AROs could negatively affect the Companys results of
operations and cash flows. Estimated liabilities for asset
retirement obligations were $1.7 million at
December 31, 2008, and $1.1 million at
December 31, 2007.
Asset
Impairment
The Companys long-lived assets include property, plant and
equipment, goodwill, and other intangible assets. We review
these assets for impairment whenever events or circumstances
indicate that their carrying values may not be recoverable. The
following are examples of such events or changes in
circumstances:
|
|
|
|
|
An adverse change in the business climate or market price of a
long-lived asset or asset group;
|
|
|
|
An adverse change in the extent or manner in which a long-lived
asset or asset group is used or in its physical
condition; or
|
|
|
|
Current operating losses for a long-lived asset or asset group
combined with a history of such losses or projected or
forecasted losses that demonstrate that the losses will be
continuing.
|
The carrying amount of long-lived assets, including amortizable
intangible assets, is not recoverable if the recorded value of
the asset group exceeds the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of the
asset group. In the event of impairment, we recognize a loss for
the excess of the recorded value over fair value. The long-term
nature of these assets requires the estimation of cash inflows
and outflows several years into the future and only takes into
consideration technological advances known at the time of review.
We review goodwill for impairment annually using a measurement
date of October 31st, primarily due to the timing of our
annual budgeting process, or more frequently in the event of an
impairment indicator. The fair value of each reporting unit that
has goodwill is estimated using the weighted average of the
income approach and the market approach, which we believe
provides a reasonable estimate of the reporting units fair
value, unless facts or circumstances exist which indicate a more
representative fair value. The income approach is a discounted
cash flow model, which uses projected cash flows attributable to
the reporting unit, including an allocation of certain corporate
expenses based on a proportional sales method. We use historical
results and trends and our projections of
49
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
market growth, internal sales efforts, input cost movements, and
cost reduction opportunities to estimate future cash flows.
Using a risk adjusted, weighted average
cost-of-capital,
we discount the cash flow projections to the measurement date.
The market approach estimates a price reasonably expected to be
realized from the sale of the reporting units based on a
comparison to similar businesses. If the fair value of any of
the reporting units were determined to be less than its carrying
value, we would obtain comparable market values or independent
appraisals of its net assets. In 2008, we recorded goodwill
impairments of $17.0 million in the Specialty Plastics
business and $41.4 million in the Tile Coating Systems
business. In 2007, we recorded goodwill impairments of
$73.5 million for the Polymer Additives business and
$32.2 million for the Pharmaceuticals business.
Income
Taxes
We determine income taxes using the liability method of
accounting. Income tax expense includes U.S. and
international income taxes plus the provision for
U.S. taxes on undistributed earnings of international
subsidiaries we have deemed not to be permanently reinvested.
Tax credits and other incentives reduce tax expense in the year
they are claimed. We recognize deferred tax assets if we believe
that it is more likely than not that the assets will be realized
in future years. We record valuation allowances against deferred
tax assets that we believe do not meet the criteria for
realization of more likely than not. We recognize
liabilities for uncertain tax positions based on our estimate of
whether, and the extent to which, additional taxes will be
recognized. We report tax-related interest and penalties as a
component of income tax expense.
Environmental
Liabilities
As part of the production of some of our products, we handle,
process, use and store hazardous materials. As part of these
routine processes, we expense recurring costs associated with
control and disposal of hazardous materials as they are
incurred. Occasionally we are subject to ongoing, pending or
threatened litigation related to the handling of these materials
or other matters. If, based on available information, we believe
that we have incurred a liability and we can reasonably estimate
the amount, we accrue for environmental remediation and other
contingent liabilities. We disclose material contingencies if
the likelihood of the potential loss is reasonably possible but
the amount is not reasonably estimable.
In estimating the amount to be accrued for environmental
remediation, we use assumptions about:
|
|
|
|
|
Remediation requirements at the contaminated site;
|
|
|
|
The nature of the remedy;
|
|
|
|
Existing technology;
|
|
|
|
The outcome of discussions with regulatory agencies;
|
|
|
|
Other potentially responsible parties at multi-party
sites; and
|
|
|
|
The number and financial viability of other potentially
responsible parties.
|
We actively monitor the status of sites, and, as assessments and
cleanups proceed, we update our assumptions and adjust our
estimates as necessary. Because we are uncertain about the
timing of related payments, we do not discount the estimated
remediation costs.
Unanticipated government enforcement actions, differences in
actual results as compared to expected remediation outcomes,
changes in health, safety or environmental regulations, or
testing requirements could result in higher or lower costs and
changes to our estimates.
50
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
Contingencies
We expense contingent items when events that give rise to the
items are probable and the amounts are reasonably estimable. If
a loss contingency is reasonably possible and the amount of the
loss is material, we disclose the item. If only a range of
possible losses can be estimated, we record the low end of the
range and disclose the possible range of outcomes. However, if
there is a best estimate of the amount of the loss within the
range, we will record that amount.
Gain contingencies are only recognized when their realization is
assured beyond a reasonable doubt. In December 2006, we received
a $2.4 million settlement in a class action lawsuit for
price-fixing in the rubber chemicals industry. The period
covered under the settlement began in 1995 and ended in 2001. We
recorded this gain in 2006 as miscellaneous income in the
consolidated statements of operations.
Restructuring
and Cost Reduction Programs
We expense costs associated with exit and disposal activities
designed to restructure operations and reduce ongoing costs of
operations when we incur the related liabilities or when other
triggering events occur. After the appropriate level of
management having the authority approves the detailed
restructuring plan, we establish accruals for underlying
activities by estimating employee termination costs. Our
estimates are based upon factors including statutory and union
requirements, affected employees lengths of service,
contract provisions, salary level, and health care benefit
choices. As part of our assessment of exit and disposal
activities, we also analyze the carrying value of the affected
long-lived assets for impairment and reductions in the remaining
estimated useful lives.
We believe our estimates and assumptions used to calculate these
restructuring provisions are appropriate, and although we do not
anticipate significant changes, actual costs could differ from
the estimates should we make changes in the nature or timing of
the restructuring plans. The changes in costs, as a result of
the eventual timing and number of employees receiving
termination benefits and the final disposition or closure of the
manufacturing facilities, could have a material impact on the
Companys results of operations, financial position, or
cash flows.
Postretirement
and Other Employee Benefits
We recognize postretirement and other employee benefits as
employees render the services necessary to earn those benefits.
We determine defined benefit pension and other postretirement
benefit costs and obligations with the assistance of actuarial
calculations performed by experts. The calculations and the
resulting amounts recorded in our consolidated financial
statements are affected by assumptions including the discount
rate, expected long-term rate of return on plan assets, the
annual rate of change in compensation for plan-eligible
employees, estimated changes in costs of healthcare benefits,
and other factors. We evaluate the assumptions used on an annual
basis. Prior to 2008, postretirement obligations for
U.S. employees were measured each
September 30th while these obligations for foreign
employees were measured each December 31st. Effective
January 1, 2008, we changed the measurement date for our
U.S. employees from September 30th to
December 31st and recognized the expense for the gap
period as an adjustment to retained earnings.
Derivative
Financial Instruments
As part of our risk management activities, we employ derivative
financial instruments, primarily interest rate swaps, foreign
currency forward contracts, raw material commodity swaps and
precious metals forward contracts, to hedge certain anticipated
transactions, firm commitments, or assets and liabilities
denominated in foreign currencies. We also purchase portions of
our energy and precious metal requirements under fixed price
forward purchase contracts designated as normal purchase
contracts. Under certain circumstances, these contracts require
us to settle the obligations in cash at prevailing market prices.
51
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
We record derivatives on our balance sheet as either assets or
liabilities that are measured at fair value. We adjust the fair
value of derivatives that are not hedges through income.
Depending on the nature of the hedge, changes in fair value of
the derivatives are either offset against the changes in the
fair value of assets, liabilities or firm commitments through
earnings or recognized in other comprehensive income until the
hedged item is recognized in earnings. The ineffective portion
of a derivatives change in value, if any, is immediately
recognized in earnings. We use derivatives only to manage
well-defined interest rate, foreign currency and commodity price
risks and do not use derivatives for speculative purposes.
Revenue
Recognition
We typically recognize sales when we ship goods to our customers
and when all of the following criteria are met:
|
|
|
|
|
Persuasive evidence of an arrangement exists;
|
|
|
|
The selling price is fixed and determinable;
|
|
|
|
Collection is reasonably assured; and
|
|
|
|
Title and risk of loss has passed to our customers.
|
In order to ensure the revenue recognition in the proper period,
we review material sales contracts for proper cut-off based upon
the business practices and legal requirements of each country.
For sales of products containing precious metals, we report
gross revenues with a separate display of cost of sales to
arrive at gross profit. We record revenues this way because we
act as the principal in the transactions we enter into and take
title and the risks and rewards of ownership of the inventory we
process, although the timing of when we take title to inventory
during the production process may vary.
The amount of shipping and handling fees invoiced to our
customers at the time our product is shipped is included in net
sales. Credit memos issued to customers for sales returns,
discounts allowed and sales adjustments are recorded when they
are incurred as a reduction of sales. We use estimated
allowances to state the related accounts receivable at their net
realizable value.
Additionally, we provide certain of our customers with incentive
rebate programs to promote customer loyalty and encourage
greater product sales. We accrue customer rebates over the
rebate periods based upon estimated attainments of the
provisions in the rebate agreements using available information
and record these rebate accruals as reductions of sales.
Cost
of Sales
We include in cost of sales the purchased cost of raw materials,
and labor and overhead directly associated with the production
process. Cost of sales also includes shipping and handling
costs, financing costs associated with precious metals,
purchasing and receiving costs, depreciation and leasing costs
of buildings and equipment used in production, utilities,
operating parts and supplies, warehousing costs, internal
transfer costs, other costs of distribution, costs of hazardous
materials control and disposal, physical inventory adjustments,
and obsolescence and rework costs.
Cost of sales is initially recorded using standard costs, which
are generally established at least annually to fully absorb
qualifying production costs into inventory based on normal
production capacity. Production variances related to volume,
rework, and other production inefficiencies are expensed as
incurred. We review manufacturing costs periodically to ensure
that only those costs that clearly relate to production and that
increase the economic utility of the related inventories are
capitalized into inventory. We adjust the standard cost of
inventory at the
52
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
balance sheet date to actual by applying material purchase price
and the appropriate production variances most recently incurred.
Selling,
General and Administrative Expenses
Expenses for sales and administrative functions, including
salaries and wages, benefits, stock-based compensation, sales
commissions, bad debt expense, lease costs and depreciation
related to buildings and equipment not used in production, and
outside services such as legal, audit and consulting fees, are
included in selling, general and administrative expenses.
Certain warehousing costs amounting to $4.3 million in
2008, $4.2 million in 2007, and $4.0 million in 2006
are also included in selling, general and administrative
expenses.
Research and development expenses are expensed as incurred and
are also included in selling, general and administrative
expenses. Amounts expended for development or significant
improvement of new or existing products, services and techniques
were $33.6 million for 2008, $36.9 million for 2007,
and $42.6 million for 2006.
Comprehensive
Income (Loss)
Comprehensive income (loss) includes charges and credits to
shareholders equity that are not the result of
transactions with shareholders. Our total comprehensive income
(loss) consists of net income or loss, foreign currency
translation adjustments, postretirement benefit liability
adjustments, and gains and losses on derivative instruments. The
cumulative foreign currency translation adjustments,
postretirement benefit liability adjustments, and gains and
losses on derivative instruments are included in accumulated
other comprehensive loss in our consolidated balance sheets and
statements of shareholders equity.
Recently
Adopted Accounting Pronouncements
On January 1, 2006, we adopted Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based
Payment, (FAS No. 123R). We now base
stock-based compensation costs on the estimated grant-date fair
value of stock-based awards that are expected to ultimately vest
and adjust expected vesting rates to actual results as these
become known. Upon the initial adoption of
FAS No. 123R, we reclassified $6.1 million of
unearned stock-based compensation to additional paid-in capital
in the consolidated balance sheet.
On December 31, 2006, we adopted the recognition and
disclosure provisions of FASB Statement No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans,
(FAS No. 158). As a result of our adoption
of FAS No. 158, we recorded a decrease in other
non-current assets of $1.2 million, an increase in accrued
expenses and other current liabilities of $6.5 million, a
decrease in postretirement and pension liabilities of
$5.2 million, an increase in non-current deferred tax
assets of $3.5 million, and a decrease in accumulated other
comprehensive loss of $1.0 million.
On January 1, 2007, we adopted FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes,
(FIN No. 48), which clarifies what
criteria must be met prior to recognition of the financial
statement benefit of a position taken or expected to be taken in
a tax return. This interpretation also provides guidance on
de-recognition of income tax assets and liabilities,
classification of current and deferred income tax assets and
liabilities, accounting for interest and penalties associated
with tax positions, accounting for income taxes in interim
periods, and income tax disclosures. The adoption of this
interpretation decreased the opening balance of retained
earnings by $11.9 million as of January 1, 2007. We
have elected to continue to report interest and penalties as
income tax expense.
On January 1, 2007, we also adopted Statement of Financial
Accounting Standards No. 156, Accounting for Servicing
of Financial Assets an amendment of FASB Statement
No. 140, (FAS No. 156). This
statement requires an entity to recognize at fair value a
servicing asset or liability each time it undertakes an
obligation to service a financial asset by entering into a
servicing contract. We provide collection agent
services for our
53
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
U.S. and certain international receivables sales programs.
The collection agent fees received by the Company
approximate adequate compensation. Therefore, the adoption of
FAS No. 156 did not have an effect on our consolidated
financial statements.
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. On
July 1, 2008, we also adopted FASB Staff Position
No. FAS 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset is not Active, (FSP
No. FAS 157-3).
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. FSP
No. FAS 157-3
amends FAS No. 157 to give an example of how to
determine the fair value of a financial asset in an inactive
market, but does not change the fair value measurement
principles of FAS No. 157. 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
(EITF) 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.
In December 2008, we adopted FASB Staff Position
No. FAS 140-4
and FIN 46(R)-8, Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests
in Variable Interest Entities, upon it issuance. This
pronouncement requires companies to provide additional
disclosures about transfers of financial assets and about their
involvement with variable interest entities. Other than for some
additional disclosures, the adoption of this FASB Staff Position
did not have an effect on our consolidated financial statements.
54
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
Newly
Issued Accounting Pronouncements
In December 2007, the FASB issued Statement No. 141(R),
Business Combinations,
(FAS No. 141(R)). This statement requires
more acquired assets and assumed liabilities to be measured at
fair value as of the acquisition date, liabilities related to
contingent consideration to be remeasured at fair value in each
subsequent reporting period, and all acquisition-related costs
in preacquisition periods to be expensed. We are required to
apply this standard prospectively beginning in our fiscal year
2009.
In December 2007, the FASB issued Statement No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51,
(FAS No. 160). Under this statement,
noncontrolling interests (e.g., minority interests) in
subsidiaries to be measured initially at fair value and
classified as a separate component of equity and the amount of
net income attributable to noncontrolling interests is included
in consolidated net income. FAS No. 160 requires
entities to apply the measurement requirements prospectively and
to apply the presentation and disclosure requirements
retrospectively to comparative financial statements. We are
required to apply this standard beginning in our fiscal year
2009. If FAS No. 160 had been applied, minority
interests in consolidated subsidiaries of $9.8 million at
December 31, 2008 would have been reclassified to equity,
and net income attributable to minority interests of
$1.6 million for 2008 would have been included in
consolidated net income.
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 and encourages, but does not
require, comparative disclosures for earlier periods at initial
adoption. We are required to apply this standard beginning in
our fiscal year 2009. 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. We are required to apply this standard prospectively
beginning in our fiscal year 2009. We are currently evaluating
the impact of the adoption of FSP
No. FAS 142-3;
at this time, we are uncertain as to the impact on our results
of operations and financial position.
In May 2008, the FASB issued Staff Position No. APB
14-1,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement), (FSP No. APB
14-1).
This pronouncement specifies that issuers of such instruments
should separately account for the liability and equity
components in a manner that will reflect the entitys
nonconvertible debt borrowing rate when interest cost is
recognized in subsequent periods. We are required to apply this
standard retrospectively beginning in our fiscal year 2009. If
FSP No. APB
14-1 had
been applied at December 31, 2008, the carrying value of
the liability component of our 6.50% Convertible Senior
Notes would have been approximately $153.5 million,
including $1.2 million of imputed interest; the carrying
value of the equity component would have been approximately
$19.6 million, net of $0.6 million of allocated
third-party transaction costs; and net income would have been
approximately $0.8 million lower due primarily to imputed
interest, net of tax.
In June 2008, the FASB ratified EITF Issue
No. 07-5,
Determining Whether an Instrument (or an Embedded Feature) Is
Indexed to an Entitys Own Stock, (EITF
No. 07-5),
which supersedes EITF
No. 01-6,
The Meaning of Indexed to a Companys Own
Stock. FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities,
(FAS No. 133) specifies that a contract
issued or held by a company that is both indexed to its own
stock and classified in stockholders equity is not
considered a derivative instrument for purposes of applying
FAS No. 133. EITF
No. 07-5
provides further guidance in requiring that both an
instruments contingency exercise provisions and its
settlement provisions be evaluated for determining whether the
instrument (or embedded feature) is indexed solely to an
entitys own stock. We are required to apply this standard
beginning in our fiscal year 2009
55
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
and recognize the cumulative effect, if any, of the change in
accounting principle in the opening balance of retained
earnings. We are currently evaluating the impact of the adoption
of EITF
No. 07-5;
at this time, we are uncertain as to the impact on our results
of operations and financial position.
In November 2008, the FASB ratified EITF Issue
No. 08-6,
Equity Method Investment Accounting Considerations,
(EITF
No. 08-6).
This pronouncement changes the way a company accounts for equity
method investments. Among other things, it requires a company to
determine the initial carrying value of an equity method
investment by applying the cost accumulation model and to
account for share issuances by the investee as a proportionate
sale of its investment. We are required to apply this standard
prospectively beginning in our fiscal year 2009. We are
currently evaluating the impact of the adoption of EITF
No. 08-6;
at this time, we are uncertain as to the impact on our results
of operations and financial position.
In November 2008, the FASB ratified EITF Issue
No. 08-7,
Accounting for Defensive Intangible Assets, (EITF
No. 08-7).
This pronouncement requires a company to account for an acquired
defensive asset as a separate unit of accounting and assign it a
useful life based on the period during which the asset would
diminish in value. We are required to apply this standard
prospectively beginning in our fiscal year 2009. We are
currently evaluating the impact of the adoption of EITF
No. 08-7;
at this time, we are uncertain as to the impact on our results
of operations and financial position.
