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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.
------------------------------------
[x]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from To
Commission File Number 1-584
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FERRO CORPORATION
(Exact Name of Registrant as specified in its charter)
An Ohio Corporation 1000 LAKESIDE AVENUE CLEVELAND, OH 44114 IRS No. 34-0217820
(Address of principal executive offices)
Registrant's telephone number including area code: 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 October 31 1996, there were 25,906,504 shares of Ferro common stock, par
value $1.00, outstanding.
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PART I - FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
ITEM 1 - FINANCIAL STATEMENTS
The Consolidated Balance Sheets as of September 30, 1996 (unaudited) and
December 31, 1995, and the Consolidated Statements of Income and Consolidated
Statements of Cash Flows for the three months ended September 30, 1996 and 1995
(unaudited) of Ferro Corporation and Subsidiaries are set forth in Exhibit 20
hereof which is incorporated herein by reference.
Those 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,
1995.
Cash dividends were paid at the rate of $0.155 per common share in the third
quarter of 1996 and $0.135 per common share in the third quarter of 1995. Cash
dividends on preferred shares were paid at the rate of $0.81 per preferred share
in the third quarter of 1996 and 1995.
Net sales and net income for the three months ended September 30, 1996 were
$329.2 million and $13.2 million ($0.44 fully diluted earnings per common share)
as compared with net sales and net income of $310.8 million and $9.8 million
($0.31 fully diluted earnings per common share) for the corresponding 1995
period. The foregoing figures are unaudited, but in the opinion of the
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.
Comparison Between Three Months Ended September 30, 1996 and 1995.
- ------------------------------------------------------------------
Net Sales. Third quarter 1996 sales of $329.2 million were 5.9% greater than the
$310.8 million of the comparable 1995 period.
Sales increased 30% in the Chemicals segment, 2% in the Coatings, Colors and
Ceramics segment, but declined 7% in the Plastics segment. The increase in
Chemicals is largely due to sales associated with the acquisition of the polymer
additives business (Synpro) from Cookson Group plc, during the fourth quarter of
1995. Coatings, Colors and Ceramics sales improved slightly, primarily because
volume increases more than offset the decline in sales associated with the 1995
divestiture of a powder coatings joint venture in Italy. Plastics sales declined
largely because of the late-1995 divestiture of an operation in France.
Geographically, consolidated sales were up in the United States and Canada and
in Latin America, but down in Europe and Asia- Pacific.
The variety of products sold by the Company makes it difficult to determine with
certainty the
2
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increases or decreases in sales resulting from changes in physical volume of
products sold and selling prices. Management's best estimate is that the 5.9%
increase in sales is comprised of the following: currency, -1.0%; volume, 3.3%;
price/mix, -0.3%; acquisitions 7.9% and divestitures -4.0%.
Cost of Sales. Gross profit as a percent of sales was 23.9% as compared with
22.5% for the comparable 1995 period. Improvement in gross margins were evident
in each segment and in each geographic region. Favorable prices for certain raw
materials and increased volume for domestic operations were the primary reasons
for the increase.
Selling, administrative and general expenses. Such expenses as a percent of
sales were 16.5% in 1996 and 1995.
Interest expense. The decrease in interest expense from $4.7 million to $3.5
million is primarily attributable to the fact that for the 1995 period interest
was incurred on two separate debt instruments, a $50 million debenture bearing
interest at 11 3/4% and another $50 million debenture bearing interest at 8%.
During the 1996 period, interest only occurred on the latter instrument as the
11 3/4% debentures were redeemed in October 1995 with the proceeds from the
8% debenture.
Net foreign currency gain or loss. The net foreign currency gain is primarily
attributable to unrealized gains on foreign currency option contracts purchased
by the parent company to hedge the earnings of various foreign subsidiaries.
Other income/expense. Net other expense was $0.2 million as compared with net
other income of $1.3 million in the prior year quarter, these are comprised of
numerous income and expense items.
Income taxes. The effective tax rate of 37.3% was comparable with the 1995 third
quarter rate of 37.2%.
Geographic discussion. European sales and operating profit declined slightly due
primarily to weakness in general market conditions. Sales and operating profit
in the United States and Canada improved as each of the segments delivered
increases in both sales and operating profit during the quarter. Latin American
sales and operating profit improved, though weak market conditions continued.
