<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1994 Commission File Number 1-584
FERRO CORPORATION
An Ohio Corporation IRS Number 34-0217820
1000 LAKESIDE AVENUE
CLEVELAND, OHIO 44114-1183
216/641-8580
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 X No
------ ------
At July 31, 1994, there were 28,332,708 shares of Ferro common stock, par value
$1.00, outstanding.
<PAGE> 2
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
The Consolidated Balance Sheets as of June 30, 1994 (unaudited) and December
31, 1993, and the Consolidated Statements of Income and Consolidated Statements
of Cash Flows for the three months and six months ended June 30, 1994 and 1993
(unaudited) of Ferro Corporation and Subsidiaries are set forth in Exhibit 20
hereof which is incorporated by reference herein.
These financial statements, which are subject to year-end audit adjustments,
should be read in conjunction with financial statements and notes thereto
included in the Company's annual report for the fiscal year ended December 31,
1993.
Cash dividends were paid at the rate of $0.135 per common share in the second
quarter of 1994 and $0.12 per common share in the second quarter of 1993. Cash
dividends on preferred shares were paid at the rate of $0.81 per preferred
share in the second quarter of 1994 and 1993.
Net sales and net income for the three months ended June 30, 1994 were
$300,225,000 and $11,966,000 ($0.38 primary earnings per common share) as
compared with net sales and net income of $279,717,000 and $13,597,000 ($0.43
primary earnings per common share) for the corresponding period in 1993. Net
income for the 1993 period includes a $3.0 million pretax charge ($1,818,000
after tax) associated with the acquisition of Imperial Chemical Industries'
(ICI) North American and European powder coatings business. Excluding the
acquisition-related charge, net income for the second quarter 1993 was
$15,415,000 ($0.49 primary earnings per common share).
Net sales and net income for the six months ended June 30, 1994 were
$583,549,000 and $23,290,000 ($0.73 primary earnings per common share) as
compared with $536,753,000 and $6,169,000 ($0.15 primary earnings per common
share) for the corresponding 1993 period. Net income for the 1993 six-month
period includes the acquisition-related charge above and the impact of required
changes in accounting principles for taxes and postretirement benefits.
Excluding these charges, net income for the 1993 six-month period was
$26,719,000 ($0.85 primary earnings per common share).
The foregoing figures are unaudited, but in the opinion of management of the
company, all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation thereof have been made.
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations.
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Comparison Between Three Months Ended June 30, 1994 and 1993
- - ------------------------------------------------------------
NET SALES. Second quarter 1994 sales of $300.2 million were 7.3 percent
greater than the $279.7 million of the second quarter 1993.
Sales, including revenues associated with the major 1993 acquisitions of the
North American and European powder coatings business from ICI and the Italian
ceramic glaze and color business from Bayer, S.p.A., increased in all
businesses and all geographic areas except Latin America, where sales were
essentially flat. Sales for Coatings, Colors and Ceramics, the primary
beneficiary of the 1993 acquisitions, increased 9.9 percent, while Plastics
sales increased 5.0 percent and Chemicals sales increased 2.5 percent.
The variety of products sold by the Company makes it difficult to determine
with certainty the increases or decreases in sales resulting from changes in
physical volume of products sold and selling prices. However, Management's
best estimate is that the 7.3 percent increase in sales is comprised of: volume
and acquisitions, 11.8 percent; exchange, (1.3) percent; price/mix, (1.6)
percent; and divestitures, (1.6) percent.
COST OF SALES. Gross profit as a percent of sales decreased from 26.3 percent
to 25.4 percent, primarily due to aggressive price competition in international
ceramic glaze markets, product mix changes and slower than anticipated
consolidation of the acquired domestic powder coatings business.
SELLING, ADMINISTRATIVE AND GENERAL EXPENSES. Such expenses increased 12.5
percent in dollar terms, largely due to costs associated with the businesses
acquired in 1993 (including amortization of goodwill) and planned increases in
research and development expenditures.
INTEREST EXPENSE. Interest expense increased from $2.4 million to $3.0
million, primarily because of the additional interest expense on the $25
million, 7 5/8 debentures issued in May, 1993.
NET FOREIGN CURRENCY. Net foreign currency was a $0.4 million loss for
the quarter, compared with a $0.9 million gain during the corresponding 1993
quarter, reflecting the relative weakness of the U.S. dollar over the prior
year period. This situation is largely the result of compliance with
established rules for marking to market forward exchange contracts and currency
options utilized to hedge the Company's exposure to foreign currency
fluctuations.