In December 2008, the FASB issued FSP
No. FAS 132(R)-1, Employers Disclosures About
Postretirement Benefit Plan Assets. This pronouncement
requires more detailed disclosures about employers plan
assets, including employers investment strategies, major
categories of plan assets, concentrations of risk within plan
assets, and valuation techniques used to measure the fair value
of plan assets. We are required to apply this standard beginning
in our fiscal year 2009. We do not expect the adoption of this
FASB Staff Position to have a material impact on our
consolidated financial statements.
Inventories at December 31st consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Raw materials
|
|
$
|
82,837
|
|
|
$
|
72,140
|
|
Work in process
|
|
|
43,224
|
|
|
|
41,599
|
|
Finished goods
|
|
|
130,350
|
|
|
|
142,280
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
256,411
|
|
|
$
|
256,019
|
|
|
|
|
|
|
|
|
|
|
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. The financial institutions retain
ownership of the precious metals and charge us fees based on the
amounts we consign. These fees were $4.6 million in 2008,
$3.7 million in 2007, and $3.1 million for 2006 and
were charged to cost of sales. We had on hand
$104.2 million at December 31, 2008, and
$148.3 million at December 31, 2007, of precious
metals, measured at fair value, owned by participants in our
precious metals program.
56
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
|
|
3.
|
Property,
Plant and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Land
|
|
$
|
33,687
|
|
|
$
|
40,455
|
|
Buildings
|
|
|
230,450
|
|
|
|
244,046
|
|
Machinery and equipment
|
|
|
720,044
|
|
|
|
808,368
|
|
Construction in progress
|
|
|
35,216
|
|
|
|
48,518
|
|
Property, plant and equipment under capital leases
|
|
|
16,957
|
|
|
|
17,011
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment
|
|
|
1,036,354
|
|
|
|
1,158,398
|
|
Total accumulated depreciation
|
|
|
(579,805
|
)
|
|
|
(662,799
|
)
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
$
|
456,549
|
|
|
$
|
495,599
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense from continuing operations was
$65.3 million for 2008, $75.4 million for 2007, and
$66.5 million for 2006. Noncash investing activities for
capital expenditures, consisting of new capital leases during
the year and unpaid capital expenditure liabilities at year end,
amounted to $12.8 million for 2008, $16.1 million for
2007, and $4.1 million for 2006. Capitalized interest costs
related to property, plant and equipment under construction were
$1.7 million in 2008, $2.3 million in 2007, and
$1.1 million in 2006.
The carrying amount of property, plant and equipment is not
recoverable if the recorded value of the asset group exceeds the
sum of the undiscounted cash flows expected to result from the
use and eventual disposition of the asset group. In 2008, the
Specialty Plastics business experienced downturns in the
automotive, appliance and container markets, particularly in the
fourth quarter of 2008. The decline in auto sales and
U.S. home construction, which negatively impacted this
business and the extended recovery time forecasted in these
markets, triggered an impairment. We recorded an asset
impairment of $1.9 million as a result of this review. Also
in the fourth quarter of 2008, we recorded an impairment of
$19.9 million in our Electronic Materials facility in Uden
Netherlands. The impairment was the result of a decline in the
operating results and reduced future sales projection for our
dielectric material products that are produced in this facility.
In 2007, we recorded an impairment of $6.8 million on the
property, plant and equipment due to the following factors: the
cumulative negative effect on earnings of a cyclical downturn in
certain of the Polymer Additives business primary
U.S.-based
end markets, including housing and automobiles; anticipated
additional product costs due to recent hazardous material
legislation and regulations, such as the newly enacted European
Union REACH registration system, which requires
chemical suppliers to perform toxicity studies of the components
of their products and to register certain information; and
higher forecasted capital expenditures related to the business.
Additionally in 2007, in our Pharmaceuticals segment, primarily
due to the result of a longer time to transition the business
from a supplier of food supplements and additives to a supplier
of high-value pharmaceutical products and services, we recorded
an impairment of $16.3 million on the property, plant and
equipment.
In October 2005, the Dutch government placed a lien on one of
the Companys facilities in the Netherlands as collateral
for any future payment relating to an unresolved environmental
claim. We do not believe the ultimate resolution of this matter
will have a material effect on Ferros financial position
or results of operations.
57
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
|
|
4.
|
Goodwill
and Other Intangible Assets
|
A summary of goodwill activity follows:
|
|
|
|
|
|
|
(Dollars in
|
|
|
|
thousands)
|
|
|
Balance at December 31, 2006
|
|
$
|
395,835
|
|
Impairments
|
|
|
(105,653
|
)
|
Currency translation adjustments
|
|
|
516
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
290,698
|
|
Impairments
|
|
|
(58,361
|
)
|
Currency translation adjustments
|
|
|
(2,672
|
)
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
229,665
|
|
|
|
|
|
|
Details of amortizable intangible assets follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
December 31,
|
|
|
|
Economic Life
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Patents
|
|
|
9-15 years
|
|
|
$
|
5,775
|
|
|
$
|
6,515
|
|
Other
|
|
|
1-20 years
|
|
|
|
14,451
|
|
|
|
10,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross amortizable intangible assets
|
|
|
|
|
|
|
20,226
|
|
|
|
16,998
|
|
Accumulated amortization
|
|
|
|
|
|
|
(8,473
|
)
|
|
|
(7,927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable intangible assets, net
|
|
|
|
|
|
$
|
11,753
|
|
|
$
|
9,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We test goodwill for impairment annually using
October 31st as our annual assessment date, primarily
due to the timing of our annual budgeting process, or more
frequently if we believe indicators of impairment exist, which
was the case at December 31, 2008. Statement of Financial
Accounting Standards No. 142, Goodwill and Other
Intangible Assets, requires an assessment consisting of two
tests. In the first test, we test goodwill for impairment by
comparing the fair value of each reporting unit that has
goodwill against its carrying value. If the carrying value of
the reporting unit exceeds its fair value, we perform a second
test to measure impairment. The Specialty Plastics business as
of October 31, 2008, and the Tile Coating Systems business
as of December 31, 2008, had fair values that were less
than the carrying values of their net assets, indicating an
impairment of goodwill. As of October 31, 2007, two
reporting units, the Polymer Additives business and the
Pharmaceuticals business had fair values that were less than the
carrying values of their net assets, indicating an impairment of
goodwill.
We estimate the fair values of reporting units primarily using
the weighted average of both the income approach and the market
approach, which we believe provides a reasonable estimate of a
reporting units fair value, unless facts or circumstances
exist which indicate a more representative fair value. The
income approach uses projected cash flows attributable to the
reporting unit over its useful life and discounted to its
present value. The market approach estimates a price reasonably
expected to be realized from the sale of similar businesses.
Factors considered in both of these approaches included
projections of our future operating results, anticipated future
cash flows, comparable marketplace data adjusted for our
industry grouping, and the cost of capital.
In 2008, an impairment of goodwill in our Tile Coating Systems
business was triggered by the cumulative negative effect on
operating results of the significant downturn in the fourth
quarter 2008 in the housing and construction markets, both in
the United States and Europe, leading to lower demand from
customers serving those markets. The lower demand in these
markets was the triggering event for our review for impairment.
The Specialty Plastics business experienced downturns in the
automotive, appliance and container markets, particularly in
the
58
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
fourth quarter of 2008. The decline in auto sales and
U.S. home construction, which negatively impacted this
business, and the extended recovery time forecasted in these
markets triggered an impairment. The step two analyses required
to complete the measurement of the amount of goodwill impairment
is not complete. As a result, at December 31, 2008, we have
recorded estimated goodwill impairments of $41.4 million
for the Tile Coating Systems business and $17.0 million
related to the Specialty Plastics business. We believe that
these impairments, which fully impair the goodwill for each of
these reporting units, are our best estimates based upon the
available evidence and analysis performed to date. These amounts
may be adjusted upon the completion of the step two test in
2009. The amounts are included in impairment charges in the
consolidated statements of operations.
As of October 31, 2007, two reporting units, the Polymer
Additives business and the Pharmaceuticals business, had fair
values that were less than the carrying values of their net
assets, indicating an impairment of goodwill. The impairment in
the Polymer Additives business was triggered by the cumulative
negative effect on operating results of a cyclical downturn in
certain of its primary
U.S.-based
end markets, including housing and automotive; anticipated
additional product costs due to recent hazardous material
legislation and regulations, such as the newly enacted European
Union REACH registration system, which requires
chemical suppliers to perform toxicity studies of the components
of their products and to register certain information; and
higher forecasted capital expenditures for this business. The
impairment of goodwill in the Pharmaceuticals business was
primarily the result of the longer time necessary to transition
the business from a supplier of food supplements and additives
to a supplier of high-value pharmaceutical products and
services. We recorded an impairment of $73.5 million for
the Polymer Additives business and $32.2 million for the
Pharmaceuticals business in 2007. The amounts are included in
impairment charges in the consolidated statements of operations.
As part of our restructuring activities in 2006, we recorded an
impairment charge of $3.5 million relating to intellectual
property at our Niagara Falls, New York, facility.
We recorded amortization expense from continuing operations
related to intangible assets and other non-current assets, as
detailed in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Intangibles
|
|
$
|
938
|
|
|
$
|
1,236
|
|
|
$
|
965
|
|
Deferred charges and other non-current assets
|
|
|
7,173
|
|
|
|
7,460
|
|
|
|
9,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortization expense
|
|
$
|
8,111
|
|
|
$
|
8,696
|
|
|
$
|
10,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate amortization expense for intangible assets is expected
to be $0.9 million annually in the years 2009 through 2013.
|
|
5.
|
Financing
and Short-term and Long-term Debt
|
Loans payable and current portion of long-term debt at
December 31st consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Loans payable to banks
|
|
$
|
4,754
|
|
|
$
|
954
|
|
Current portion of long-term debt
|
|
|
4,129
|
|
|
|
4,490
|
|
|
|
|
|
|
|
|
|
|
Total loans payable and current portion of long-term debt
|
|
$
|
8,883
|
|
|
$
|
5,444
|
|
|
|
|
|
|
|
|
|
|
The weighted-average interest rate on loans payable to banks was
7.6% at December 31, 2008, and 10.0% at December 31,
2007. These loans are primarily from overdraft facilities.
59
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
Long-term debt at December 31st consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
$172.5 million 6.50% Convertible Senior Notes
|
|
$
|
172,500
|
|
|
$
|
|
|
$200 million
91/8% Senior
Notes, net of unamortized discounts
|
|
|
|
|
|
|
199,636
|
|
Revolving credit facility
|
|
|
111,803
|
|
|
|
13,857
|
|
Term loan facility
|
|
|
292,498
|
|
|
|
301,950
|
|
Capitalized lease obligations (see Note 14)
|
|
|
6,447
|
|
|
|
8,924
|
|
Other notes
|
|
|
1,543
|
|
|
|
768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
584,791
|
|
|
|
525,135
|
|
Current portion
|
|
|
(4,129
|
)
|
|
|
(4,490
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt, less current portion
|
|
$
|
580,662
|
|
|
$
|
520,645
|
|
|
|
|
|
|
|
|
|
|
The annual maturities of long-term debt for each of the five
years after December 31, 2008, were as follows:
|
|
|
|
|
|
|
(Dollars in
|
|
|
|
thousands)
|
|
|
2009
|
|
$
|
4,129
|
|
2010
|
|
|
4,361
|
|
2011
|
|
|
185,969
|
|
2012
|
|
|
213,923
|
|
2013
|
|
|
173,231
|
|
Thereafter
|
|
|
3,178
|
|
|
|
|
|
|
Total maturities of long-term debt
|
|
$
|
584,791
|
|
|
|
|
|
|
6.50% Convertible
Senior Notes
In August 2008, Ferro issued $172.5 million of
6.50% Convertible Senior Notes due 2013 (the
Convertible Notes). The proceeds from the offering,
along with available cash, including borrowings under
Ferros revolving credit facility, were used to purchase
all of Ferros outstanding
91/8% Senior
Notes. The Convertible Notes bear interest at a rate of 6.5% per
year, payable semi-annually in arrears on
February 15th and August 15th of each year,
beginning on February 15, 2009. The Convertible Notes
mature on August 15, 2013. Under certain circumstances,
holders of the Convertible Notes may convert their notes prior
to maturity.
The initial base conversion rate is 30.9253, equivalent to an
initial base conversion price of $32.34 per share of our common
stock. If the price of our common stock at conversion exceeds
the base conversion price, the base conversion rate is increased
by an additional number of shares. The base conversion rate and
the additional number of shares are adjusted in certain events.
Upon conversion of Convertible Notes, we will pay the conversion
value in cash up to the aggregate principal amount of the
Convertible Notes being converted and in shares of our common
stock, for the remainder, if any. Upon a fundamental change,
holders may require us to repurchase Convertible Notes for cash
equal to the principal amount plus accrued and unpaid interest.
The Convertible Notes are unsecured obligations and rank equally
in right of payment with any other unsecured, unsubordinated
obligations. At December 31, 2008, we were in compliance
with the covenants under the Convertible Notes indentures.
60
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
91/8% Senior
Notes
In June 2008, Ferro commenced a cash tender offer to purchase
any and all of its outstanding $200 million aggregate
principal amount of
91/8% Senior
Notes due 2009 (the
91/8% Notes).
In August and September, we purchased all of the
91/8% Notes
for $205.3 million, including call premiums and tender
costs, and recorded a loss of $5.5 million, including
unamortized discounts and fees. We financed the purchase of the
91/8% Notes
and related costs from the issuance of the Convertible Notes,
along with available cash, including borrowings under
Ferros revolving credit facility.
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, which replaced a former revolving credit
facility that would have expired later that year. In 2007, we
cancelled the unused portion of the term loan facility and
amended the credit facility (the 2007 Amended Credit
Facility) primarily to increase the size of the revolving
credit facility, reduce interest rates, and increase operating
flexibility. At December 31, 2008, the 2007 Amended Credit
Facility consisted of a $300.0 million revolving credit
facility, which matures in 2011, and a term loan facility with
an outstanding principal balance of $292.5 million, which
matures in 2012. The Company is required to make periodic
principal payments to the term loan investors with a
corresponding reduction in the commitment amount under the term
loan facility.
We had $180.0 million at December 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 January 2009 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 an additional principal payment of
$6.4 million.
On March 11, 2009, we amended the 2007 Amended Credit
Facility (the 2009 Amended Credit Facility)
primarily to provide additional operating flexibility and to
change pricing to more accurately reflect current market
interest rates. The primary effects of the 2009 Amended Credit
Facility are to:
|
|
|
|
|
Increase the interest rates and commitment fees payable
thereunder pursuant to a grid structure based on our leverage
ratio,
|
|
|
|
Increase the maximum permitted leverage ratio and decrease the
minimum permitted fixed charge coverage ratio,
|
|
|
|
Add a minimum quarterly EBITDA requirement for fiscal year 2009,
|
|
|
|
Restrict the Companys ability to engage in acquisitions
and make investments,
|
|
|
|
Limit the amount of cash and cash equivalent collateral the
Company is permitted to deliver to participants in our precious
metals program to secure our obligations arising under the
precious metals consignment agreements,
|
|
|
|
Require additional financial reporting by the Company to the
lenders,
|
|
|
|
Increase the amount of the annual excess cash flow required to
be used to repay term loans,
|
61
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
|
|
|
|
|
Require application of the net proceeds of certain dispositions,
but excluding the first $20 million of such net proceeds,
to be applied to repay debt outstanding under the revolving
credit facility and term loans and to permanently reduce
availability under the revolving loan facility on a dollar for
dollar basis, provided that we are not required to reduce the
commitments under the revolving credit facility to below
$150 million,
|
|
|
|
Eliminate our ability to request an increase of $50 million
in the revolving credit facility,
|
|
|
|
Add provisions governing the obligations of the Company and the
lenders if one or more lenders under the revolving credit
facility fails to satisfy its funding obligations or otherwise
becomes a defaulting lender, and
|
|
|
|
Restrict our ability to make payments with respect to our
capital securities. The 2009 Amended Credit Facility effectively
prohibits us from paying dividends on our common stock.
|
The interest rates under the 2009 Amended Credit Facility are
the sum of (A) either (1) LIBOR or (2) the higher
of the Federal Funds Rate plus 0.5%, the Prime Rate, or LIBOR
plus 1.0% and (B) for the revolving credit facility, a
variable margin based on the Companys leverage, or for the
term loan facility, a fixed margin. As part of the June 2007
amendments, $175 million of borrowings under the term loan
facility were restricted to using three-month LIBOR in
determining their interest rates. This change was made in
connection with interest rate swap agreements executed in June
2007. These swap agreements effectively fixed the interest rate
through June 2011 on $150 million of borrowings under the
term loan facility. At December 31, 2008, the average
interest rate for revolving credit borrowings was 2.6%, and the
effective interest rate for term loan borrowings after adjusting
for the interest rate swaps was 6.5%. At December 31, 2007,
the average interest rate was 6.5% for revolving credit
borrowings and 7.2% for term loan borrowings.
The 2009 Amended Credit Facility is secured by substantially all
of Ferros assets, generally including 100% of the shares
of the Companys domestic subsidiaries and 65% of the
shares of the foreign subsidiaries directly owned by the
domestic parent company, but excluding trade receivables legally
sold pursuant to our accounts receivable sales programs.
The 2009 Amended Credit Facility contains customary operating
covenants that limit our ability to engage in certain
activities, including additional loans and investments; creation
of liens; prepayments, redemptions and repurchases of debt; and
mergers, acquisitions and asset sales. We are also subject to
customary financial covenants, including a leverage ratio, a
fixed charge coverage ratio, and a minimum EBITDA requirement.
Failure to satisfy certain of these covenants, either
immediately or within a brief period, would result in a default.
If a default should occur and be continuing and we have not
obtained a waiver, the obligations under the 2009 Amended Credit
Facility may become immediately due and payable at the option of
providers of more than 50% of the credit facility commitment. At
December 31, 2008, we were in compliance with the financial
covenants of the 2007 Amended Credit Facility.
Receivables
Sales Programs
We have several programs to sell, on an ongoing basis, pools of
our trade accounts receivable. These programs accelerate cash
collections at favorable financing costs and help us manage the
Companys liquidity requirements. The costs associated with
these programs were $5.8 million in 2008, $7.0 million
in 2007, and $5.6 million in 2006 and are reported as
interest expense.