Asia-Pacific sales were down, but operating profit improved slightly.
Comparison Between Nine Months Ended September 30, 1996 and 1995.
- -----------------------------------------------------------------
Net Sales. Consolidated sales for the nine months ended September 30, 1996 were
$1.02 billion, 3.4% greater than those of the comparable 1995 period.
Chemical sales increased 36.0%, largely due to the Synthetic Products (Synpro)
acquisition in the fourth quarter of 1995. Coatings, Colors and Ceramics sales
declined 1.4% because of the
3
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divestiture of a joint venture in Italy, weak conditions in some European
markets and economic conditions in Latin America. The decline in Plastics sales
is primarily associated with the divestiture of an operation in France.
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. Management's best estimate is that
the 3.5% increase in sales is comprised of the following: currency, -0.9%;
volume, 0.2%; price/mix, 0.2%; acquisitions 7.7% and divestitures -3.7%.
Cost of Sales. Gross profit as a percent of sales was 24.3% as compared with
24.2% for the comparable 1995 period.
Selling, administrative and general expenses. Such expenses as a percent of
sales declined from 17.0% in 1995 to 16.7% in 1996.
Interest expense. The decrease in interest expense from $11.3 million to $9.8
million is primarily attributable to replacement of $50 million of 11 3/4% debt
with $50 million of 8% debt.
Net foreign currency gain or loss. The net foreign currency gain is primarily
attributable to transaction gains in European operations and unrealized currency
gains on foreign currency option contracts purchased by the parent company to
hedge the earnings of various foreign subsidiaries.
Other income/expense. Net other expense was $2.9 million as compared with net
other income of $1.4 million in the prior year period, these are comprised of
numerous income and expense items.
Income taxes. The effective tax rate declined from 38.5% to 38.0% reflecting
worldwide tax planning and utilization of tax loss carryforwards in various
subsidiaries.
Geographic discussion. Improved sales and operating profit in the United States
and Canada were evident in all businesses, but particularly in the Chemicals and
Plastics businesses. European sales and operating profit were down slightly.
While sales increased slightly in Latin America, economic conditions in the
region kept operating income essentially flat versus the comparable 1995 period.
Asia-Pacific sales were down, as was operating income due to continuing margin
pressures in several of the markets served in the region.
Liquidity and Capital Resources
- -------------------------------
Working capital. Net working capital was comparable to year-end 1995.
4
<PAGE> 5
Cash flow. Net cash provided from operating activities for the nine months ended
September 30, 1996 was $83.4 million which compares favorably with the $73.0
million for the 1995 period. The increase in Net Cash used for Financing
Activities is primarily due to the repurchase of outstanding shares by the
Company and the fact that during the 1996 period the Company did not issue any
long-term debt as it did for the nine months ended September 30, 1995.
Financing requirements and resources. The long-term debt to equity ratio was
27.2% at September 30, 1996, excluding the loan guarantee of the Employee Stock
Ownership Plan adopted in April 1989. This compares to the 27.5% ratio at
December 31, 1995. The Company expects to be able to meet the financial
requirements of its existing businesses from existing cash and cash equivalents
and future cash flows. The Company has available to it a $150.0 million
five-year revolving credit facility with four domestic banks. There were no
borrowings under this facility as of the end of the quarter. The Company also
has available a $300 million Universal Shelf Registration that was filed with
the Securities and Exchange Commission on October 31, 1995, under which various
types of securities may be issued.
OTHER SIGNIFICANT DEVELOPMENTS
On October 25, the Company decided to suspend production of fuel
additive components in its Port-du-Bouc, France chemical facility. The Company
will continue to manufacture other products at this facility. This action will
result in a non-recurring charge of $0.03-0.04 per share in the fourth quarter
of 1996.
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS.
In September, 1996, the Company signed a consent decree with the United
States Environmental Protection Agency and the Indiana Department of
Environmental Management with respect to the alleged violation of the
Clean Water Act and the River and Harbors Act by the Company and
several other defendants disclosed in the 10-Q report dated September
30, 1995. The final terms are as disclosed therein.