OTHER INCOME/EXPENSE. Net other expense increased by $0.6 million and is
comprised of numerous income and expense items.
INCOME TAXES. Income taxes declined $1.1 million, reflecting the lower level
of income in the current period. The effective tax rate for the second quarter
was comparable to that of the corresponding 1993 period.
GEOGRAPHIC DISCUSSION. European sales increased for each of the core
businesses and, for the first time since the fourth quarter 1992, operating
earnings improved over the prior year period. In the United States and
Canada, sales increased in each core business.
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Earnings in the United States and Canada declined, largely due the items
discussed in COST OF SALES and SELLING, ADMINISTRATIVE AND GENERAL EXPENSES
above. Latin American sales were flat and earnings declined nominally due to
product mix changes in the traditional businesses. Asia-Pacific sales
increased, despite the sale of a plastics business in Australia, while earnings
were basically flat.
Comparison Between Six Months Ended June 30, 1994 and 1993
- - ----------------------------------------------------------
NET SALES. Consolidated sales for the six months ended June 30, 1994 were
$583,549,000 or 8.7 percent greater than those for the comparable 1993 period.
Management's best estimate is that the 8.7 percent increase in sales is
comprised of: volume and acquisitions, 13.5 percent; exchange, (2.0) percent;
price/mix, (1.9) percent; and divestitures, (0.9) percent.
COST OF SALES. Gross profit as a percent of sales declined from 26.5 percent
to 25.2 percent, primarily due to the one-time charges in the first quarter
within the domestic chemical business, aggressive price competition in
international ceramic glaze markets, product mix changes and the slower than
anticipated consolidation of the acquired domestic powder coatings business.
SELLING, ADMINISTRATIVE AND GENERAL EXPENSES. These expenses increased 12.2
percent in dollar terms, primarily due to costs associated with the businesses
acquired in 1993 (including amortization of goodwill) and planned increases in
research and development expenses.
INTEREST EXPENSE. The $1.1 million increase over the 1993 period is
essentially due to the incremental interest associated with the issuance of the
$25 million, 7 5/8 debentures in May, 1993.
NET FOREIGN CURRENCY GAIN OR LOSS. Net loss for the 1994 period was $0.7
million as compared with net gain for the 1993 period of $1.6 million. The
1994 situation reflects the results of compliance with established rules for
marking to market forward exchange contracts and options utilized to hedge the
Company's exposure to foreign currency fluctuations, while the 1993 gain is
largely attributable to hedging gains.
OTHER INCOME/EXPENSE. Net other income increased by $0.9 million and is
comprised of numerous income and expense items.
INCOME TAXES. Income taxes declined $2.6 million, reflecting the lower level
of income and reduction of effective rate from 38.7 percent to 38.1 percent due
to continuing effective worldwide tax planning.
GEOGRAPHIC DISCUSSION. To date, European sales increased in all core
businesses, except plastics, while operating profit was essentially flat due to
continued price pressure impact on margins. Sales in the United States and
Canada increased because of the incremental powder coatings sales acquired in
1993 and volume increases in the domestic plastics business. Earnings in the
United States and Canada declined in response to the factors discussed above in
COST OF SALES and SELLING, ADMINISTRATIVE AND GENERAL EXPENSES. Latin
<PAGE> 5
American sales and earnings declined, largely due to product mix changes.
Despite the sale of the Australian plastics business already mentioned,
Asia-Pacific sales increased and earnings were up nominally.
Liquidity and Capital Resources
- - -------------------------------
WORKING CAPITAL. Working capital was $9.0 million less at June 30, 1994 than
at year-end 1993, largely due to decreases in Cash and Marketable Securities
effected to purchase Ferro stock.
CASH FLOW. For the six months ended June 30, 1994, net cash provided from
operating activities was $35.2 million. During the period, cash and marketable
securities declined $24.5 million, the single largest reason other than normal
capital expenditures being the repurchase of $20.2 million worth of Ferro stock
under the authorized stock repurchase program.
FINANCING REQUIREMENTS AND RESOURCES. The long-term debt to equity ratio was
21.8 percent at June 30, 1994, excluding the loan guarantee of the Employee
Stock Ownership Plan adopted in April 1989. The Company expects to be able to
meet the financial requirements of its existing businesses from existing cash
and cash equivalents and future cash flow. The Company has available to it a
$150.0 million five-year revolving credit facility with four banks. There have
been no borrowings drawn under this facility. The Company also has available
$75.0 million of the original $100.0 million under the Shelf Registration filed
with the Securities and Exchange Commission in August 1992. Additionally, the
foreign subsidiaries have credit facilities available.