We have an asset securitization program for substantially all of
Ferros U.S. trade accounts receivable. This program
accelerates cash collections at favorable financing costs and
helps us manage the Companys liquidity requirements. We
legally sell these trade accounts receivable to FFC, which
finances its acquisition of trade receivable assets by issuing
beneficial interests in (securitizing) the receivables to
multi-seller receivables securitization companies (the
conduits). 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
62
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
U.S. bankruptcy laws. FFC is a wholly-owned subsidiary,
which until December 2008 was a qualified special purpose entity
(QSPE) and, therefore, was not consolidated. At
December 31, 2007, Ferros consolidated balance sheet
does not include outstanding trade accounts receivable sold to
FFC of $115.0 million nor FFCs obligation to the
conduits for $54.6 million advanced against beneficial
interests in those receivables, but does include a note
receivable from FFC of $29.6 million, net of a valuation
allowance, representing proceeds from the sale of trade accounts
receivable to FFC that have not yet been received in cash by
Ferro. In December 2008, we amended the program so that FFC is
no longer a QSPE, FFC is included in our consolidated financial
statements, and this program is no longer accounted for as an
off balance sheet arrangement. Upon consolidation of FFC,
accounts receivable increased $105.9 million, the note
receivable from FFC decreased $75.9 million, and other
non-current assets decreased $30.0 million. At
December 31, 2008, Ferros consolidated balance sheet
includes outstanding trade accounts receivable legally
transferred to FFC of $90.3 million, while there was no
advance to FFC from the conduits against beneficial interests in
those receivables, and the note receivable from FFC was
eliminated in consolidation.
In June 2008, we amended the facility to reduce the
programs size from $100 million to $75 million.
At December 31, 2008, after reductions for non-qualifying
receivables, we had $56.8 million available under this
program. The Company intends to renew or replace the asset
securitization program prior to its scheduled expiration in June
2009, however there can be no assurance that the Company will be
able to do so.
Activity from this program prior to December 15, 2008, is
detailed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Sales of trade accounts receivable to FFC
|
|
$
|
1,031,164
|
|
|
$
|
985,922
|
|
|
$
|
994,436
|
|
Purchases of previously sold trade accounts receivable
|
|
|
6,483
|
|
|
|
2,302
|
|
|
|
|
|
Net cash proceeds from FFC
|
|
|
994,771
|
|
|
|
969,265
|
|
|
|
1,090,485
|
|
Trade accounts receivable collected and remitted to FFC and the
conduits
|
|
|
1,049,393
|
|
|
|
975,243
|
|
|
|
1,005,885
|
|
Servicing fees from FFC
|
|
|
563
|
|
|
|
308
|
|
|
|
310
|
|
The program contains operating covenants that limit FFCs
ability to engage in certain activities, including borrowings,
creation of liens, mergers, and investing in other companies.
The program also requires FFC and Ferro to provide periodic
financial statements and reports on the accounts receivable and
limits our ability to make significant changes in receivable
collection practices. In addition, FFC is required to maintain a
minimum tangible net worth. To meet this requirement, we
invested an additional $25 million in FFC in June 2006. The
program is subject to customary termination events, including
non-performance, deterioration in the quality of the accounts
receivable pool, and cross-default provisions with Ferros
2009 Amended Credit Facility and other debt obligations with
principal outstanding of at least $5 million. If a
termination event occurs and is not cured, the program may be
terminated or a third party may be selected to act as
administrator in collecting FFCs accounts receivable.
In addition, we maintain several international programs to sell
trade accounts receivable to financial institutions. The
commitments supporting these programs can be withdrawn at any
time and totaled $81.7 million at December 31, 2008,
and $80.8 million at December 31, 2007. The amount of
outstanding receivables sold under the international programs
was $16.7 million at December 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.
Servicing fees are not material.
63
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
Activity from these programs is detailed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Trade accounts receivable sold to financial institutions
|
|
$
|
232,065
|
|
|
$
|
182,075
|
|
|
$
|
104,869
|
|
Cash proceeds from financial institutions
|
|
|
221,509
|
|
|
|
178,429
|
|
|
|
104,676
|
|
Trade accounts receivable collected and remitted to financial
institutions
|
|
|
73,301
|
|
|
|
84,273
|
|
|
|
53,090
|
|
Other
Financing Arrangements
We maintain other lines of credit to provide global flexibility
for Ferros short-term liquidity requirements. These
facilities are uncommitted lines for our international
operations and totaled $24.9 million at December 31,
2008, and $30.7 million at December 31, 2007. The
unused portions of these lines provided additional liquidity of
$22.0 million at December 31, 2008, and
$28.9 million at December 31, 2007.
The carrying amounts of the following assets and liabilities
meeting the definition of a financial instrument approximate
their fair values due to the short period to maturity of the
instruments:
|
|
|
|
|
Cash and cash equivalents;
|
|
|
|
Notes receivable;
|
|
|
|
Deposits;
|
|
|
|
Miscellaneous receivables; and
|
|
|
|
Short-term loans payable to banks.
|
Long-term
Debt
The following financial instruments are measured at fair value
at December 31st for disclosure purposes. The carrying
values of these instruments may or may not be their fair values.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
|
(Dollars in thousands)
|
|
|
$172.5 million 6.50% Convertible Senior Notes
|
|
$
|
172,500
|
|
|
$
|
84,725
|
|
|
$
|
|
|
|
$
|
|
|
$200 million
91/8% Senior
Notes
|
|
|
|
|
|
|
|
|
|
|
199,636
|
|
|
|
205,000
|
|
Revolving credit facility
|
|
|
111,803
|
|
|
|
88,757
|
|
|
|
13,857
|
|
|
|
13,857
|
|
Term loan facility
|
|
|
292,498
|
|
|
|
225,731
|
|
|
|
301,950
|
|
|
|
301,950
|
|
Other notes
|
|
|
1,543
|
|
|
|
975
|
|
|
|
768
|
|
|
|
705
|
|
The fair values of the Convertible Notes and the
91/8% Notes
are based on a third partys estimated bid price.
The fair values of the revolving credit facility, the term loan
facility, and the other long-term notes are based on the present
value of expected future cash flows and assumptions about
current interest rates. In connection with the adoption of
FAS No. 157 in 2008, the fair value also reflects
assumptions about the creditworthiness of the Company that
market participants would use in pricing the debt.
64
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
Derivative
Instruments
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 at
December 31st were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
|
|
|
$
|
480
|
|
|
$
|
|
|
|
$
|
480
|
|
|
$
|
16
|
|
Precious metals forward contracts
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
8
|
|
|
|
755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value
|
|
$
|
|
|
|
$
|
488
|
|
|
$
|
|
|
|
$
|
488
|
|
|
$
|
771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
|
|
|
$
|
(12,724
|
)
|
|
$
|
|
|
|
$
|
(12,724
|
)
|
|
$
|
(8,109
|
)
|
Foreign currency forward contracts
|
|
|
|
|
|
|
(576
|
)
|
|
|
|
|
|
|
(576
|
)
|
|
|
(284
|
)
|
Raw material commodity swaps
|
|
|
|
|
|
|
(576
|
)
|
|
|
|
|
|
|
(576
|
)
|
|
|
(1,499
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value
|
|
$
|
|
|
|
$
|
(13,876
|
)
|
|
$
|
|
|
|
$
|
(13,876
|
)
|
|
$
|
(9,892
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. The notional amount of foreign currency forward
contracts was $156.8 million at December 31, 2008, and
$142.6 million at December 31, 2007.
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
$5.5 million at December 31, 2008, are designated as
normal purchase contracts and are not marked to fair value. We
mark the remaining precious metal contracts to fair
65
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
value based on market prices for comparable contracts and
recognize the resulting gains or losses as miscellaneous income
or expense.
Income tax (benefits) expenses are based on our (losses)
earnings from continuing operations before income taxes as
presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
U.S.
|
|
$
|
(11,026
|
)
|
|
|
(143,828
|
)
|
|
$
|
(32,070
|
)
|
Foreign
|
|
|
(45,511
|
)
|
|
|
26,310
|
|
|
|
49,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(56,537
|
)
|
|
|
(117,518
|
)
|
|
$
|
17,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under the liability method of accounting for income taxes, we
determine deferred income tax assets and liabilities based on
the temporary differences between the carrying amount of assets
and liabilities for financial reporting purposes and the amounts
used for tax purposes. We measure these differences using the
income tax rates and laws that are currently in effect.
Our income tax (benefit) expense from continuing operations
consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
(2,262
|
)
|
|
$
|
(2,584
|
)
|
|
$
|
(2,768
|
)
|
Foreign
|
|
|
21,713
|
|
|
|
14,688
|
|
|
|
18,349
|
|
State and local
|
|
|
580
|
|
|
|
606
|
|
|
|
(189
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
20,031
|
|
|
|
12,710
|
|
|
|
15,392
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
|
(7,722
|
)
|
|
|
(30,320
|
)
|
|
|
(1,333
|
)
|
Foreign
|
|
|
(15,167
|
)
|
|
|
(3,824
|
)
|
|
|
(12,054
|
)
|
State and local
|
|
|
67
|
|
|
|
3,482
|
|
|
|
376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(22,822
|
)
|
|
|
(30,662
|
)
|
|
|
(13,011
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax (benefit) expense
|
|
$
|
(2,791
|
)
|
|
$
|
(17,952
|
)
|
|
$
|
2,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
In addition, income tax expense (benefit) we allocated directly
to shareholders equity is detailed in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Foreign currency translation adjustments
|
|
$
|
1,952
|
|
|
$
|
2,134
|
|
|
$
|
|
|
Postretirement benefit liability adjustments
|
|
|
(32,783
|
)
|
|
|
16,348
|
|
|
|
1,085
|
|
Raw material commodity swap adjustments
|
|
|
394
|
|
|
|
(1,386
|
)
|
|
|
586
|
|
Interest rate swap adjustments
|
|
|
(1,643
|
)
|
|
|
(2,887
|
)
|
|
|
|
|
Dividends on performance shares
|
|
|
(43
|
)
|
|
|
(50
|
)
|
|
|
(45
|
)
|
Stock options exercised
|
|
|
(3
|
)
|
|
|
175
|
|
|
|
(208
|
)
|
Other
|
|
|
(35
|
)
|
|
|
|
|
|
|
(214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit) allocated to
shareholders equity
|
|
$
|
(32,161
|
)
|
|
$
|
14,334
|
|
|
$
|
1,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the U.S. federal statutory income tax
rate and our effective tax rate follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
U.S. federal statutory income tax rate
|
|
|
(35.0
|
)%
|
|
|
(35.0
|
)%
|
|
|
35.0
|
%
|
Goodwill impairment
|
|
|
27.3
|
|
|
|
10.4
|
|
|
|
|
|
Adjustment of valuation allowances
|
|
|
17.3
|
|
|
|
4.0
|
|
|
|
(42.0
|
)
|
Foreign tax rate difference
|
|
|
12.5
|
|
|
|
0.3
|
|
|
|
(17.3
|
)
|
U.S. tax cost of foreign dividends
|
|
|
(10.8
|
)
|
|
|
6.0
|
|
|
|
41.7
|
|
Uncertain tax positions
|
|
|
(10.1
|
)
|
|
|
|
|
|
|
|
|
Net adjustment of prior year accrual
|
|
|
(4.0
|
)
|
|
|
(1.0
|
)
|
|
|
9.9
|
|
ESOP dividend tax benefit
|
|
|
(0.8
|
)
|
|
|
(0.4
|
)
|
|
|
(3.3
|
)
|
Effect of equity earnings
|
|
|
(0.5
|
)
|
|
|
(0.3
|
)
|
|
|
(4.7
|
)
|
Extraterritorial income exclusion
|
|
|
|
|
|
|
|
|
|
|
(5.9
|
)
|
Miscellaneous
|
|
|
(0.8
|
)
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
(4.9
|
)%
|
|
|
(15.3
|
)%
|
|
|
13.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
The components of deferred tax assets and liabilities at
December 31st were:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Pension and other benefit programs
|
|
$
|
72,442
|
|
|
$
|
49,256
|
|
Foreign net operating loss carryforwards
|
|
|
29,932
|
|
|
|
24,547
|
|
Foreign tax credit carryforwards
|
|
|
28,503
|
|
|
|
35,756
|
|
Capitalized research costs
|
|
|
20,481
|
|
|
|
17,809
|
|
Accrued liabilities
|
|
|
14,537
|
|
|
|
15,380
|
|
Other credit carryforwards
|
|
|
12,024
|
|
|
|
8,319
|
|
State net operating loss carryforwards
|
|
|
5,972
|
|
|
|
5,691
|
|
Allowance for doubtful accounts
|
|
|
3,619
|
|
|
|
1,981
|
|
Inventories
|
|
|
1,626
|
|
|
|
835
|
|
Deferred gains
|
|
|
|
|
|
|
5,426
|
|
Other
|
|
|
9,917
|
|
|
|
5,824
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
199,053
|
|
|
|
170,824
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property, equipment and intangibles depreciation and
amortization
|
|
|
25,535
|
|
|
|
43,665
|
|
Unremitted earnings of foreign subsidiaries
|
|
|
1,942
|
|
|
|
12,541
|
|
Other
|
|
|
2,858
|
|
|
|
2,897
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
30,335
|
|
|
|
59,103
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset before valuation allowance
|
|
|
168,718
|
|
|
|
111,721
|
|
Valuation allowance
|
|
|
(21,451
|
)
|
|
|
(8,906
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
147,267
|
|
|
$
|
102,815
|
|
|
|
|
|
|
|
|
|
|
We had benefits from state operating loss carryforwards and
foreign operating loss carryforwards for tax purposes, some of
which can be carried forward indefinitely and others expire in
one to twenty years.
We maintain a valuation allowance due to the uncertainty of
realizing certain state and foreign net deferred tax assets. The
overall increase in the valuation allowance in 2008 related to
net deferred tax assets in Holland and to domestic state tax
credits.
At December 31, 2008, we had $43.8 million in tax
benefits from foreign tax credit carryforwards for tax purposes
that can be carried forward for ten years. In our opinion, it is
more likely than not that the credits will be utilized before
expiration.
We classified net deferred income tax assets as of December 31
as detailed in the following table:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Current assets
|
|
$
|
19,167
|
|
|
$
|
14,773
|
|
Non-current assets
|
|
|
134,139
|
|
|
|
100,935
|
|
Current liabilities
|
|
|
|
|
|
|
(4,036
|
)
|
Non-current liabilities
|
|
|
(6,039
|
)
|
|
|
(8,857
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
147,267
|
|
|
$
|
102,815
|
|
|
|
|
|
|
|
|
|
|
68
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
The Company adopted the provisions of FIN No. 48 on
January 1, 2007. As a result of the implementation of
FIN No. 48, the Company recognized an increase of
$11.9 million in the liability for unrecognized tax
benefits, which was accounted for as a reduction to the
January 1, 2007, balance of retained earnings. Activity and
balances of unrecognized tax benefits for 2008 and 2007 are
summarized below:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Balance at beginning of year
|
|
$
|
52,173
|
|
|
$
|
47,380
|
|
Additions based on tax positions related to the current year
|
|
|
1,770
|
|
|
|
1,783
|
|
Additions for tax positions of prior years
|
|
|
2,774
|
|
|
|
2,661
|
|
Reductions for tax positions of prior years
|
|
|
(5,256
|
)
|
|
|
(1,401
|
)
|
Reductions as a result of expiring statutes of limitations
|
|
|
(11,420
|
)
|
|
|
(1,817
|
)
|
Foreign currency translation of non-U.S. dollar denominated
reserves
|
|
|
(1,472
|
)
|
|
|
3,692
|
|
Settlements with taxing authorities
|
|
|
(3,805
|
)
|
|
|
(125
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
34,764
|
|
|
$
|
52,173
|
|
|
|
|
|
|
|
|
|
|
The total amount of unrecognized tax benefits that, if
recognized, would affect the effective rate was
$12.6 million at December 31, 2008, and
$20.8 million at December 31, 2007. The Company
recognizes interest accrued and penalties related to
unrecognized tax benefits as part of income tax expense. The
Company recognized $0.7 million of benefit in 2008 and $0.6
million of expense in 2007 for interest, net of tax, and
penalties. The Company had accrued $3.0 million at
December 31, 2008, and $4.1 million at
December 31, 2007, for the payment of interest, net of tax,
and penalties.
We anticipate that between $5.0 and $6.0 million of
liabilities for unrecognized tax benefits, including accrued
interest and penalties, may be reversed within the next
12 months. These liabilities relate to
non-U.S. tax
issues and are expected to reverse due to the expiration of the
applicable statute of limitations periods.
The Company conducts business globally, and, as a result, the
U.S. parent company or one of its subsidiaries files income
tax returns in the U.S. federal jurisdiction and various
state and foreign jurisdictions. In the normal course of
business, the U.S. parent company and its subsidiaries are
subject to examination by taxing authorities throughout the
world, including Spain, France, Germany, the 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 2001.
We have provided $1.9 million for deferred income taxes on
$20.2 million of undistributed earnings of foreign
subsidiaries. We have not provided deferred income taxes on
undistributed earnings of approximately $68.0 million,
since we intend to indefinitely reinvest the earnings.
|
|
8.
|
Contingent
Liabilities
|
As previously disclosed, in February 2003, we produced 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. Before closing its investigation, the Department
of Justice took no action against the Company or any of its
current or former employees. In 2003, the Company was named as a
defendant in several lawsuits alleging civil damages and
requesting injunctive relief relating to the conduct the
Government was investigating, and, in June 2008, the Company was
named in four more indirect purchaser lawsuits related to an
existing lawsuit in the Eastern District of Pennsylvania. In
July 2007, we entered into a definitive written settlement
agreement in the class action lawsuit involving direct
purchasers. The settlement agreement was approved by the United
States District Court for the Eastern District of Pennsylvania
in December 2007. Although the Company decided to bring this
matter to a close through settlement, the Company did not admit
to any of the alleged violations and continues to deny any
69
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
wrongdoing. The Company is vigorously defending the remaining
six civil actions alleging antitrust violations in the heat
stabilizer industry. These actions are in their early 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. 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 United States Court of Appeals for the Sixth
Circuit.
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
$13.9 million at December 31, 2008, and
$17.7 million at December 31, 2007. These agreements
primarily relate to Ferros insurance programs 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.