ITEM 2 CHANGE IN SECURITIES. NO CHANGE.
ITEM 3 DEFAULT UPON SENIOR SECURITIES. NO CHANGE.
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.
5
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The Company has not filed any reports on Form 8-K for the
quarter ended September 30, 1996.
Exhibits 4(a) through 4(k) referenced in Ferro Corporation's
Form 10-K for the year ended December 31, 1995 are
incorporated herein by reference.
Exhibit 4(l) - referenced in Ferro Corporation's Form 10-Q for
the period ended March 31, 1996 is incorporated herein by
reference.
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 September
30, 1996 (Unaudited) and December 31, 1995, and the
Consolidated Statements of Income and Consolidated Statements
of Cash Flows for the three months September 30, 1996 and 1995
(Unaudited) of Ferro Corporation and Subsidiaries.
Exhibit 27 - Financial Data Schedule (Electronic Filing Only)
6
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SIGNATURES
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: November 13, 1996
/s/ Hector R. Ortino
--------------------
Hector R. Ortino
President and
Chief Operating Officer
Date: November 13, 1996
/s/ Gary H. Ritondaro
---------------------
Gary H. Ritondaro
Vice President and
Chief Financial Officer
<PAGE> 1
Exhibit 11
FERRO CORPORATION AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
9 Months 9 Months
(Dollars in Thousands) September September
1996 1995
---- ----
PRIMARY:
<S> <C> <C>
Weighted average shares and common stock equivalents 26,711,778 27,995,032
Net Income $ 40,693 $ 37,579
Less Preferred Stock Dividend, Net of Tax (2,799) (2,743)
------------ ------------
Income Available to Common Shareholders $ 37,894 $ 34,836
PRIMARY EARNINGS PER COMMON SHARE $ 1.42 $ 1.24
FULLY DILUTED:
Weighted average shares and common stock equivalents 26,711,778 27,995,032
Adjustments (primarily assumed conversion of
convertible preferred stock) 2,412,873 2,433,373
------------ ------------
29,124,651 30,428,405
Net Income $ 40,693 $ 37,579
Additional ESOP Contribution, Net of Tax (1,432) (1,516)
------------ ------------
Adjusted Net Income $ 39,261 $ 36,063
FULLY DILUTED EARNINGS PER SHARE $ 1.35 $ 1.19
</TABLE>
<PAGE> 1
Exhibit 12
FERRO CORPORATION AND SUBSIDIARIES
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
SEPTEMBER SEPTEMBER
(DOLLARS IN THOUSANDS) 1996 1995
----------- ----------
<S> <C> <C>
EARNINGS:
PRE-TAX INCOME 65,583 61,143
ADD: FIXED CHARGES 11,663 12,560
LESS: INTEREST CAPITALIZATION (103) (617)
------- -------
TOTAL EARNINGS 77,143 73,086
======= =======
FIXED CHARGES:
INTEREST EXPENSE 9,861 11,343
INTEREST CAPITALIZATION 103 617
INTEREST PORTION OF RENTAL EXPENSE 1,699 600
------- -------
TOTAL FIXED CHARGES 11,663 12,560
======= =======
TOTAL EARNINGS 77,143 73,086
DIVIDED BY:
TOTAL FIXED CHARGES 11,663 12,560
------- -------
RATIO 6.61 5.82
</TABLE>
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 INCLUDES CONSERVATIVE ESTIMATES
BASED ON ACTUAL AMOUNTS FROM PRIOR YEARS.