Other Significant Developments
- - ------------------------------
Sandra Harden Austin was elected to the Board of Directors in June, 1994. Ms.
Austin is President of Caremark Healthcare Services' Headquarters Operations
and serves on the boards of National City Corporation and South Shore Bank.
In June, 1994, the Board of Directors voted to increase the number of shares
authorized to be repurchased under the repurchase plan of October 30, 1992 from
one million shares to two million shares.
During the second quarter 1994, the Company, in accordance with the authorized
stock repurchase plan, acquired approximately 812,000 shares of Ferro common
stock at an average price approximating $25.00 per share. The impact on
earnings per share in the second quarter resulting from the stock repurchase
activity was less than $0.01 per share.
PART II OTHER INFORMATION
Item 1 Legal Proceedings.
On July 29, 1994, the Company signed an Agreed Order with the Indiana
Department of Environmental Management and the Hammond Department of
Environmental Management
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(the "Agencies") settling the Agencies' claims that the Keil Chemical facility
had violated various air emission regulations. Subject to satisfactory
compliance with the terms of the Agreed Order, the United States Environmental
Protection Agency has concluded its Notice of Violations against the Keil
Chemical facility. Under the Agreed Order, the Company is required to pay a
civil, cash penalty of $1.5 million; to construct a supplemental environmental
project, estimated to cost approximately $1.5 million; and to reduce air
emissions to reach compliance with federal and state air emission regulations
under compliance schedules as contained in the Agreed Order. The cash penalty
and supplemental environmental project are incremental to the $3.0 million
capital spending program discussed on page 6 of the 1993 Form 10-K.
The 1993 Form 10-K report addressed alleged violations of pre-treatment
requirements for removal of pollutants prior to discharge of wastewater into
the Grand Calumet and Little Calumet rivers and secondly, alleged violation of
air emission regulations within the same facility, namely Keil Chemical, a
Ferro operation located in Hammond, Indiana. The July 29, 1994 settlement
addresses the air emission matter discussed in the 1993 10-K report, but does
not address the wastewater discharge matter, which remains.
Item 2 Change in Securities. No change.
Item 3 Default Upon Senior Securities. None
Item 4 Submission of Matters to a Vote of Security Holders. None.
Item 5 Other Information. None.
Item 6 Exhibits and Reports on Form 8-K.
The Company has not filed any reports on Form 8-K for the quarter
ended June 30, 1994.
Exhibit 11 - Statement regarding computation of earnings per share.
Exhibit 12 - Ratio of Earnings to Fixed Charges.
Exhibit 20 - The Consolidated Balance Sheets as of June 30, 1994
(unaudited) and December 31, 1993, and the Consolidated Statements of
Income and Consolidated Statements of Cash Flows for the three months
and six months ended June 30, 1994 and 1993 (unaudited) of Ferro
Corporation and Subsidiaries.
<PAGE> 7
S I G N A T U R E S
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FERRO CORPORATION
(Registrant)
Date: August 11, 1994 ____________________________
H. R. Ortino
Executive Vice President
Chief Financial Administrative Officer
Date: August 11, 1994 ____________________________
G. H. Ritondaro
Vice President, Finance
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<TABLE>
EXHIBIT 11
FERRO CORPORATION
Statement Regarding Computation of Earnings Per Share
<CAPTION>
Six Months Ended June 30, 1994
--------------------------------
(Dollars in Thousands) 1994 1993
----------- ----------
<S> <C> <C>
Primary:
Weighted average shares and common
stock equivalents 29,290,182 29,435,792
Net Income $ 23,290 $ 26,719
Less Preferred Stock Dividend
Net of Tax (1,780) (1,753)
---------- ----------
Income Available to Common
Shareholders $ 21,510 $ 24,966
========== ==========
Primary Earnings Per Common Share $ 0.73 $ 0.85(A)
========== ==========
Fully Diluted:
Weighted average shares and common
stock equivalents from above 29,290,182 29,435,792
Adjustments (primarily assumed con-
version of convertible preferred
stock) 2,467,337 2,528,804
---------- ----------
31,757,519 31,964,596
========== ==========
Net Income $ 23,290 $ 26,719
Additional ESOP Contribution,
Net of Tax (1,037) (1,119)
---------- ----------
Adjusted Net Income $ 22,253 $ 25,600
========== ==========
Fully Diluted Earnings Per Common Share $ 0.70 $ 0.80(A)
========== ==========
<FN>
(A) Before cumulative effect of accounting changes. Both Primary Earnings and
Fully Diluted Earnings are $0.15 after the cumulative effect of accounting
changes.