Defined
Benefit Pension Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
201
|
|
|
$
|
1,232
|
|
|
$
|
6,568
|
|
|
$
|
5,405
|
|
|
$
|
6,434
|
|
|
$
|
6,131
|
|
Interest cost
|
|
|
20,705
|
|
|
|
20,105
|
|
|
|
20,395
|
|
|
|
11,503
|
|
|
|
9,606
|
|
|
|
7,949
|
|
Expected return on plan assets
|
|
|
(22,652
|
)
|
|
|
(20,543
|
)
|
|
|
(19,232
|
)
|
|
|
(8,353
|
)
|
|
|
(7,578
|
)
|
|
|
(5,899
|
)
|
Amortization of prior service cost
|
|
|
100
|
|
|
|
157
|
|
|
|
136
|
|
|
|
118
|
|
|
|
125
|
|
|
|
121
|
|
Net amortization and deferral
|
|
|
2,495
|
|
|
|
5,845
|
|
|
|
6,157
|
|
|
|
189
|
|
|
|
570
|
|
|
|
1,058
|
|
Curtailment and settlement effects
|
|
|
259
|
|
|
|
532
|
|
|
|
2,565
|
|
|
|
(747
|
)
|
|
|
(374
|
)
|
|
|
(24
|
)
|
Special termination benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121
|
|
|
|
2,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net periodic benefit cost
|
|
$
|
1,108
|
|
|
$
|
7,328
|
|
|
$
|
16,589
|
|
|
$
|
8,236
|
|
|
$
|
10,939
|
|
|
$
|
9,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.49
|
%
|
|
|
6.05
|
%
|
|
|
5.90
|
%
|
|
|
5.56
|
%
|
|
|
4.69
|
%
|
|
|
4.34
|
%
|
Rate of compensation increase
|
|
|
N/A
|
|
|
|
3.25
|
%
|
|
|
3.43
|
%
|
|
|
3.49
|
%
|
|
|
3.05
|
%
|
|
|
3.09
|
%
|
Expected return on plan assets
|
|
|
8.50
|
%
|
|
|
8.50
|
%
|
|
|
8.50
|
%
|
|
|
5.25
|
%
|
|
|
4.95
|
%
|
|
|
4.63
|
%
|
In 2008, we recorded settlement losses of $0.3 million
related to retirements in the U.S., settlement gains of
$0.8 million related to retirements and terminations in
Mexico, Italy and Japan, a curtailment gain of $0.1 million
related to the closing of the Rotterdam, Netherlands,
manufacturing facility, a settlement loss of $0.2 million
related to a required settlement of a plan in France, and
special termination benefits of $0.1 million related to
terminations in the Netherlands and Indonesia.
In 2007, we recorded curtailment losses of $0.3 million
related to closing our Niagara Falls, New York, manufacturing
facility and $0.3 million related to freezing benefits at
several U.S. plants and recorded a curtailment gain of
$0.3 million related to European restructuring activities
in Italy. We also recorded costs of $2.2 million for
special termination benefits from other European restructuring
activities that resulted in closing the Companys
Rotterdam, Netherlands, manufacturing facility in 2008.
70
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
In 2006, we announced changes to certain of our defined benefit
pension plans. Employees who had been participating in our
largest U.S. pension plan stopped accruing benefit service
after March 31, 2006, and became eligible to receive the
basic pension contribution under the Companys defined
contribution plan. As a result, we recorded a curtailment gain
of $2.5 million. In 2006, we also recorded settlement
losses of $4.9 million in our unfunded nonqualified defined
benefit pension plans, related primarily to a lump sum payment
to the beneficiary of our deceased former Chief Executive
Officer.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
330,925
|
|
|
$
|
340,727
|
|
|
$
|
211,241
|
|
|
$
|
197,582
|
|
Adjustment to apply measurement provisions of
FAS No. 158 as of January 1, 2008
|
|
|
763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
|
201
|
|
|
|
1,232
|
|
|
|
5,405
|
|
|
|
6,434
|
|
Interest cost
|
|
|
20,705
|
|
|
|
20,105
|
|
|
|
11,503
|
|
|
|
9,606
|
|
Amendments
|
|
|
|
|
|
|
|
|
|
|
(4,716
|
)
|
|
|
100
|
|
Curtailments
|
|
|
|
|
|
|
(1,214
|
)
|
|
|
(2,614
|
)
|
|
|
137
|
|
Settlements
|
|
|
(630
|
)
|
|
|
|
|
|
|
(4,493
|
)
|
|
|
(746
|
)
|
Special termination benefits
|
|
|
|
|
|
|
|
|
|
|
121
|
|
|
|
2,156
|
|
Plan participants contributions
|
|
|
|
|
|
|
12
|
|
|
|
755
|
|
|
|
721
|
|
Benefits paid
|
|
|
(20,456
|
)
|
|
|
(18,536
|
)
|
|
|
(9,345
|
)
|
|
|
(9,240
|
)
|
Actuarial (gain) loss
|
|
|
(10,969
|
)
|
|
|
(11,401
|
)
|
|
|
(7,827
|
)
|
|
|
(12,562
|
)
|
Exchange rate effect
|
|
|
|
|
|
|
|
|
|
|
(14,966
|
)
|
|
|
17,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
320,539
|
|
|
$
|
330,925
|
|
|
$
|
185,064
|
|
|
$
|
211,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation at end of year
|
|
$
|
320,539
|
|
|
$
|
330,925
|
|
|
$
|
175,636
|
|
|
$
|
197,399
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
294,810
|
|
|
$
|
258,737
|
|
|
$
|
156,806
|
|
|
$
|
143,438
|
|
Adjustment to apply measurement provisions of
FAS No. 158 as of January 1, 2008
|
|
|
(4,627
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual return on plan assets
|
|
|
(78,444
|
)
|
|
|
32,027
|
|
|
|
(11,301
|
)
|
|
|
1,550
|
|
Employer contributions
|
|
|
10,055
|
|
|
|
22,570
|
|
|
|
11,387
|
|
|
|
8,749
|
|
Plan participants contributions
|
|
|
|
|
|
|
12
|
|
|
|
755
|
|
|
|
721
|
|
Benefits paid
|
|
|
(20,456
|
)
|
|
|
(18,536
|
)
|
|
|
(9,345
|
)
|
|
|
(9,240
|
)
|
Effect of settlements
|
|
|
(630
|
)
|
|
|
|
|
|
|
(4,493
|
)
|
|
|
(746
|
)
|
Exchange rate effect
|
|
|
|
|
|
|
|
|
|
|
(12,414
|
)
|
|
|
12,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
200,708
|
|
|
$
|
294,810
|
|
|
$
|
131,395
|
|
|
$
|
156,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of accrued costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(119,831
|
)
|
|
$
|
(36,115
|
)
|
|
$
|
(53,669
|
)
|
|
$
|
(54,435
|
)
|
Contributions between measurement date and end of year
|
|
|
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(119,831
|
)
|
|
$
|
(35,980
|
)
|
|
$
|
(53,669
|
)
|
|
$
|
(54,435
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Amounts recognized in the balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-current assets
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,798
|
|
|
$
|
1,861
|
|
Accrued expenses and other current liabilities
|
|
|
(431
|
)
|
|
|
(508
|
)
|
|
|
(2,190
|
)
|
|
|
(2,224
|
)
|
Postretirement and pension liabilities
|
|
|
(119,400
|
)
|
|
|
(35,472
|
)
|
|
|
(53,277
|
)
|
|
|
(54,072
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(119,831
|
)
|
|
$
|
(35,980
|
)
|
|
$
|
(53,669
|
)
|
|
$
|
(54,435
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average assumptions as of the measurement date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.74
|
%
|
|
|
6.49
|
%
|
|
|
5.85
|
%
|
|
|
5.56
|
%
|
Rate of compensation increase
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
3.45
|
%
|
|
|
3.49
|
%
|
Pension plans with benefit obligations in excess of plan
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligations
|
|
$
|
320,539
|
|
|
$
|
330,925
|
|
|
$
|
148,422
|
|
|
$
|
190,652
|
|
Plan assets
|
|
|
200,708
|
|
|
|
294,810
|
|
|
|
92,955
|
|
|
|
134,356
|
|
Pension plans with accumulated benefit obligations in excess
of plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligations
|
|
$
|
320,539
|
|
|
$
|
330,925
|
|
|
$
|
146,159
|
|
|
$
|
187,876
|
|
Accumulated benefit obligations
|
|
|
320,539
|
|
|
|
330,925
|
|
|
|
139,704
|
|
|
|
176,768
|
|
Plan assets
|
|
|
200,708
|
|
|
|
294,810
|
|
|
|
90,796
|
|
|
|
131,827
|
|
72
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
Activity and balances in accumulated other comprehensive income
(loss) related to defined benefit pension plans are summarized
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Balance at beginning of year
|
|
$
|
(54,868
|
)
|
|
$
|
(85,500
|
)
|
|
$
|
(16,740
|
)
|
|
$
|
(22,331
|
)
|
Net (loss) gain arising during the year
|
|
|
(95,788
|
)
|
|
|
24,099
|
|
|
|
(9,213
|
)
|
|
|
5,949
|
|
Prior service cost arising during the year
|
|
|
|
|
|
|
|
|
|
|
4,716
|
|
|
|
(100
|
)
|
Amounts recognized as net periodic benefit costs
|
|
|
2,854
|
|
|
|
6,533
|
|
|
|
(440
|
)
|
|
|
769
|
|
Adjustment to apply measurement provisions of
FAS No. 158 as of January 1, 2008
|
|
|
649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange rate effects
|
|
|
|
|
|
|
|
|
|
|
2,729
|
|
|
|
(1,027
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
(147,153
|
)
|
|
$
|
(54,868
|
)
|
|
$
|
(18,948
|
)
|
|
$
|
(16,740
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(146,784
|
)
|
|
$
|
(54,374
|
)
|
|
$
|
(21,879
|
)
|
|
$
|
(14,807
|
)
|
Prior service (cost) credit
|
|
|
(369
|
)
|
|
|
(494
|
)
|
|
|
2,931
|
|
|
|
(1,933
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(147,153
|
)
|
|
$
|
(54,868
|
)
|
|
$
|
(18,948
|
)
|
|
$
|
(16,740
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated amounts to be amortized in 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(15,380
|
)
|
|
|
|
|
|
$
|
(1,035
|
)
|
|
|
|
|
Prior service (cost) credit
|
|
|
(98
|
)
|
|
|
|
|
|
|
333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(15,478
|
)
|
|
|
|
|
|
$
|
(702
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We base the expected return on plan assets at the beginning of
the year on the weighted-average expected return for the target
asset allocations of the principal asset categories held by each
plan. In determining the expected return, the Company considers
both historical performance and an estimate of future long-term
rates of return. The Company consults with and considers the
opinion of its actuaries in developing appropriate return
assumptions.
The Company establishes asset allocation ranges for each major
category of plan assets. The risks inherent in the various asset
categories are considered along with the benefit obligations,
financial status and short-term liquidity needs of the fund. The
target allocation for each major asset category and the actual
weighted average asset allocations at the pension plan
measurement dates were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
|
Target
|
|
|
|
|
|
|
|
|
Target
|
|
|
|
|
|
|
|
|
|
Allocation
|
|
|
2008
|
|
|
2007
|
|
|
Allocation
|
|
|
2008
|
|
|
2007
|
|
|
Debt Securities
|
|
|
30
|
%
|
|
|
40
|
%
|
|
|
31
|
%
|
|
|
63
|
%
|
|
|
65
|
%
|
|
|
61
|
%
|
Equity Securities
|
|
|
70
|
|
|
|
60
|
|
|
|
69
|
|
|
|
30
|
|
|
|
25
|
|
|
|
29
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
10
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys U.S. pension plans held
424,651 shares of the Companys common stock with a
market value of $3.0 million at December 31, 2008, and
$8.8 million at December 31, 2007, and received
$0.2 million of dividends from the Companys common
stock in 2008, 2007, and 2006.
We expect to contribute approximately $10.1 million to our
U.S. pension plans and $10.1 million to our
non-U.S. pension
plans in 2009.
73
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
We estimate that future pension benefit payments, which reflect
expected future service, will be as follows:
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
|
(Dollars in thousands)
|
|
|
2009
|
|
$
|
20,167
|
|
|
$
|
9,025
|
|
2010
|
|
|
20,422
|
|
|
|
9,298
|
|
2011
|
|
|
20,896
|
|
|
|
10,278
|
|
2012
|
|
|
21,489
|
|
|
|
10,441
|
|
2013
|
|
|
21,923
|
|
|
|
10,648
|
|
2014-2018
|
|
|
116,956
|
|
|
|
62,574
|
|
Postretirement
Health Care and Life Insurance Benefit Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
64
|
|
|
$
|
512
|
|
|
$
|
690
|
|
Interest cost
|
|
|
2,923
|
|
|
|
3,387
|
|
|
|
3,287
|
|
Amortization of prior service cost
|
|
|
(1,643
|
)
|
|
|
(1,349
|
)
|
|
|
(835
|
)
|
Net amortization and deferral
|
|
|
|
|
|
|
|
|
|
|
|
|
Curtailment and settlement effects
|
|
|
|
|
|
|
(3,197
|
)
|
|
|
(2,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net periodic benefit cost
|
|
$
|
1,344
|
|
|
$
|
(647
|
)
|
|
$
|
689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.10
|
%
|
|
|
5.90
|
%
|
|
|
5.90
|
%
|
Current trend rate for health care costs
|
|
|
9.40
|
%
|
|
|
10.10
|
%
|
|
|
9.30
|
%
|
Ultimate trend rate for health care costs
|
|
|
5.20
|
%
|
|
|
5.20
|
%
|
|
|
5.20
|
%
|
Year that ultimate trend rate is reached
|
|
|
2017
|
|
|
|
2017
|
|
|
|
2013
|
|
In 2007, we recorded a curtailment gain of $3.1 million
related to closing our Niagara Falls, New York, manufacturing
facility. In 2006, we limited eligibility for retiree medical
and life insurance coverage for nonunion employees and recorded
a curtailment gain of $2.5 million.
A one-percentage-point change in the assumed health care cost
trend rates would have the following effect:
|
|
|
|
|
|
|
|
|
|
|
1-Percentage
|
|
|
1-Percentage
|
|
|
|
Point Increase
|
|
|
Point Decrease
|
|
|
|
(Dollars in thousands)
|
|
|
Effect on total of service and interest cost components
|
|
$
|
218
|
|
|
$
|
(198
|
)
|
Effect on postretirement benefit obligation
|
|
|
2,753
|
|
|
|
(2,519
|
)
|
74
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
52,923
|
|
|
$
|
60,475
|
|
Adjustment to apply measurement provisions of
FAS No. 158 as of January 1, 2008
|
|
|
(2,714
|
)
|
|
|
|
|
Service cost
|
|
|
64
|
|
|
|
512
|
|
Interest cost
|
|
|
2,923
|
|
|
|
3,387
|
|
Effect of curtailment
|
|
|
(1,540
|
)
|
|
|
(2,794
|
)
|
Benefits paid
|
|
|
(4,159
|
)
|
|
|
(3,548
|
)
|
Actuarial (gain) loss
|
|
|
(333
|
)
|
|
|
(5,109
|
)
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
47,164
|
|
|
$
|
52,923
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
|
|
|
$
|
|
|
Adjustment to apply measurement provisions of
FAS No. 158 as of January 1, 2008
|
|
|
(819
|
)
|
|
|
|
|
Employer contributions
|
|
|
4,978
|
|
|
|
3,548
|
|
Benefits paid
|
|
|
(4,159
|
)
|
|
|
(3,548
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of accrued costs:
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(47,164
|
)
|
|
$
|
(52,923
|
)
|
Contributions between measurement date and end of year
|
|
|
|
|
|
|
819
|
|
Curtailment gain between measurement date and end of year
|
|
|
|
|
|
|
2,383
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(47,164
|
)
|
|
$
|
(49,721
|
)
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the balance sheet:
|
|
|
|
|
|
|
|
|
Accrued expenses and other current liabilities
|
|
$
|
(4,956
|
)
|
|
$
|
(4,554
|
)
|
Postretirement and pension liabilities
|
|
|
(42,208
|
)
|
|
|
(45,167
|
)
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(47,164
|
)
|
|
$
|
(49,721
|
)
|
|
|
|
|
|
|
|
|
|
Weighted-average assumptions as of December 31:
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.45
|
%
|
|
|
6.10
|
%
|
Current trend rate for health care costs
|
|
|
8.70
|
%
|
|
|
9.40
|
%
|
Ultimate trend rate for health care costs
|
|
|
5.20
|
%
|
|
|
5.20
|
%
|
Year that ultimate trend rate is reached
|
|
|
2018
|
|
|
|
2017
|
|
75
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
Activity and balances in accumulated other comprehensive income
(loss) related to our postretirement health care and life
insurance benefit plans are summarized below:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Balance at beginning of year
|
|
$
|
9,463
|
|
|
$
|
3,723
|
|
Net loss (gain) arising during the year
|
|
|
333
|
|
|
|
5,109
|
|
Prior service cost arising during the year
|
|
|
1,540
|
|
|
|
1,980
|
|
Amounts recognized as net periodic benefit costs
|
|
|
(1,643
|
)
|
|
|
(1,349
|
)
|
Adjustment to apply measurement provisions of
FAS No. 158 as of January 1, 2008
|
|
|
(80
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
9,613
|
|
|
$
|
9,463
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive income
(loss):
|
|
|
|
|
|
|
|
|
Net (loss) gain
|
|
$
|
4,609
|
|
|
$
|
3,945
|
|
Prior service cost
|
|
|
5,004
|
|
|
|
5,518
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,613
|
|
|
$
|
9,463
|
|
|
|
|
|
|
|
|
|
|
Estimated amounts to be amortized in 2009:
|
|
|
|
|
|
|
|
|
Net (loss) gain
|
|
$
|
|
|
|
|
|
|
Prior service cost
|
|
|
(1,748
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,748
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Medicare Prescription Drug, Improvement, and Modernization
Act of 2003 provides subsidies for certain drug costs to
companies that provide coverage that is actuarially equivalent
to the drug coverage under Medicare D. We estimate that future
postretirement health care and life insurance benefit payments
will be as follows:
|
|
|
|
|
|
|
|
|
|
|
Before
|
|
|
After
|
|
|
|
Medicare Subsidy
|
|
|
Medicare Subsidy
|
|
|
|
(Dollars in thousands)
|
|
|
2009
|
|
$
|
5,461
|
|
|
$
|
4,956
|
|
2010
|
|
|
5,381
|
|
|
|
4,866
|
|
2011
|
|
|
5,258
|
|
|
|
4,738
|
|
2012
|
|
|
5,037
|
|
|
|
4,510
|
|
2013
|
|
|
4,835
|
|
|
|
4,312
|
|
2014-2018
|
|
|
21,201
|
|
|
|
18,816
|
|
Other
Retirement Plans
We also have defined contribution retirement plans covering
certain employees. Our contributions are determined by the terms
of the plans and are limited to amounts that are deductible for
income taxes. The largest plan covers U.S. salaried and
non-bargaining hourly employees. In this plan, the Company
contributes a percentage of eligible employee basic compensation
and also a percentage of employee contributions. Generally,
benefits under these plans vest gradually over a period of five
years from date of employment. The expense applicable to these
plans was $8.3 million, $8.5 million, and
$7.8 million in 2008, 2007, and 2006, respectively.
76
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
|
|
10.
|
Serial
Convertible Preferred Stock
|
We are authorized to issue up to 2,000,000 shares of serial
convertible preferred stock without par value. In 1989, Ferro
issued 1,520,215 shares of 7% Series A ESOP
Convertible Preferred Stock (Series A Preferred
Stock) to the Trustee of the Ferro Employee Stock
Ownership Plan (ESOP) at a price of $46.375 per
share for a total consideration of $70.5 million. All
shares of the Series A Preferred Stock have been allocated
to participating individual employee accounts. The Trustee may
redeem the Series A Preferred Stock to provide for
distributions to, loans to, or withdrawals by participants or to
satisfy an investment election provided to participants. The
Company can redeem any or all of the Series A Preferred
Stock at any time. The redemption price is $46.375 per preferred
share plus earned but unpaid dividends as of the date of
redemption. The redemption value approximates the carrying
value. In addition, the Trustee can convert any or all of the
Series A Preferred Stock at any time into Ferro common
stock at a conversion rate of 2.5988 shares of common stock
(adjusted for stock splits) per preferred share.
Each share of Series A Preferred Stock carries one vote,
voting together with the common stock on most matters. The
Series A Preferred Stock accrues dividends at an annual
rate of 7% on shares outstanding. The dividends are cumulative
from the date of issuance. To the extent the Company is legally
permitted to pay dividends and the Board of Directors declares a
dividend payable, Ferro pays dividends on a quarterly basis. In
the case of liquidation or dissolution of the Company, the
holders of the Series A Preferred Stock are entitled to
receive $46.375 per preferred share, or $25.00 per preferred
share in the event of involuntary liquidation, plus earned but
unpaid dividends, before any amount is paid to holders of the
Companys common stock.
There were 249,017 shares of Series A Preferred Stock
outstanding at December 31, 2008, and 293,766 shares
outstanding at December 31, 2007. The number of shares
redeemed was 44,749 in 2008 (72,649 in 2007 and 75,856 in 2006).
Our common stock has a par value of $1 per share. At
December 31, 2008 and 2007, there were 300,000,000
authorized and 52,323,053 shares issued. We did not
purchase common stock on the open market in 2008, 2007, or 2006.
The 2009 Amended Credit Facility limits our ability to purchase
shares.
|
|
12.
|
Stock-based
Compensation
|
In November 2006, our shareholders approved the 2006 Long-Term
Incentive Plan (the Plan). The Plans purpose
is to promote the Companys and the shareholders
long-term financial interests and growth by attracting,
retaining and motivating high-quality executives and directors
and aligning their interests with those of our shareholders. The
Plan authorizes us to grant several different types of long-term
incentives, including stock options, stock appreciation rights,
restricted shares, performance shares, other common stock-based
awards, and dividend equivalent rights. Unissued authorized
shares or treasury stock may be issued under the Plan.
Generally, Ferro has issued treasury stock to satisfy the common
stock requirements of its long-term incentive plans. The Plan
has an effective date of September 28, 2006, and reserves
3,000,000 common shares for future issuance.
Previous incentive plans authorized various types of long-term
incentives, including stock options, stock appreciation rights,
performance shares and common stock awards. No further grants
may be made under these previous plans. However, any outstanding
awards or grants made under these plans will continue until the
end of their specified terms. Stock options granted under the
previous plans have terms of 10 years and performance share
awards granted under those plans have terms of three years.
Stock options, performance shares, deferred stock units, and
restricted share awards are the only grant types currently
outstanding. These are discussed separately below because of the
significant differences between the grant types.
77
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
Stock
Options
General
Information
The Compensation Committee of the Board of Directors (the
Committee) awards stock options under the Plan and
generally grants stock options during regularly scheduled
meetings. The exercise price of stock options granted may not be
less than the per share fair market value of the Companys
common stock on the date of the grant. Stock options have a term
of 10 years and vest evenly over four years on the
anniversary of the grant date. The normal vesting period is used
for retirement eligible employees. In the case of death,
retirement or change in control, the stock options become 100%
vested and exercisable.
Stock
Option Valuation Model and Method Information
We estimate the fair value of each stock option on the date of
grant using the Black-Scholes option pricing model that uses the
assumptions noted in the following table. We use judgment in
selecting these assumptions because they may significantly
impact the timing and amount of compensation expense and we base
our judgments primarily on historical data. When appropriate, we
adjust the historical data for circumstances that are not likely
to occur in the future. We adjust the assumptions each year
based upon new information.
We estimate stock option forfeitures based upon historical
employee termination rates. The following table details the
estimation method and the ranges of assumptions used for
differing grants of stock options:
|
|
|
|
|
Assumption
|
|
Estimation Method
|
|
Range
|
|
Expected life, in years
|
|
Historical stock option exercise experience
|
|
6.25 to 8.20
|
Risk-free interest rate
|
|
Yield of U.S. Treasury Bonds with remaining life equal to
expected life of the stock option
|
|
2.67% to 5.94%
|
Expected volatility
|
|
Historical daily price observations of the Companys common
stock over a period equal to the expected life of the stock
option
|
|
28.07% to 37.30%
|
Expected dividend yield
|
|
Historical dividend rate at the date of grant
|
|
2.18% to 6.99%
|
78
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
Stock
Option Activity Information
A summary of the stock option activity for 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
(In years)
|
|
|
(Dollars in
|
|
|
|
|
|
|
|
|
|
|
|
|
thousands)
|
|
|
Outstanding at December 31, 2007
|
|
|
4,239,408
|
|
|
$
|
22.36
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
515,600
|
|
|
|
17.41
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(2,750
|
)
|
|
|
21.06
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(566,898
|
)
|
|
|
22.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
4,185,360
|
|
|
|
21.70
|
|
|
|
5.0
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2008
|
|
|
3,151,356
|
|
|
|
22.44
|
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at December 31, 2008
|
|
|
4,058,670
|
|
|
|
21.71
|
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The per share weighted-average grant-date fair value of stock
options granted during the year was $4.25 in 2008, $6.24 in
2007, and $5.93 in 2006.
We calculated the aggregate intrinsic value in the table above
by subtracting the total pretax difference between our common
stocks closing fair market value per share on the last
trading day of the year and the stock option exercise price for
each grant and that result by the number of shares that would
have been received by the option holders had they exercised all
their
in-the-money
stock options. At December 31, 2008, there were no
in-the-money
stock options. We do not record the aggregate intrinsic value
for financial accounting purposes, and the value changes daily
based on the changes in the fair market value of our common
stock.
Information related to the stock options exercised follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Proceeds from the exercise of stock options
|
|
$
|
58
|
|
|
$
|
9,843
|
|
|
$
|
4,169
|
|
Intrinsic value of stock options exercised
|
|
|
7
|
|
|
|
947
|
|
|
|
577
|
|
Income tax benefit related to stock options exercised
|
|
|
3
|
|
|
|
333
|
|
|
|
202
|
|
A summary of the status of the Companys nonvested stock
options as of December 31, 2008, and changes during 2008,
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant-date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Nonvested at December 31, 2007
|
|
|
1,000,007
|
|
|
$
|
6.01
|
|
Granted
|
|
|
515,600
|
|
|
|
4.25
|
|
Vested
|
|
|
(366,215
|
)
|
|
|
5.99
|
|
Forfeited
|
|
|
(115,388
|
)
|
|
|
5.36
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2008
|
|
|
1,034,004
|
|
|
|
5.21
|
|
|
|
|
|
|
|
|
|
|
79
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
Stock-Based
Compensation Expense Information
A summary of the amounts recorded and to be recorded related to
stock-based compensation related to stock options follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Compensation expense recorded in selling, general and
administrative expenses
|
|
$
|
2,274
|
|
|
$
|
2,363
|
|
|
$
|
3,035
|
|
Deferred income tax benefits related to compensation expense
|
|
|
796
|
|
|
|
827
|
|
|
|
1,062
|
|
Total fair value of stock options vested
|
|
|
2,195
|
|
|
|
2,698
|
|
|
|
3,230
|
|
Unrecognized compensation cost related to stock options
|
|
|
3,656
|
|
|
|
4,057
|
|
|
|
5,035
|
|
Expected weighted-average recognition period for unrecognized
compensation, in years
|
|
|
2.3
|
|
|
|
2.4
|
|
|
|
2.4
|
|
Performance
Shares
General
Information
We maintain multiple performance share awards whereby these
awards, expressed as shares of the Companys common stock,
are earned only if the Company meets specific performance
targets over a three-year period. The grants have a duration of
three years, and we establish a new grant each year. Therefore,
there are three grants outstanding at a given point in time. On
the grant date, we issue restricted common stock to the
participants and a trustee holds the shares for the benefit of
the participants until the end of the performance period. During
the performance period, participants have voting rights and
receive dividends on the restricted common shares.
We pay half of the value of any earned performance shares in
cash and half in unrestricted common shares. The portions of the
awards that will be paid in cash are treated as liabilities, and
therefore, we remeasure our liability, and the related
compensation expense, at the balance sheet date based upon the
fair value of the Companys common stock. We treat the
awards that are settled with common stock as equity awards, and
therefore, the amount of stock-based compensation we record over
the performance period is equal to the fair value on the grant
date. The compensation expense for all performance share awards
is adjusted for the achievement of the performance share
awards performance conditions based upon our best estimate
using available facts and circumstances.
Performance
Share Award Information
In the following table, we have identified the potential number
of common shares that may be issued and the common stock price
on the date of each grant. For the portion of the awards that
are treated as liabilities, the awards were remeasured using the
common stock closing market price of $7.05 at December 31,
2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
|
|
|
|
|
|
|
|
Potential Number
|
|
|
Weighted-Average
|
|
|
Potential Future
|
|
|
|
Potential Number
|
|
|
of Shares at
|
|
|
Common
|
|
|
Stock-Based
|
|
|
|
of Shares at
|
|
|
December 31,
|
|
|
Stock Price at
|
|
|
Compensation
|
|
Plan
|
|
Grant Date
|
|
|
2008
|
|
|
Grant Date
|
|
|
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
2006 2008
|
|
|
271,200
|
|
|
|
225,600
|
|
|
$
|
18.03
|
|
|
$
|
|
|
2007 2009
|
|
|
131,600
|
|
|
|
118,400
|
|
|
|
21.99
|
|
|
|
112
|
|
2008 2010
|
|
|
77,825
|
|
|
|
77,825
|
|
|
|
17.26
|
|
|
|
|
|
The potential compensation expense is reduced during the
performance period by forfeitures and non-attainment of
performance conditions. However, actual compensation expense
related to the grants may be greater than the amount in the
table above because the plan allows for us to pay up to 200% of
the grant date value if the
80
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
Companys performance goals are exceeded. Conversely, the
actual compensation expense related to the grants may be lower
than the amount in the table if the Companys performance
goals are not met.
At December 31, 2008, we estimated each plans average
achievement percentage as follows:
|
|
|
|
|
|
|
Achievement
|
|
Plan
|
|
Percentage
|
|
|
2006 2008
|
|
|
53.1
|
%
|
2007 2009
|
|
|
22.5
|
%
|
2008 2010
|
|
|
00.0
|
%
|
Stock-Based
Compensation Expense Information
A summary of the amounts recorded and to be recorded related to
stock-based compensation related to the performance share awards
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Compensation (credit) expense recorded in selling, general and
administrative expenses
|
|
$
|
(710
|
)
|
|
$
|
1,018
|
|
|
$
|
1,224
|
|
Estimated future compensation cost
|
|
|
112
|
|
|
|
1,836
|
|
|
|
2,603
|
|
The expected recognition period for the estimated future
compensation cost was 2.0 years for 2008, 2007 and 2006. As
of December 31, 2008, the Company had accrued
$0.2 million of compensation related to the performance
share awards. During 2008, we recorded deferred income tax
benefits related to compensation expense for performance share
awards of $0.2 million.
Deferred
Stock Units
General
Information
Under the Plan, the Company may award deferred stock units
(DSUs), expressed as shares of the Companys
common stock, to non-employee directors of the Company. For
accounting purposes, the awards are treated as if they were
stock compensation. The DSUs vest in one year from the date of
the award and are forfeited in the event the recipient is no
longer serving as a director, except in the case of retirement,
death or disability. The directors also have the option to
transfer the vested units into the Deferred Compensation Plan.
The first DSUs were awarded in 2007.
Deferred
Stock Unit Activity Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Award-date
|
|
|
|
Shares
|
|
|
Price
|
|
|
Outstanding at December 31, 2007
|
|
|
32,900
|
|
|
$
|
22.07
|
|
Awarded
|
|
|
34,200
|
|
|
|
17.26
|
|
Exercised
|
|
|
(32,900
|
)
|
|
|
22.07
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
34,200
|
|
|
|
17.26
|
|
|
|
|
|
|
|
|
|
|
The per share weighted-average award-date fair value of the DSUs
awarded in 2008 was $16.69. Compensation expense recorded in
selling, general and administrative expenses for DSUs was
$0.6 million in 2008, and the
81
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
unrecognized compensation cost was $0.1 million at
December 31, 2008. We also recorded deferred tax benefits
related to compensation expense for DSUs of $0.2 million in
2008.
Directors
Deferred Compensation
The Company has established the Ferro Corporation Deferred
Compensation Plan for Non-employee Directors, permitting its
non-employee directors to voluntarily defer all or a portion of
their compensation. The voluntarily deferred amounts are placed
in individual accounts in a benefit trust known as a rabbi
trust and invested in the Companys common stock with
dividends reinvested in additional shares. All disbursements
from the trust are made in the Companys common stock. The
Company has applied the provisions of EITF Issue
No. 97-14,
Accounting for Deferred Compensation Arrangements Where
Amounts Earned are Held in A Rabbi Trust and Invested.
The stock held in the rabbi trust is classified as treasury
stock in shareholders equity and the deferred compensation
obligation that is required to be settled in shares of
Companys common stock is classified as paid-in capital.
The rabbi trust held 180,497 shares ($3.8 million at
cost) and 152,262 shares ($3.1 million at cost) at
December 31, 2008 and 2007, respectively.
Restricted
Share Awards
General
Information:
Under the 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.
Restricted
Share Awards Activity Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Award-date Fair
|
|
|
|
Shares
|
|
|
Value
|
|
|
Nonvested at December 31, 2007
|
|
|
|
|
|
$
|
|
|
Awarded
|
|
|
99,600
|
|
|
|
17.51
|
|
Vested
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(7,200
|
)
|
|
|
17.22
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2008
|
|
|
92,400
|
|
|
|
17.53
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008, there was $1.2 million
unrecognized compensation cost related to the restricted share
awards. The cost is expected to be amortized over a weighted
average period of 2.79 years. Compensation expense recorded
in selling, general and administration expense for the
restricted share awards was $0.4 million in fiscal 2008.
82
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
Stock-based
Compensation Transactions in Shareholders
Equity
The stock-based compensation transactions in shareholders
equity consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares
|
|
|
|
|
|
|
in Treasury
|
|
|
Paid-in
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
|
(In thousands)
|
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
(232
|
)
|
|
$
|
4,080
|
|
|
$
|
3,299
|
|
Performance shares, net
|
|
|
(95
|
)
|
|
|
2,016
|
|
|
|
(1,952
|
)
|
Preferred stock conversions
|
|
|
(185
|
)
|
|
|
3,723
|
|
|
|
206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(512
|
)
|
|
$
|
9,819
|
|
|
$
|
1,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
(497
|
)
|
|
$
|
8,399
|
|
|
$
|
3,360
|
|
Performance shares, net
|
|
|
(25
|
)
|
|
|
(215
|
)
|
|
|
978
|
|
Deferred stock units
|
|
|
|
|
|
|
|
|
|
|
632
|
|
Directors deferred compensation
|
|
|
|
|
|
|
(3,127
|
)
|
|
|
3,127
|
|
Preferred stock conversions
|
|
|
(183
|
)
|
|
|
3,364
|
|
|
|
(210
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(705
|
)
|
|
$
|
8,421
|
|
|
$
|
7,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
(3
|
)
|
|
$
|
50
|
|
|
$
|
2,293
|
|
Performance shares, net
|
|
|
|
|
|
|
25
|
|
|
|
(83
|
)
|
Deferred stock units
|
|
|
(33
|
)
|
|
|
596
|
|
|
|
(48
|
)
|
Directors deferred compensation
|
|
|
|
|
|
|
(664
|
)
|
|
|
664
|
|
Preferred stock conversions
|
|
|
(185
|
)
|
|
|
3,519
|
|
|
|
(1,872
|
)
|
Restricted shares
|
|
|
(100
|
)
|
|
|
1,805
|
|
|
|
(1,377
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(321
|
)
|
|
$
|
5,331
|
|
|
$
|
(423
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.
|
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.
Inorganic Specialties. In July 2006, we
announced our Inorganic Specialties Group European operations
restructuring, in our Performance Coatings and Color and Glass
Performance Materials segments that affected operations in
Spain, Italy, Portugal, France, the Netherlands, and Germany. We
expect these actions to significantly reduce cost in our
manufacturing operations.
The initial phase of this European restructuring resulted in a
workforce reduction of 130 employees in these two segments
and we are evaluating further workforce reductions. A decision
to proceed with actions related to any additional charges will
be made after the Company has completed required consultations
with employee representatives at the affected sites. Revised
total anticipated charges through 2009 amount to
$11.6 million. Charges
83
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
incurred through 2007 amounted to $9.0 million.
Restructuring charges for the year ended December 31, 2008,
include $1.5 million for employee severance costs, other
costs of $0.8 million, and $0.3 million of accrual
reversals.
In May 2007, we began another phase of our European
restructuring by initiating discussions with representatives of
workers in our Rotterdam, Netherlands, porcelain enamel
manufacturing site within our Performance Coating segment. In
September 2007, we reached an agreement with the Rotterdam Works
Council. As a result, the Company discontinued porcelain enamel
manufacturing at this facility in the third quarter of 2008 and
consolidated production at other European facilities. This
consolidation resulted in the reduction of 84 employees.
Restructuring charges are expected to total $26.7 million.
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 2008, we recorded
$9.1 million for employee severance costs,
$3.8 million for future minimum lease obligations, and
$1.4 million in other costs, partly offset by a pension
curtailment credit of $0.1 million.
Additionally we undertook Inorganic Specialties Group worldwide
restructuring plans in 2007 and 2008 for our Performance
Coatings, and Color and Glass Performance Materials segments in
North America, Latin America and Asia. These restructuring plans
resulted in the reduction of 234 employees. Total estimated
charges for these restructuring actions through 2008 are
$7.3 million. During 2007, we recorded total charges of
$1.4 million. During 2008, we recorded $4.9 million of
severance, $0.4 million of impairment charges and
$0.2 million in other costs.