</TABLE>
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<TABLE>
RATIO OF EARNINGS TO FIXED CHARGES
PER REGULATION S-K 229.503 (ITEM 503)
<CAPTION>
BEFORE
ACCT CHG
JUNE JUNE JUNE
1994 1993 1993
------- ------- -------
<S> <C> <C> <C>
EARNINGS:
PRE-TAX INCOME 37,609 43,621 43,621
ACCOUNTING CHANGE 1. - (37,764) -
ADD: FIXED CHARGES 6,715 5,682 5,682
LESS: INTEREST CAPITALIZATION (462) (537) (537)
------- ------- -------
TOTAL EARNINGS (LOSS) 43,862 11,002 48,766
======= ======= =======
FIXED CHARGES:
INTEREST EXPENSE 5,853 4,745 4,745
INTEREST CAPITALIZATION 462 537 537
INTEREST PORTION OF
RENTAL EXPENSE 400 400 400
------- ------- -------
TOTAL FIXED CHARGES 6,715 5,682 5,682
======= ======= =======
TOTAL EARNINGS (LOSS) 43,862 11,002 48,766
DIVIDED BY:
TOTAL FIXED CHARGES 6,715 5,682 5,682
------- ------- -------
RATIO 6.53 1.94 8.58
<FN>
1. PRE-TAX EFFECT OF FASB 106, ACCOUNTING FOR RETIREE BENEFITS.
NOTE: PREFERRED DIVIDENDS ARE EXCLUDED. AMORTIZATION OF DEBT EXPENSE AND DISCOUNTS AND PREMIUMS WERE DEEMED
IMMATERIAL TO THE ABOVE CALCULATION. INTEREST PORTION OF RENTAL EXPENSE ARE CONSERVATIVE ESTIMATES BASED ON
ACTUAL AMOUNTS FROM PRIOR YEARS.
</TABLE>
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EXHIBIT 12
FERRO CORPORATION
Ratio of Earnings to Fixed Charges
<PAGE> 1
EXHIBIT 20
FERRO CORPORATION
Consolidated Balance Sheets
As of June 30, 1994 (Unaudited)
Consolidated Statements of Income
For the Three Months Ended
June 30, 1994 (Unaudited)
Consolidated Statements of Cash Flows
For the Three Months Ended
June 30, 1994 (Unaudited)
<PAGE> 2
<TABLE>
Consolidated Statements of Income
Ferro Corporation and Subsidiaries
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
(Dollars in Thousands) 1994 1993 1994 1993
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Segment Sales
Coatings, Colors, and Ceramics $ 177,539 $ 161,532 $ 343,340 $ 304,775
Plastics 66,787 63,631 132,470 127,866
Chemicals 55,899 54,554 107,739 104,112
--------- --------- --------- ---------
Total Net Sales $ 300,225 $ 279,717 $ 583,549 $ 536,753
Cost of Sales 224,030 206,158 436,412 394,472
Selling, Administrative and
General Expenses 53,157 47,264 103,661 92,348
Restructuring Cost - 3,000 - 3,000
--------- --------- --------- ---------
Operating Income 23,038 23,295 43,476 46,933
Interest Expense 2,986 2,442 5,853 4,745
Net Foreign Currency (Gain) Loss 391 (884) 735 (1,606)
Other (Income) Expense - Net 272 (350) (721) 173
--------- --------- --------- ---------
Income Before Taxes and Cumulative
Effect of Change in Accounting
Principles 19,389 22,087 37,609 43,621
Taxes on Income 7,423 8,490 14,319 16,902
--------- --------- --------- ---------
Income Before Cumulative Effect of
Change in Accounting Principles 11,966 13,597 23,290 26,719
Cumulative Effect of Changes in
Accounting Principles for:
Postretirement Benefits, Net of Tax - 0 - (23,603)
Income Tax - 0 - 3,053
--------- --------- --------- ---------
Net Income $ 11,966 $ 13,597 $ 23,290 $ 6,169
Dividend on Preferred Stock, Net of Tax 894 877 1,780 1,753
--------- --------- --------- ---------
Net Income Available to Common
Shareholders $ 11,072 $ 12,720 $ 21,510 $ 4,416
Per Common Share Data:
Before Cumulative Effect of Accounting
Changes
Primary Earnings $ 0.38 $ 0.43 $ 0.73 $ 0.85
Fully Diluted Earnings $ 0.36 $ 0.41 $ 0.70 $ 0.80