Organic Specialties. Our Organic Specialties
Group has initiated several restructuring programs for its
Specialty Plastics and Polymer Additives segments. In 2008, we
announced restructuring programs in our Specialty Plastics
segment operations in North America, the United Kingdom and the
Netherlands. These 2008 initiatives resulted in the reduction of
95 employees. Total anticipated costs are
$2.5 million. During 2008, we recorded $1.8 million in
severance costs and $0.2 million in lease termination
costs. Additionally, in 2007 and 2006, we incurred
$2.0 million of severance costs related to prior
restructuring efforts.
In 2008, we closed the Polymer Additives facility in
Castanheira, Portugal, and announced further restructuring
efforts in North America and Belgium for our Polymer Additives
segment. These efforts resulted in the elimination of
16 employees with total restructuring costs of
$1.6 million. In 2008, we recorded $0.6 million in
severance costs, $0.5 million in contract termination
costs, and $0.5 million in asset impairment costs.
Electronic Material Systems. In November 2006,
we announced a restructuring of the Electronic Materials segment
due to excess capacity for the production of dielectric
materials. We ceased production at our Niagara Falls, New York,
manufacturing facility in December 2007 and transferred some of
its production to facilities in Penn Yan, New York, and Uden,
Netherlands.
During 2008, our Electronic Material Systems Group initiated a
multi- functional restructuring plan in Uden, Netherlands. These
actions impacted 8 employees. Total anticipated charges
through 2009 amount to $0.7 million. During 2008, we
recorded charges of $0.5 million related to employee
terminations benefits and other costs of $0.1 million,
including repairs, equipment relocation fees, and professional
fees.
84
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
We have summarized the activities and accruals related to our
restructuring and cost reduction programs below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
Other
|
|
|
Asset
|
|
|
|
|
|
|
Benefits
|
|
|
Costs
|
|
|
Impairment
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
Balance, December 31, 2005
|
|
$
|
2,232
|
|
|
$
|
66
|
|
|
$
|
|
|
|
$
|
2,298
|
|
Restructuring charges
|
|
|
7,351
|
|
|
|
|
|
|
|
15,795
|
|
|
|
23,146
|
|
Cash payments
|
|
|
(2,853
|
)
|
|
|
(27
|
)
|
|
|
|
|
|
|
(2,880
|
)
|
Non-cash items
|
|
|
|
|
|
|
|
|
|
|
(15,795
|
)
|
|
|
(15,795
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
6,730
|
|
|
|
39
|
|
|
|
|
|
|
|
6,769
|
|
Restructuring charges
|
|
|
11,013
|
|
|
|
2,580
|
|
|
|
3,259
|
|
|
|
16,852
|
|
Cash payments
|
|
|
(11,225
|
)
|
|
|
(1,439
|
)
|
|
|
|
|
|
|
(12,664
|
)
|
Currency translation adjustment
|
|
|
166
|
|
|
|
17
|
|
|
|
|
|
|
|
183
|
|
Non-cash items
|
|
|
1,697
|
|
|
|
363
|
|
|
|
(3,259
|
)
|
|
|
(1,199
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
8,381
|
|
|
|
1,560
|
|
|
|
|
|
|
|
9,941
|
|
Restructuring charges
|
|
|
18,189
|
|
|
|
6,839
|
|
|
|
909
|
|
|
|
25,937
|
|
Cash payments
|
|
|
(24,852
|
)
|
|
|
(2,466
|
)
|
|
|
|
|
|
|
(27,318
|
)
|
Currency translation adjustment
|
|
|
(289
|
)
|
|
|
(582
|
)
|
|
|
|
|
|
|
(871
|
)
|
Non-cash items
|
|
|
(223
|
)
|
|
|
(249
|
)
|
|
|
(909
|
)
|
|
|
(1,381
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
$
|
1,206
|
|
|
$
|
5,102
|
|
|
$
|
|
|
|
$
|
6,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We expect to make cash payments to settle the remaining
liability for employee termination benefits and other costs
primarily over the next twelve months, except where legal or
contractual restrictions prevent us from doing so.
We did not incur any restructuring charges for discontinued
operations in 2008, 2007 or 2006.
Rent expense for all operating leases was $21.1 million in
2008, $20.2 million in 2007, and $14.9 million in
2006. Amortization of assets recorded under capital leases is
recorded as depreciation expense.
The Company has a number of capital lease arrangements relating
primarily to buildings and production equipment. Assets held
under capitalized leases and included in property, plant and
equipment at December 31st were as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Gross amounts capitalized:
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
3,100
|
|
|
$
|
3,100
|
|
Equipment
|
|
|
13,857
|
|
|
|
13,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,957
|
|
|
|
17,011
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
|
Buildings
|
|
|
(1,666
|
)
|
|
|
(1,589
|
)
|
Equipment
|
|
|
(10,821
|
)
|
|
|
(8,954
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,487
|
)
|
|
|
(10,543
|
)
|
|
|
|
|
|
|
|
|
|
Net assets under capitalized leases
|
|
$
|
4,470
|
|
|
$
|
6,468
|
|
|
|
|
|
|
|
|
|
|
85
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
At December 31, 2008, future minimum lease payments under
all non-cancelable leases were as follows:
|
|
|
|
|
|
|
|
|
|
|
Capital Leases
|
|
|
Operating Leases
|
|
|
|
(Dollars in thousands)
|
|
|
2009
|
|
$
|
1,392
|
|
|
$
|
13,105
|
|
2010
|
|
|
1,360
|
|
|
|
8,817
|
|
2011
|
|
|
958
|
|
|
|
6,167
|
|
2012
|
|
|
958
|
|
|
|
4,518
|
|
2013
|
|
|
909
|
|
|
|
4,166
|
|
Thereafter
|
|
|
4,701
|
|
|
|
12,623
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
10,278
|
|
|
$
|
49,396
|
|
|
|
|
|
|
|
|
|
|
Less amount representing executory costs
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net minimum lease payments
|
|
|
10,162
|
|
|
|
|
|
Less amount representing imputed interest
|
|
|
3,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of net minimum lease payments
|
|
|
6,447
|
|
|
|
|
|
Less current portion
|
|
|
810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term obligations at December 31, 2008
|
|
$
|
5,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15.
|
Discontinued
Operations
|
In the fourth quarter of 2008, we sold our Fine Chemicals
business to Novolyte Technologies LP (Novolyte), an
affiliate of Arsenal Capital Management LP. Fine Chemicals was a
reportable segment, previously included in the Other Businesses
segment. The sale generated gross proceeds of
$60.0 million, subject to a post-closing working capital
adjustment, a pretax gain of $16.7 million, and an after
tax gain of $9.1 million. The gain (loss) on disposal of
discontinued operations also includes residual legal and
environmental costs directly related to the Powder Coatings,
Petroleum Additives and Specialty Ceramics businesses, which
were sold in 2002 and 2003.
The gain (loss) on disposal of discontinued operations resulted
in the following pre-tax losses and related income tax benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Gain (loss) on disposal of discontinued operations before income
tax expense (benefit)
|
|
$
|
16,614
|
|
|
$
|
(369
|
)
|
|
$
|
(738
|
)
|
Income tax expense (benefit)
|
|
|
7,580
|
|
|
|
(144
|
)
|
|
|
(266
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on disposal of discontinued operations, net of
income tax expense (benefit)
|
|
$
|
9,034
|
|
|
$
|
(225
|
)
|
|
$
|
(472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
The following operations of the Fine Chemicals business, which
had previously been presented as a separate reporting segment,
have been segregated from continuing operations and are included
in discontinued operations in the Companys consolidated
statements of operations. Interest expense has been allocated to
discontinued operations based on the ratio of the net assets of
discontinued operations to consolidated net assets before debt.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Net sales
|
|
$
|
60,980
|
|
|
$
|
56,881
|
|
|
$
|
53,919
|
|
Cost of sales
|
|
|
47,464
|
|
|
|
42,677
|
|
|
|
40,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
13,516
|
|
|
|
14,204
|
|
|
|
13,120
|
|
Selling, general and administrative expenses
|
|
|
4,303
|
|
|
|
4,187
|
|
|
|
2,769
|
|
Other expense (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
1,526
|
|
|
|
1,853
|
|
|
|
1,713
|
|
Foreign currency losses, net
|
|
|
19
|
|
|
|
|
|
|
|
|
|
Miscellaneous expense (income), net
|
|
|
76
|
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations before income taxes
|
|
|
7,592
|
|
|
|
8,200
|
|
|
|
8,638
|
|
Income tax expense
|
|
|
2,578
|
|
|
|
2,888
|
|
|
|
2,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of income taxes
|
|
$
|
5,014
|
|
|
$
|
5,312
|
|
|
$
|
5,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of the assets and liabilities of the
Fine Chemicals business at December 31, 2007, and are
presented separately on the consolidated balance sheets:
|
|
|
|
|
|
|
(Dollars in
|
|
|
|
thousands)
|
|
|
Accounts receivable, net
|
|
$
|
3,330
|
|
Inventories
|
|
|
6,780
|
|
Deferred income taxes
|
|
|
991
|
|
Other receivables
|
|
|
81
|
|
Other current assets
|
|
|
21
|
|
|
|
|
|
|
Current assets of discontinued operations
|
|
$
|
11,203
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
24,360
|
|
Goodwill
|
|
|
372
|
|
|
|
|
|
|
Other assets of discontinued operations
|
|
$
|
24,732
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
4,268
|
|
Accrued payrolls
|
|
|
310
|
|
Accrued expenses and other current liabilities
|
|
|
878
|
|
|
|
|
|
|
Current liabilities of discontinued operations
|
|
$
|
5,456
|
|
|
|
|
|
|
Deferred income taxes
|
|
$
|
991
|
|
|
|
|
|
|
Other liabilities of discontinued operations
|
|
$
|
991
|
|
|
|
|
|
|
We have continuing environmental remediation obligations that
are related to these divestitures, and we have accrued
$3.0 million as of December 31, 2008, and
$3.3 million as of December 31, 2007, for these
matters. The estimated amounts we have accrued are based on our
assessment of the nature and extent of the soil
and/or
87
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
groundwater contamination and the remedial actions we expect to
perform. In some cases, we have agreed to the required remedial
actions with the relevant governmental authorities, and we have
based our estimates of the costs to remediate upon those
actions. Where alternative technologies exist to remediate a
contaminated site, we have determined our estimates of the costs
to remediate based on the technologies that we are most likely
to use.
|
|
16.
|
(Loss)
earnings per Share from Continuing Operations
|
Details of the calculations of basic and diluted (loss) earnings
per share follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands,
|
|
|
|
except per share amounts)
|
|
|
Basic (loss) earnings per share computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common shareholders
|
|
$
|
(40,575
|
)
|
|
$
|
(95,514
|
)
|
|
$
|
19,368
|
|
Less: Income from discontinued operations
|
|
|
(14,048
|
)
|
|
|
(5,087
|
)
|
|
|
(5,198
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(54,623
|
)
|
|
$
|
(100,601
|
)
|
|
$
|
14,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
43,261
|
|
|
|
42,926
|
|
|
|
42,394
|
|
Basic (loss) earnings per share from continuing operations
|
|
$
|
(1.26
|
)
|
|
$
|
(2.34
|
)
|
|
$
|
0.33
|
|
Diluted (loss) earnings per share computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common shareholders
|
|
$
|
(40,575
|
)
|
|
$
|
(95,514
|
)
|
|
$
|
19,368
|
|
Less: Income from discontinued operations
|
|
|
(14,048
|
)
|
|
|
(5,087
|
)
|
|
|
(5,198
|
)
|
Plus: Convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(54,623
|
)
|
|
$
|
(100,601
|
)
|
|
$
|
14,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
43,261
|
|
|
|
42,926
|
|
|
|
42,394
|
|
Assumed exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed satisfaction of performance share conditions
|
|
|
|
|
|
|
|
|
|
|
28
|
|
Assumed satisfaction of deferred stock unit conditions
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed conversion of convertible notes
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed conversion of convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average diluted shares outstanding
|
|
|
43,261
|
|
|
|
42,926
|
|
|
|
42,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share from continuing operations
|
|
$
|
(1.26
|
)
|
|
$
|
(2.34
|
)
|
|
$
|
0.33
|
|
Diluted (loss) earnings per share reflects the potential
dilution that could occur if stock options, preferred stock or
other share-based awards were exercised or converted into common
stock. The dilutive effect is computed using the treasury stock
method, which assumes that the hypothetical proceeds from
exercise or conversion are used by the Company to purchase
common stock at the average market price during the period. The
incremental shares (the difference between shares assumed to be
issued versus purchased), to the extent they would have been
dilutive, are included in the denominator of the diluted (loss)
earnings per share calculation. Options to purchase
4.3 million, 4.5 million, and 5.1 million shares
of common stock, performance shares of 0.6 million,
0.5 million, and 0.3 million, and preferred stock
convertible into 0.7 million, 0.8 million, and
1.0 million shares of common stock for 2008, 2007 and 2006,
respectively, and an immaterial number of deferred stock units
were antidilutive or unearned and therefore excluded from the
computation of diluted earnings per share.
88
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
|
|
17.
|
Reporting
for Segments
|
The Company has six reportable segments: Performance
Coatings, Electronic Materials, Color and Glass Performance
Materials, Polymer Additives, Specialty Plastics, and
Pharmaceuticals. 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.
In past years, our Other Businesses segment reported the
combined results of operations from Ferros Pharmaceuticals
and Fine Chemicals businesses. The Fine Chemicals business was
sold during the fourth quarter of 2008, and the financial
results from this business are now included in discontinued
operations.
The accounting policies of our segments are consistent with
those described in the summary of significant accounting
policies found in Note 1. We measure segment income for
internal reporting purposes as net operating profit before
interest and taxes. Segment income excludes unallocated
corporate expenses, primarily corporate employment costs and
professional services, and charges associated with impairments,
restructuring and cost reduction programs.
We have presented net sales to external customers by segment in
the table below. Sales between segments were not material:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Performance Coatings
|
|
$
|
627,918
|
|
|
$
|
609,285
|
|
|
$
|
538,385
|
|
Electronic Materials
|
|
|
558,313
|
|
|
|
469,885
|
|
|
|
444,463
|
|
Color and Glass Performance Materials
|
|
|
456,644
|
|
|
|
445,709
|
|
|
|
387,540
|
|
Polymer Additives
|
|
|
349,902
|
|
|
|
334,492
|
|
|
|
313,500
|
|
Specialty Plastics
|
|
|
225,856
|
|
|
|
261,956
|
|
|
|
271,307
|
|
Pharmaceuticals
|
|
|
26,519
|
|
|
|
26,577
|
|
|
|
32,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
2,245,152
|
|
|
$
|
2,147,904
|
|
|
$
|
1,987,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below are each segments income and reconciliations to
(loss) income before taxes from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Performance Coatings
|
|
$
|
36,935
|
|
|
$
|
37,965
|
|
|
$
|
42,718
|
|
Electronic Materials
|
|
|
52,868
|
|
|
|
32,785
|
|
|
|
35,136
|
|
Color and Glass Performance Materials
|
|
|
39,112
|
|
|
|
48,222
|
|
|
|
43,512
|
|
Polymer Additives
|
|
|
6,086
|
|
|
|
10,755
|
|
|
|
10,947
|
|
Specialty Plastics
|
|
|
5,385
|
|
|
|
15,116
|
|
|
|
14,629
|
|
Pharmaceuticals
|
|
|
3,524
|
|
|
|
1,947
|
|
|
|
(1,219
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment income
|
|
|
143,910
|
|
|
|
146,790
|
|
|
|
145,723
|
|
Unallocated corporate expenses
|
|
|
37,362
|
|
|
|
59,209
|
|
|
|
45,640
|
|
Impairment charges
|
|
|
80,205
|
|
|
|
128,737
|
|
|
|
|
|
Restructuring charges
|
|
|
25,937
|
|
|
|
16,852
|
|
|
|
23,146
|
|
Other expense, net
|
|
|
56,943
|
|
|
|
59,510
|
|
|
|
59,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes from continuing operations
|
|
$
|
(56,537
|
)
|
|
$
|
(117,518
|
)
|
|
$
|
17,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
We do not allocate restructuring charges to individual segment
income. Restructuring charges related to the following segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Performance Coatings
|
|
$
|
17,806
|
|
|
$
|
13,469
|
|
|
$
|
914
|
|
Electronic Materials
|
|
|
602
|
|
|
|
(929
|
)
|
|
|
16,488
|
|
Color and Glass Performance Materials
|
|
|
3,877
|
|
|
|
4,105
|
|
|
|
4,127
|
|
Polymer Additives
|
|
|
1,617
|
|
|
|
|
|
|
|
|
|
Specialty Plastics
|
|
|
2,035
|
|
|
|
207
|
|
|
|
1,617
|
|
Pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring charges
|
|
$
|
25,937
|
|
|
$
|
16,852
|
|
|
$
|
23,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table details depreciation and amortization
expense by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Performance Coatings
|
|
$
|
17,736
|
|
|
$
|
17,854
|
|
|
$
|
14,543
|
|
Electronic Materials
|
|
|
17,294
|
|
|
|
18,444
|
|
|
|
18,565
|
|
Color and Glass Performance Materials
|
|
|
8,101
|
|
|
|
11,228
|
|
|
|
9,581
|
|
Polymer Additives
|
|
|
10,753
|
|
|
|
11,033
|
|
|
|
10,765
|
|
Specialty Plastics
|
|
|
3,314
|
|
|
|
3,705
|
|
|
|
3,841
|
|
Pharmaceuticals
|
|
|
1,693
|
|
|
|
2,684
|
|
|
|
2,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment depreciation and amortization
|
|
|
58,891
|
|
|
|
64,948
|
|
|
|
59,864
|
|
Unallocated depreciation and amortization
|
|
|
14,559
|
|
|
|
19,100
|
|
|
|
16,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$
|
73,450
|
|
|
$
|
84,048
|
|
|
$
|
76,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets primarily consist of trade accounts receivable;
inventories; property, plant and equipment; and intangible
assets. Unallocated assets primarily include cash and cash
equivalents, deferred taxes and assets related to uncertain tax
positions. Total assets at December 31st by segment
are detailed below:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Performance Coatings
|
|
$
|
379,054
|
|
|
$
|
444,226
|
|
Electronic Materials
|
|
|
330,013
|
|
|
|
361,637
|
|
Color and Glass Performance Materials
|
|
|
260,927
|
|
|
|
288,951
|
|
Polymer Additives
|
|
|
139,572
|
|
|
|
154,154
|
|
Specialty Plastics
|
|
|
62,952
|
|
|
|
94,826
|
|
Pharmaceuticals
|
|
|
41,243
|
|
|
|
36,063
|
|
|
|
|
|
|
|
|
|
|
Total segment assets
|
|
|
1,213,761
|
|
|
|
1,379,857
|
|
Assets of discontinued operations
|
|
|
|
|
|
|
35,935
|
|
Unallocated assets
|
|
|
330,739
|
|
|
|
222,468
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,544,500
|
|
|
$
|
1,638,260
|
|
|
|
|
|
|
|
|
|
|
90
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
Each segments goodwill at December 31st is
detailed below:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Performance Coatings
|
|
$
|
590
|
|
|
$
|
45,269
|
|
Electronic Materials
|
|
|
151,901
|
|
|
|
152,081
|
|
Color and Glass Performance Materials
|
|
|
68,949
|
|
|
|
68,078
|
|
Polymer Additives
|
|
|
|
|
|
|
|
|
Specialty Plastics
|
|
|
|
|
|
|
17,045
|
|
Pharmaceuticals
|
|
|
8,225
|
|
|
|
8,225
|
|
|
|
|
|
|
|
|
|
|
Total goodwill
|
|
$
|
229,665
|
|
|
$
|
290,698
|
|
|
|
|
|
|
|
|
|
|
We have detailed each segments expenditures for long-lived
assets, including acquisitions, in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Performance Coatings
|
|
$
|
29,294
|
|
|
$
|
17,900
|
|
|
$
|
17,646
|
|
Electronic Materials
|
|
|
18,892
|
|
|
|
13,866
|
|
|
|
7,256
|
|
Color and Glass Performance Materials
|
|
|
7,715
|
|
|
|
10,591
|
|
|
|
6,378
|
|
Polymer Additives
|
|
|
8,379
|
|
|
|
7,925
|
|
|
|
7,084
|
|
Specialty Plastics
|
|
|
1,989
|
|
|
|
1,300
|
|
|
|
2,271
|
|
Pharmaceuticals
|
|
|
3,645
|
|
|
|
4,173
|
|
|
|
3,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment expenditures for long-lived assets
|
|
|
69,914
|
|
|
|
55,755
|
|
|
|
44,121
|
|
Expenditures for long-lived assets of discontinued operations
|
|
|
2,317
|
|
|
|
4,852
|
|
|
|
4,604
|
|
Unallocated corporate expenditures for long-lived assets
|
|
|
4,237
|
|
|
|
7,027
|
|
|
|
1,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenditures for long-lived assets
|
|
$
|
76,468
|
|
|
$
|
67,634
|
|
|
$
|
50,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We sell our products throughout the world and we attribute sales
to countries based on the country where we generate the customer
invoice. No single country other than the U.S. and Spain
represents greater than 10% of our net sales. We have detailed
net sales by geographic region in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
United States
|
|
$
|
973,717
|
|
|
$
|
900,146
|
|
|
$
|
908,497
|
|
Spain
|
|
|
362,370
|
|
|
|
339,516
|
|
|
|
198,470
|
|
Other international
|
|
|
909,065
|
|
|
|
908,242
|
|
|
|
880,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
2,245,152
|
|
|
$
|
2,147,904
|
|
|
$
|
1,987,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None of our operations in countries other than the
U.S. owns greater than 10% of consolidated long-lived
assets. We have detailed long-lived assets that consist of
property, plant and equipment, goodwill, and amortizable
intangible assets by geographic region at
December 31st in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
United States
|
|
$
|
402,192
|
|
|
$
|
425,824
|
|
|
$
|
558,577
|
|
International
|
|
|
295,775
|
|
|
|
369,544
|
|
|
|
350,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$
|
697,967
|
|
|
$
|
795,368
|
|
|
$
|
909,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
|
|
18.