After Cumulative Effect of Accounting
Changes
Primary Earnings $ 0.38 $ 0.43 $ 0.73 $ 0.15
Fully Diluted Earnings $ 0.36 $ 0.41 $ 0.70 $ 0.15
Average Shares Outstanding 28,969,544 29,457,322 29,290,182 29,435,792
========== ========== ========== ==========
</TABLE>
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<TABLE>
Consolidated Balance Sheet
Ferro Corporation and Subsidiaries
June 30, 1994 and December 31, 1993
<CAPTION>
(Dollars in Thousands)
(Unaudited) (Audited)
ASSETS 1994 1993
- - ------ --------- ----------
<S> <C> <C>
Current Assets:
Cash $ 18,321 $ 25,116
Marketable Securities 20,620 38,335
Net Receivables 219,261 175,826
Inventories 135,046 128,736
Other Current Assets 36,384 43,240
--------- ---------
Total Current Assets $ 429,632 $ 411,253
Investments in Affiliated Companies 8,110 10,096
Unamortized Excess of Cost Over Net Assets Acquired 52,268 53,988
Other Assets 34,901 34,736
Net Plant & Equipment 276,646 257,821
--------- ---------
$ 801,557 $ 767,894
========= =========
LIABILITIES
- - -----------
Current Liabilities:
Notes and Loans Payable $ 19,994 $ 19,301
Accounts Payable, Trade 118,046 97,247
Income Taxes 9,104 5,957
Accrued Payrolls 18,084 15,917
Accrued Expenses and Other Current Liabilities 61,153 60,536
--------- ---------
Total Current Liabilities $ 226,381 $ 198,958
Long-Term Debt 79,380 79,349
ESOP Loan Guarantee 40,607 44,076
Deferred Income Taxes 14,920 14,884
Postretirement Liabilities 41,192 40,096
Other Liabilities 34,130 31,734
Shareholders' Equity 364,947 358,797
--------- ---------
$ 801,557 $ 767,894
========= =========
</TABLE>
Consolidated Statements of Cash Flows
Ferro Corporation and Subsidiaries
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<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
(Dollars in Thousands) 1994 1993 1994 1993
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Cash Provided from Operating Activities $16,373 $14,663 $35,155 $29,366
Cash Flow from Investing Activities:
Investment in Marketable Securities 22,139 41,131 17,715 10,397
Capital Expenditures for Plant and Equipment (17,564) (8,969) (28,763) (18,589)
Acquisition of Companies, Net of Cash Acquired (8,796) (64,430) (8,796) (68,676)
Proceeds From Divestitures 0 225 3,156 721
Other Investing Activities 1,832 (1,688) 2,305 703
------- ------- ------- -------
Net Cash Used for Investing Activities (2,389) (33,731) (14,383) (75,444)
Cash Flow from Financing Activities:
Net Borrowings Under Short-Term Lines 3,249 (3,634) 693 (1,739)
Purchase of Treasury Stock (19,975) (529) (20,237) (800)
Proceeds from Long-Term Debt 0 25,557 0 25,690
Cash Dividends Paid (5,028) (4,626) (10,130) (9,285)
Other Financing Activities (57) 467 1,184 1,092
------- ------- ------- -------
Net Cash (Used for) Provided by Financing
Activities (21,811) 17,235 (28,490) 14,958
Effect of Exchange Rate Changes on Cash 770 (873) 923 (938)
------- -------- ------- -------
Increase (Decrease) in Cash and Cash Equivalents (7,057) (2,706) (6,795) (32,058)
Cash and Cash Equivalents at Beginning of Period 25,378 31,460 25,116 60,812
------- ------- ------- -------
Cash and Cash Equivalents at End of Period $18,321 $28,754 $18,321 $28,754
======= ======= ======= =======
Cash Paid During the Period:
Interest $ 4,986 $ 4,296 $ 5,702 $ 5,127
Income Taxes $ 7,756 $14,212 $11,132 $17,687
</TABLE>