|
Related
Party Transactions
|
We had the following transactions with our unconsolidated
affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Sales
|
|
$
|
10,157
|
|
|
$
|
9,727
|
|
|
$
|
7,659
|
|
Purchases
|
|
|
5,495
|
|
|
|
5,573
|
|
|
|
5,229
|
|
Dividends and interest received
|
|
|
159
|
|
|
|
702
|
|
|
|
1,590
|
|
Commissions and royalties received
|
|
|
194
|
|
|
|
132
|
|
|
|
136
|
|
Commissions and royalties paid
|
|
|
230
|
|
|
|
227
|
|
|
|
130
|
|
A Ferro Director, Mr. Bulkin, and a former Ferro Director,
Mr. Weisser, serve on the board of Bunge Limited. We made
purchases from Bunge Limited of $25.1 million in 2008,
$14.2 million in 2007, and $12.5 million in 2006.
Accounts payable related to these purchases were
$0.5 million at December 31, 2008, and
$3.2 million at December 31, 2007. At
December 31, 2008, we were committed to purchases of
$0.2 million in 2008 from Bunge Limited.
|
|
19.
|
Summarized
Financial Information of Unconsolidated Affiliates Accounted For
Under the Equity Method
|
We participate in several joint ventures that are located in
Spain, Italy, South Korea and Thailand through investments in
the common stock of affiliated companies. As of
December 31, 2008, our percentage of ownership interest in
these affiliates ranges from 36% to 50%. Because we exert
significant influence over the affiliates, but we do not control
them, our investments have been accounted for under the equity
method and their results and financial position are not
consolidated.
In May 2006, we sold a 20% owned, $1.2 million investment
in a joint venture in Spain for cash proceeds of
$1.6 million. We recorded the resulting pre-tax gain of
$0.4 million in miscellaneous expense (income), net in the
consolidated statements of operations. We have included the
results of this joint ventures operations in investment
income and the summarized condensed income statement information
presented below up to the date of the sale.
Investment income from these equity method investments, which is
reported in miscellaneous expense (income), net was
$1.2 million in 2008, $2.5 million in 2007, and
$2.4 million in 2006. The combined balance of our equity
method investments was $16.0 million at December 31,
2008, and $15.4 million at December 31, 2007.
The income that we record for these investments is equal to our
proportionate share of the affiliates income and our
investments are equal to our proportionate share of the
affiliates shareholders equity based upon our
ownership percentage. Below we have summarized condensed income
statement and balance sheet information for the combined equity
method investees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Net sales
|
|
$
|
73,048
|
|
|
$
|
67,894
|
|
|
$
|
72,976
|
|
Gross profit
|
|
|
20,337
|
|
|
|
18,475
|
|
|
|
18,808
|
|
Income from continuing operations
|
|
|
4,065
|
|
|
|
8,284
|
|
|
|
7,841
|
|
Net income
|
|
|
2,755
|
|
|
|
5,667
|
|
|
|
5,479
|
|
92
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2008, 2007 and
2006 (Continued)
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Current assets
|
|
$
|
42,466
|
|
|
$
|
50,677
|
|
Non-current assets
|
|
|
24,914
|
|
|
|
25,371
|
|
Current liabilities
|
|
|
23,552
|
|
|
|
28,046
|
|
Non-current liabilities
|
|
|
4,450
|
|
|
|
4,348
|
|
On January 29, 2009, Ferros Board of Directors
declared a quarterly dividend of $0.01 per share on the
Companys common stock.
On March 11, 2009, we entered into an amendment to our
senior credit facility. For further information on this
amendment, see Note 5. This amendment includes terms which
effectively prohibit us from paying dividends on our common
stock.
|
|
21.
|
Quarterly
Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Common Share
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
Basic
|
|
|
Diluted
|
|
Quarter
|
|
Net Sales
|
|
|
Gross Profit
|
|
|
Income (Loss)
|
|
|
Earnings (Loss)
|
|
|
Earnings (Loss)
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
$
|
515,057
|
|
|
$
|
102,349
|
|
|
$
|
6,079
|
|
|
$
|
0.14
|
|
|
$
|
0.14
|
|
2
|
|
|
538,478
|
|
|
|
102,936
|
|
|
|
4,540
|
|
|
|
0.10
|
|
|
|
0.10
|
|
3
|
|
|
537,244
|
|
|
|
97,564
|
|
|
|
5,585
|
|
|
|
0.12
|
|
|
|
0.12
|
|
4
|
|
|
557,125
|
|
|
|
99,610
|
|
|
|
(110,683
|
)
|
|
|
(2.58
|
)
|
|
|
(2.58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,147,904
|
|
|
$
|
402,459
|
|
|
$
|
(94,479
|
)
|
|
$
|
(2.23
|
)
|
|
$
|
(2.23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
$
|
590,838
|
|
|
$
|
109,265
|
|
|
$
|
9,140
|
|
|
$
|
0.21
|
|
|
$
|
0.21
|
|
2
|
|
|
631,976
|
|
|
|
118,974
|
|
|
|
9,365
|
|
|
|
0.21
|
|
|
|
0.21
|
|
3
|
|
|
590,150
|
|
|
|
110,343
|
|
|
|
4,831
|
|
|
|
0.11
|
|
|
|
0.11
|
|
4
|
|
|
432,188
|
|
|
|
65,085
|
|
|
|
(63,034
|
)
|
|
|
(1.46
|
)
|
|
|
(1.46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,245,152
|
|
|
$
|
403,667
|
|
|
$
|
(39,698
|
)
|
|
$
|
(0.94
|
)
|
|
$
|
(0.94
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly earnings per share amounts do not always add to the
full year amounts due to the averaging of shares.
We sold our Fine Chemicals segment in the fourth quarter of
2008, and the financial results from this business are reported
as discontinued operations for all periods presented.
Pre-tax restructuring charges in 2007 were $1.5 million in
the first quarter, $0.3 million in the second quarter,
$5.8 million in the third quarter and $9.3 million in
the fourth quarter. The fourth quarter of 2007 also included
pre-tax impairment charges of $128.7 million. Pre-tax
restructuring charges in 2008 were $4.2 million in the
first quarter, $9.0 million in the second quarter,
$9.0 million in the third quarter and $3.7 million in
the fourth quarter. The third quarter of 2008 also included a
pre-tax loss on extinguishment of debt of $5.5 million. The
fourth quarter of 2008 also included pre-tax impairment charges
of $80.2 million and a pre-tax gain on disposal of
discontinued operations of $16.7 million.
93
|
|
Item 9
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A
|
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.
The Companys management, under the supervision and with
the participation of the Chief Executive Officer and the Chief
Financial Officer, evaluated the effectiveness of the design and
operation of the Companys disclosure controls and
procedures, as defined in Exchange Act
Rule 13a-15(e),
as of December 31, 2008. Based on that evaluation,
management concluded that the disclosure controls and procedures
were effective as of December 31, 2008.
Managements
Annual Report on Internal Control over Financial
Reporting
The Companys management is responsible for establishing
and maintaining adequate internal control over financial
reporting as defined in Exchange Act
Rule 13a-15(f).
The Companys internal control system is a process designed
by, or under the supervision of, the Companys principal
executive and principal financial officers, or persons
performing similar functions, and effected by the Companys
board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with U.S. generally
accepted accounting principles (U.S. GAAP).
The Companys internal control over financial reporting
includes policies and procedures that pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect transactions and dispositions of assets; provide
reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with
U.S. GAAP, and that receipts and expenditures are being
made only in accordance with the authorization of its management
and directors; and provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use
or disposition of the Companys assets that could have a
material effect on its consolidated financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to risk that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Companys
internal control over financial reporting as of
December 31, 2008. In making this assessment, the Company
used the control criteria framework of the Committee of
Sponsoring Organizations of the Treadway Commission published in
its report entitled Internal Control Integrated
Framework. Management concluded that the Companys
internal control over financial reporting was effective as of
December 31, 2008.
Deloitte & Touche LLP, the independent registered
public accounting firm that audited the Companys
consolidated financial statements, has issued an attestation
report on the Companys internal control over financial
reporting as of December 31, 2008, which is included below.
94
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Ferro Corporation
Cleveland, Ohio
We have audited the internal control over financial reporting of
Ferro Corporation and subsidiaries (the Company) as
of December 31, 2008, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying
Managements Annual Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion
on the Companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
that risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company has maintained effective internal
control over financial reporting as of December 31, 2008,
based on the criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
95
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement
schedule as of and for the year ended December 31, 2008, of
the Company and our report dated March 11, 2009, expressed
an unqualified opinion on those financial statements and
financial statement schedule and included an explanatory
paragraph concerning the adoption of new accounting standards in
2007 and 2006.
/s/ Deloitte & Touche LLP
Cleveland, Ohio
March 11, 2009
Changes
in Internal Control over Financial Reporting and Other
Remediation
During the fourth quarter of 2008, there were no 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.
|
|
Item 9B
|
Other
Information
|
None.
96
PART III
|
|
Item 10
|
Directors,
Executive Officers and Corporate Governance
|
The information on Ferros directors is contained under the
heading Election of Directors of the Proxy Statement
for Ferro Corporations 2009 Annual Meeting of Shareholders
and is incorporated here by reference. The information about the
Audit Committee and the Audit Committee financial expert is
contained under the heading Corporate Governance-Board
Committees-Audit Committee of the Proxy Statement for
Ferro Corporations 2009 Annual Meeting of Shareholders and
is incorporated here by reference. Information on Ferros
executive officers is contained under the heading
Executive Officers of the Registrant in Part 1
of this Annual Report on
Form 10-K.
Section 16(a) filing information is contained under the
subheading Section 16(a) Beneficial Ownership
Reporting Compliance of the Proxy Statement for Ferro
Corporations 2009 Annual Meeting of Shareholders and is
incorporated here by reference.
Ferro has adopted a series of policies dealing with business and
ethics. These policies apply to all Ferro Directors, officers
and employees. A summary of these policies may be found on
Ferros Web site and the full text of the policies is
available in print, free of charge, by writing to: General
Counsel, Ferro Corporation, 1000 Lakeside Avenue, Cleveland,
Ohio
44114-1147,
USA. Exceptions, waivers and amendments of those policies may be
made, if at all, only by the Audit Committee of the Board of
Directors, and, in the event any such exceptions, waivers or
amendments are granted, a description of the change or event
will be posted on Ferros Web site (www.ferro.com)
within four business days. Ferro maintains a worldwide hotline
that allows employees throughout the world to report
confidentially any detected violations of these legal and
ethical conduct policies consistent with local legal
requirements and subject to local legal limitations.
|
|
Item 11
|
Executive
Compensation
|
The information on executive compensation is contained under the
headings Executive Compensation Discussion &
Analysis and 2008 Executive Compensation of
the Proxy Statement for Ferro Corporations 2009 Annual
Meeting of Shareholders and is incorporated here by reference.
|
|
Item 12
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information contained under the headings Stock
Ownership by Director, Executive Officers and Employees
and Stock Ownership by Other Major Shareholders of
the Proxy Statement for Ferro Corporations 2009 Annual
Meeting of Shareholders is incorporated here by reference.
The numbers of shares issued and available for issuance under
Ferros equity compensation plans as of December 31,
2008, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares to
|
|
|
|
|
|
Number of Shares
|
|
|
|
Be Issued on
|
|
|
Weighted-Average
|
|
|
Remaining Available
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
for Future Issuance
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
Under Equity
|
|
Equity Compensation Plan
|
|
and Other Awards
|
|
|
and Other Awards
|
|
|
Compensation Plans(1)
|
|
|
Approved by Ferro Shareholders(2)
|
|
|
4,108,360 shares
|
|
|
$
|
21.64
|
|
|
|
1,702,175 shares
|
(4)
|
Not Approved by Ferro
Shareholders(3)
|
|
|
104,553 shares
|
|
|
$
|
24.96
|
|
|
|
0 shares
|
|
Total
|
|
|
4,212,913 shares
|
|
|
$
|
21.70
|
|
|
|
1,702,175 shares
|
|
|
|
|
(1) |
|
Excludes shares listed in the second column. |
|
(2) |
|
Includes options issued under the Companys Stock Option
Plan and 2003 Long-Term Incentive Compensation Plan. |
|
(3) |
|
Includes options granted in excess of 100,000 shares to the
Chief Executive Officer and phantom units issued under the
Companys Executive Employee Deferred Compensation Plan and
Supplemental Executive Defined Contribution Plan. |
97
|
|
|
(4) |
|
Shares are only available under the 2006 Long-Term Incentive
Plan and may be issued as stock options, stock appreciation
rights, restricted shares, performance shares, and other common
stock-based awards. |
A description follows of the material features of each plan that
was not approved by Ferro shareholders:
|
|
|
|
|
Stock Options. On February 11, 2002 and
February 9, 2001, respectively, the Board granted
Mr. Ortino, then our Chief Executive Officer, 155,000 and
122,000 options to purchase shares. Of this amount, options for
100,000 shares each year were granted under the 1985
Employee Stock Option Plan approved by shareholders and the
remaining options were approved and granted by the Board from
available treasury shares. The options granted in 2002 have an
exercise price of $25.50 and the options granted in 2001 have an
exercise price of $23.60. Both grants have a maximum term of ten
years and vested evenly over four years from the grant date.
|
|
|
|
Executive Employee Deferred Compensation
Plan. The Ferro Corporation Deferred Compensation
Plan for Executive Employees allows participants to defer up to
75% of annual base salary and up to 100% of incentive cash bonus
awards and cash performance share payouts. Participants may
elect to have all or a portion of their deferred compensation
accounts deemed to be invested in shares of Ferro Common Stock,
and credited with hypothetical appreciation, depreciation, and
dividends. When distributions are made from this Plan in respect
of such shares, the distributions are made in actual shares of
Ferro Common Stock.
|
|
|
|
Supplemental Executive Defined Contribution
Plan. The Ferro Corporation Supplemental Defined
Contribution Plan for Executive Employees allows participants to
be credited annually with matching and basic pension
contributions that they would have received under the
Companys 401(k) plan except for the applicable IRS
limitations on compensation and contributions. Contributions
vest at 20% for each year of service, are deemed invested in
Ferro Common Stock and earn dividends. Distributions are made in
Ferro Common Stock or in cash.
|
|
|
Item 13
|
Certain
Relationships and Related Transactions, and Director
Independence
|
There are no relationships or transactions that are required to
be reported. The information about director independence is
contained under the heading Corporate
Governance Director Independence of the Proxy
Statement for Ferro Corporations 2009 Annual Meeting of
Shareholders and is incorporated here by reference.
|
|
Item 14
|
Principal
Accountant Fees and Services
|
The information contained under the heading Appointment of
Independent Registered Public Accounts of the Proxy
Statement for Ferro Corporations 2009 Annual Meeting of
Shareholders is incorporated here by reference.
98
PART IV
|
|
Item 15
|
Exhibits
and Financial Statement Schedules
|
The following documents are filed as part of this Annual Report
on
Form 10-K:
|
|
|
|
(a)
|
The consolidated financial statements of Ferro Corporation and
its subsidiaries contained in Part II, Item 8 of this
Annual Report on
Form 10-K:
|
|
|
|
|
|
Consolidated Statements of Operations for the years ended
December 31, 2008, 2007 and 2006;
|
|
|
|
Consolidated Balance Sheets at December 31, 2008 and 2007;
|
|
|
|
Consolidated Statements of Shareholders Equity and
Comprehensive Income (Loss) for the years ended
December 31, 2008, 2007 and 2006;
|
|
|
|
Consolidated Statements of Cash Flows for the years ended
December 31, 2008, 2007 and 2006; and
|
|
|
|
Notes to Consolidated Financial Statements
|
|
|
|
|
(b)
|
Schedule II Valuation and Qualifying Accounts
and Reserves for the years ended December 31, 2008, 2007,
and 2006, contained on page 101 of this Annual Report on
Form 10-K.
All other schedules have been omitted because the material is
not applicable or is not required as permitted by the rules and
regulations of the U.S. Securities and Exchange Commission,
or the required information is included in the consolidated
financial statements.
|
|
|
|
|
(c)
|
The exhibits listed in the Exhibit Index beginning on page
102 of this Annual Report on
Form 10-K.
|
99
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Annual Report on
Form 10-K
to be signed on its behalf by the undersigned, thereunto duly
authorized.
FERRO CORPORATION
James F. Kirsch
Chairman, President and Chief Executive Officer
Date: March 11, 2009
Pursuant to the requirements of the Securities Exchange Act of
1934, this Annual Report on
Form 10-K
has been signed below by the following persons on behalf of the
Registrant and in their indicated capacities as of the
11th day of March 2009.
|
|
|
|
|
/s/ James
F. Kirsch
James
F. Kirsch
|
|
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
/s/ Sallie
B. Bailey
Sallie
B. Bailey
|
|
Vice President and Chief Financial Officer
(Principal Financial Officer)
|
|
|
|
/s/ Nicholas
Katzakis
Nicholas
Katzakis
|
|
Chief Accounting Officer
(Principal Accounting Officer)
|
|
|
|
/s/ Michael
H. Bulkin
Michael
H. Bulkin
|
|
Director
|
|
|
|
/s/ Sandra
Austin Crayton
Sandra
Austin Crayton
|
|
Director
|
|
|
|
/s/ Richard
J. Hipple
Richard
J. Hipple
|
|
Director
|
|
|
|
/s/ Jennie
S. Hwang
Jennie
S. Hwang
|
|
Director
|
|
|
|
/s/ William
B. Lawrence
William
B. Lawrence
|
|
Director
|
|
|
|
/s/ Michael
F. Mee
Michael
F. Mee
|
|
Director
|
|
|
|
/s/ Perry
W. Premdas
Perry
W. Premdas
|
|
Director
|
|
|
|
/s/ William
J. Sharp
William
J. Sharp
|
|
Director
|
|
|
|
/s/ Dennis
W. Sullivan
Dennis
W. Sullivan
|
|
Director
|
100
FERRO
CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years Ended December 31, 2008, 2007, and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions Charged
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Reductions
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Credited) to
|
|
|
|
|
|
Adjustment for
|
|
|
Balance
|
|
|
|
Beginning
|
|
|
Costs and
|
|
|
Other
|
|
|
|
|
|
Differences in
|
|
|
at End of
|
|
|
|
of Period
|
|
|
Expenses
|
|
|
Accounts
|
|
|
Deductions
|
|
|
Exchange Rates
|
|
|
Period
|
|
|
|
(Dollars in thousands)
|
|
|
Allowance for Possible Losses on Collection of Accounts and
Trade Notes Receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008
|
|
$
|
6,396
|
|
|
|
4,472
|
|
|
|
3,544
|
(1)
|
|
|
(2,436
|
)
|
|
|
(308
|
)
|
|
$
|
11,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007
|
|
$
|
7,524
|
|
|
|
(345
|
)
|
|
|
|
|
|
|
(1,430
|
)
|
|
|
647
|
|
|
$
|
6,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006
|
|
$
|
7,507
|
|
|
|
836
|
|
|
|
|
|
|
|
(1,468
|
)
|
|
|
649
|
|
|
$
|
7,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Possible Losses on Collection of Note
Receivable from Ferro Finance Corporation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008
|
|
$
|
3,015
|
|
|
|
1,371
|
|
|
|
(3,544
|
)(1)
|
|
|
(842
|
)
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007
|
|
$
|
2,702
|
|
|
|
948
|
|
|
|
|
|
|
|
(635
|
)
|
|
|
|
|
|
$
|
3,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006
|
|
$
|
3,158
|
|
|
|
608
|
|
|
|
|
|
|
|
(1,064
|
)
|
|
|
|
|
|
$
|
2,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation Allowance on Net Deferred Tax Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008
|
|
$
|
8,906
|
|
|
|
20,598
|
|
|
|
|
|
|
|
(8,053
|
)
|
|
|
|
|
|
$
|
21,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007
|
|
$
|
4,023
|
|
|
|
4,644
|
|
|
|
545
|
|
|
|
(469
|
)
|
|
|
163
|
|
|
$
|
8,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006
|
|
$
|
9,651
|
|
|
|
(5,800
|
)
|
|
|
|
|
|
|
|
|
|
|
172
|
|
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$
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4,023
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(1) |
|
When Ferro Finance Corporation (FFC) was
consolidated in December 2008, the valuation allowance on
Ferros note receivable from FFC was combined with the
valuation allowance on accounts and trade notes receivable. |
101
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:
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3
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Articles of Incorporation and by-laws
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3
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.1
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Eleventh Amended Articles of Incorporation of Ferro Corporation.
(Reference is made to Exhibit 4.1 to Ferro
Corporations Registration Statement on
Form S-3,
filed March 5, 2008, which Exhibit is incorporated here by
reference.)
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3
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.2
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Certificate of Amendment to the Eleventh Amended Articles of
Incorporation of Ferro Corporation filed December 29, 1994.
(Reference is made to Exhibit 4.2 to Ferro
Corporations Registration Statement on
Form S-3,
filed March 5, 2008, which Exhibit is incorporated here by
reference.)
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3
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.3
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Certificate of Amendment to the Eleventh Amended Articles of
Incorporation of Ferro Corporation filed June 23, 1998.
(Reference is made to Exhibit 4.3 to Ferro
Corporations Registration Statement on
Form S-3,
filed March 5, 2008, which Exhibit is incorporated here by
reference.)
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3
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.4
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Ferro Corporation Code of Regulations. (Reference is made to
Exhibit 4.4 to Ferro Corporations Registration
Statement on
Form S-3,
filed March 5, 2008, which Exhibit is incorporated here by
reference.)
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4
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Instruments defining rights of security holders, including
indentures
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4
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.1
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Senior Indenture, dated as of March 5, 2008, by and between
Ferro Corporation and U.S. Bank National Association. (Reference
is made to Exhibit 4.5 to Ferro Corporations
Registration Statement on
Form S-3,
filed March 5, 2008, which Exhibit is incorporated here by
reference.)
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4
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.2
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First Supplemental Indenture, dated August 19, 2008, by and
between Ferro Corporation and U.S. Bank National Association
(with Form of 6.50% Convertible Senior Note due 2013).
(Reference is made to Exhibit 4.2 to Ferro
Corporations Current Report on
Form 8-K,
filed August 19, 2008, which Exhibit is incorporated here
by reference.)
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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.
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10
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Material Contracts
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10
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.1
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Fourth Amendment to Amended and Restated Credit Agreement, dated
March 11, 2009, among Ferro Corporation; Credit Suisse,
Cayman Islands Branch, as term loan administrative agent;
National City Bank, as revolving loan administrative agent.
(Reference is made to Exhibit 10.1 to Ferro
Corporations Current Report on
Form 8-K,
filed March 11, 2009, which Exhibit is incorporated here by
reference.)
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10
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.2
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Third Amendment to Amended and Restated Credit Agreement, dated
June 12, 2008, among Ferro Corporation; Credit Suisse,
Cayman Islands Branch, as term loan administrative agent;
National City Bank, as revolving loan administrative agent.
(Reference is made to Exhibit 10.1 to Ferro
Corporations Current Report on
Form 8-K,
filed June 18, 2008, which Exhibit is incorporated here by
reference.)
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10
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.3
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Second Amendment to Amended and Restated Credit Agreement, dated
January 4, 2008, among Ferro Corporation; certain of
Ferros subsidiaries; Credit Suisse, Cayman Islands Branch,
as term loan administrative agent; and National City Bank, as
revolving loan administrative agent; and various financial
institutions as lenders. (Reference is made to Exhibit 10.1
to Ferro Corporations Current Report on
Form 8-K,
filed January 10, 2008, which Exhibit is incorporated here
by reference.)
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10
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.4
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First Amendment to Amended and Restated Credit Agreement and
First Amendment to Pledge and Security Agreement, dated
December 17, 2007, among Ferro Corporation; certain of
Ferros subsidiaries; Credit Suisse, Cayman Islands Branch,
as Term Loan Administrative Agent; and National City Bank, as
revolving loan administrative agent; and various financial
institutions as lenders. (Reference is made to Exhibit 10.2
to Ferro Corporations Current Report on
Form 8-K,
filed January 10, 2008, which Exhibit is incorporated here
by reference.)
|
102
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10
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.5
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Amended and Restated Credit Agreement, dated June 8, 2007,
among Ferro; certain of Ferros subsidiaries; Credit
Suisse, as term loan administrative agent; National City Bank,
as revolving loan administrative agent and collateral agent;
KeyBank National Association, as documentation agent; Citigroup
Global Markets, Inc., as syndication agent; and various
financial institutions as lenders. (Reference is made to
Exhibit 10.3 to Ferro Corporations Current Report on
Form 8-K,
filed June 11, 2007, which Exhibit is incorporated here by
reference.)
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10
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.6
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Pledge and Security Agreement, dated as of June 6, 2006,
made by Ferro Corporation and each U.S. Subsidiary, as Grantors,
in favor of National City Bank, as Collateral Agent. (Reference
is made to Exhibit 10.2 to Ferro Corporations Current
Report on
Form 8-K,
filed June 12, 2006, which Exhibit is incorporated here by
reference.)
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10
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.7
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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.)
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10
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.8
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Amendment No. 1 to Amended and Restated Purchase and
Contribution Agreement dated October 31, 2008 by and among
Ferro Finance Corporation, Ferro Corporation and Citicorp North
America, Inc. (Reference is made to Exhibit 10.3 to Ferro
Corporations Current Report on
Form 8-K,
filed December 16, 2008, which Exhibit is incorporated here
by reference.)
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10
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.9
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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.)
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10
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.10
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Amendment No. 4 to Second Amended and Restated Receivables
Purchase Agreement, dated December 15, 2008, among Ferro
Corporation, Ferro Color & Glass Corporation, Ferro
Pfanstiehl Laboratories, Inc., Ferro Finance Corporation, CAFCO,
LLC, Citicorp North America, Inc., and Citibank, N.A. (Reference
is made to Exhibit 10.1 to Ferro Corporations Current
Report on
Form 8-K,
filed December 16, 2008, which Exhibit is incorporated here
by reference.)
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10
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.11
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Amendment No. 3 to Second Amended and restated Receivables
Purchase Agreement, dated October 31, 2008, by and among
Ferro Corporation, Ferro Finance Corporation, CAFCO, LLC, and
Citicorp North America, Inc. (Reference is made to
Exhibit 10.2 to Ferro Corporations Current Report on
Form 8-K,
filed December 16, 2008, which Exhibit is incorporated here
by reference.)
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10
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.12
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Amendment No. 2 to Second Amended and Restated Receivables
Purchase Agreement, dated as of June 10, 2008, among Ferro
Finance Corporation, as Seller; CAFCO, LLC, as the Investor;
Citibank, N.A., as a Bank; Citicorp North America, Inc., as the
Agent; Ferro Color & Glass Corporation and Ferro
Pfanstiehl Laboratories, Inc., each as an Originator; and Ferro
Corporation, as Originator and Collection Agent. (Reference is
made to Exhibit 10.2 to Ferro Corporations Current
Report on
Form 8-K,
filed June 16, 2008, which Exhibit is incorporated here by
reference.)
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10
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.13
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Amendment No. 1 to Second Amended and Restated Receivables
Purchase Agreement, dated as of June 3, 2008, among Ferro
Finance Corporation, as Seller; CAFCO, LLC, as the Investor;
Citibank, N.A., as a Bank; Citicorp North America, Inc., as the
Agent; Ferro Color & Glass Corporation and Ferro
Pfanstiehl Laboratories, Inc., each as an Originator; and Ferro
Corporation, as Originator and Collection Agent. (Reference is
made to Exhibit 10.1 to Ferro Corporations Current
Report on
Form 8-K,
filed June 16, 2008, which Exhibit is incorporated here by
reference.)
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10
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.14
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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, Citicorp North America, Inc., as the Agent, Ferro
Color & Glass Corporation and Ferro Pfanstiehl
Laboratories, Inc., each as an Originator, and Ferro
Corporation, as Originator and 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.)
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10
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.15
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Ferro Corporation Employee Stock Option Plan. (Reference is made
to Exhibit 10.1 to Ferro Corporations Annual Report
on
Form 10-K
for the year ended December 31, 2006, which Exhibit is
incorporated here by reference.)*
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10
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.16
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Ferro Corporation 2003 Long-Term Incentive Compensation Plan.*
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10
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.17
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Form of Terms of Incentive Stock Option Award Grants under the
Ferro Corporation 2003 Long-Term Incentive Compensation Plan.*
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103
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10
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.18
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Form of Terms of Performance Share Awards under the Ferro
Corporation 2003 Long-Term Incentive Compensation Plan.*
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10
|
.19
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Ferro Corporation 2006 Long-Term Incentive Plan (Reference is
made to Exhibit 10.01 to Ferro Corporations Current
Report on
Form 8-K,
filed November 8, 2006, which Exhibit is incorporated here
by reference.)*
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10
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.20
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Form of Terms of Incentive Stock Option Award Grants under the
Ferro Corporation 2006 Long-Term Incentive Compensation Plan.*
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10
|
.21
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Form of Terms of Nonstatutory Stock Option Grants under the
Ferro Corporation 2006 Long-Term Incentive Compensation Plan.*
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10
|
.22
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Form of Terms of Performance Share Awards under the Ferro
Corporation 2006 Long-Term Incentive Compensation Plan.*
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10
|
.23
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|
Form of Terms of Restricted Share Awards under the Ferro
Corporation 2006 Long-Term Incentive Compensation Plan.*
|
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10
|
.24
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|
Form of Terms of Deferred Stock Unit Awards under the Ferro
Corporation 2006 Long-Term Incentive Compensation Plan.*
|
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10
|
.25
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|
Ferro Corporation Deferred Compensation Plan for Executive
Employees. (Reference is made to Exhibit 10.1 to Ferro
Corporations Current Report on
Form 8-K,
filed September 24, 2007, which Exhibit is incorporated
here by reference.)*
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10
|
.26
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Ferro Corporation Deferred Compensation Plan for Non-Employee
Directors. (Reference is made to Exhibit 10.2 to Ferro
Corporations Current Report on
Form 8-K,
filed September 24, 2007, which Exhibit is incorporated
here by reference.)*
|
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10
|
.27
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|
Ferro Corporation Deferred Compensation Plan for Non-Employee
Directors Trust Agreement. (Reference is made to
Exhibit 10.11.1 to Ferro Corporations Annual Report
on
Form 10-K
for the year ended December 31, 2006, which Exhibit is
incorporated here by reference.)*
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10
|
.28
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Ferro Corporation Supplemental Defined Benefit Plan for
Executive Employees. (Reference is made to Exhibit 10.3 to
Ferro Corporations Current Report on
Form 8-K,
filed September 24, 2007, which Exhibit is incorporated
here by reference.)*
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10
|
.29
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|
Ferro Corporation Supplemental Defined Contribution Plan for
Executive Employees. (Reference is made to Exhibit 10.4 to
Ferro Corporations Current Report on
Form 8-K,
filed September 24, 2007, which Exhibit is incorporated
here by reference.)*
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10
|
.30
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|
Amended and Restated Employment Agreement, dated as of
December 31, 2008, between Mr. Kirsch and Ferro
Corporation. (Reference is made to Exhibit 10.3 to Ferro
Corporations Current Report on
Form 8-K,
filed January 7, 2009, which Exhibit is incorporated here
by reference.)*
|
|
10
|
.31
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|
Form of Indemnification Agreement. (James F. Kirsch is the only
officer that is party to an indemnification agreement with Ferro
Corporation.)*
|
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10
|
.32
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|
Change in Control Agreement, dated as of January 1, 2009,
between Mr. Kirsch and Ferro Corporation. (Reference is
made to Exhibit 10.1 to Ferro Corporations Current
Report on
Form 8-K,
filed January 7, 2009, which Exhibit is incorporated here
by reference.)*
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10
|
.33
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|
Form of Change in Control Agreement, dated as of January 1,
2009. (Sallie B. Bailey, Mark H. Duesenberg, Ann E. Killian,
James F. Kirsch, Michael J. Murry, Barry D. Russell and Peter T.
Thomas have entered into this form of change in control
agreement.) (Reference is made to Exhibit 10.2 to Ferro
Corporations Current Report on
Form 8-K,
filed January 7, 2009, which Exhibit is incorporated here
by reference.)*
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10
|
.34
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Employment Transition Agreement between Ferro Corporation and
Thomas M. Gannon. (Reference is made to Exhibit 10.1 to
Ferro Corporations Current Report on
Form 8-K,
filed October 26, 2006, which Exhibit is incorporated here
by reference.)*
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10
|
.35
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First Amendment to Asset Purchase Agreement, dated
October 31, 2008, between Ferro Corporation and Novolyte
Technologies LP. (Reference is made to Exhibit 10.1 to
Ferro Corporations Current Report on
Form 8-K,
filed November 4, 2008, which Exhibit is incorporated here
by reference.)
|
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10
|
.36
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|
Asset Purchase Agreement, dated as of September 29, 2008,
between Ferro Corporation and Novolyte Technologies LP.
(Reference is made to Exhibit 10.1 to Ferro
Corporations Current Report on
Form 8-K,
filed October 3, 2008, which Exhibit is incorporated here
by reference.)
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104
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10
|
.37
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Suzhou Equity Transfer Agreement, dated October 31, 2008,
among Novolyte Technologies Limited, Novolyte Technologies LP
and Ferro Corporation. (Reference is made to Exhibit 10.3
to Ferro Corporations Current Report on
Form 8-K,
filed November 4, 2008, which Exhibit is incorporated here
by reference.)
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10
|
.38
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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.)
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12
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Ratio of Earnings to Fixed Charges and Ratio of Earnings to
Combined Fixed Charges and Preferred Stock Dividends.
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21
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List of Subsidiaries.
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23
|
.1
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Consent of Independent Registered Public Accounting Firm.
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31
|
.1
|
|
Certification of Principal Executive Officer Pursuant to
Rule 13a-14(a)/15d-14(a).
|
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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.
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* |
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Indicates management contract or compensatory plan, contract or
arrangement in which one or more Directors and/or executives of
Ferro Corporation may be participants. |
105