<PAGE> 1
Exhibit 20
FERRO CORPORATION
Consolidated Balance Sheets
As of September 30, 1996 (Unaudited) and December 31, 1995
Consolidated Statements of Income
For the Three Months Ended
September 30, 1996 and 1995 (Unaudited)
Consolidated Statements of Cash Flows
For the Three Months Ended
September 30, 1996 and 1995 (Unaudited)
<PAGE> 2
CONSOLIDATED BALANCE SHEET
FERRO CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
(Dollars in Thousands)
(Unaudited) (Audited)
ASSETS 1996 1995
- ------ --------- ---------
Current Assets:
<S> <C> <C>
Cash and Cash Equivalents $ 22,227 $ 16,695
Net Receivables 235,546 230,742
Inventories 146,548 155,253
Other Current Assets 32,879 29,676
-------- --------
Total Current Assets $437,200 $432,366
Investments in Affiliated Companies 7,123 7,622
Unamortized Excess of Cost Over Net Assets Acquired 92,179 95,553
Other Assets 39,027 33,119
Net Plant & Equipment 302,555 307,288
-------- --------
$878,084 $875,948
======== ========
LIABILITIES
- -----------
Current Liabilities:
Notes and Loans Payable $ 33,954 $ 35,587
Accounts Payable, Trade 119,673 115,889
Income Taxes 9,744 10,870
Accrued Payrolls 18,827 16,718
Accrued Expenses and Other Current Liabilities 80,823 78,244
-------- --------
Total Current Liabilities $263,021 $257,308
Long-Term Debt 105,043 104,910
ESOP Loan Guarantee 24,622 30,470
Deferred Income Taxes 21,920 21,380
Postretirement Liabilities 45,113 43,570
Other Liabilities 32,547 36,160
Shareholders' Equity 385,818 382,150
-------- --------
$878,084 $875,948
======== ========
</TABLE>
<PAGE> 3
CONSOLIDATED STATEMENTS OF INCOME
FERRO CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
(Dollars in Thousands) 1996 1995 1996 1995
================================================================================ ===============================
<S> <C> <C> <C> <C>
Segment Sales
Coatings, Colors, and Ceramics $ 188,921 $ 185,435 $ 581,145 $ 589,565
Plastics 57,044 61,403 182,531 208,225
Chemicals 83,247 64,003 258,435 190,009
------------ ------------ ------------ ------------
Total Net Sales $ 329,212 $ 310,841 $ 1,022,111 $ 987,799
Cost of Sales 250,497 240,853 773,630 748,779
Selling, Administrative and General Expenses 54,170 51,251 170,717 167,869
------------ ------------ ------------ ------------
Operating Income 24,545 18,737 77,764 71,151
Interest Expense 3,447 4,676 9,861 11,343
Net Foreign Currency (Gain) Loss (208) (321) (555) 90
Other Expense (Income) - Net 218 (1,258) 2,875 (1,425)
------------ ------------ ------------ ------------
Income Before Taxes 21,088 15,640 65,583 61,143
Taxes on Income 7,861 5,815 24,890 23,564
------------ ------------ ------------ ------------
Net Income 13,227 9,825 40,693 37,579
Dividend on Preferred Stock, Net of Tax 937 919 2,799 2,743
------------ ------------ ------------ ------------
Net Income Available to Common Shareholders $ 12,290 $ 8,906 $ 37,894 $ 34,836
============ ============ ============ ============
Per Common Share Data:
Primary Earnings $ 0.46 $ 0.32 $ 1.42 $ 1.24
Fully Diluted Earnings $ 0.44 $ 0.31 $ 1.35 $ 1.19
Shares Outstanding:
Average Outstanding 26,442,282 27,913,904 26,711,778 27,995,032
Average Fully Diluted 28,805,666 30,323,976 29,124,651 30,428,405
Actual End of Period 26,069,470 27,344,105 26,069,470 27,344,105
================================================================================ =================================
</TABLE>
<PAGE> 4
CONSOLIDATED STATEMENTS OF CASH FLOWS
FERRO CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
(Dollars in Thousands) 1996 1995 1996 1995
================================================================================================= ============================
<S> <C> <C> <C> <C>
Net Cash Provided from Operating Activities $40,072 $34,602 $83,418 $72,958
Cash Flow from Investing Activities:
Investment in Marketable Securities 0 25,004 0 (24,980)
Capital Expenditures for Plant and Equipment (11,420) (11,402) (35,746) (37,244)
Acquisition of Companies, net of cash acquired 0 0 (6,800) 0
Proceeds From Divestitures (465) 1,569 2,191 2,497
Transactions With Affiliated Companies 59 1833 830 1833
Change in Restricted Deposits 0 4,800 0 4,365
Other Investing Activities (67) 260 306 1,800
- ------------------------------------------------------------------------------------------------- ----------------------------
Net Cash (Used for) Provided by Investing Activities (11,893) 22,064 (39,219) (51,729)
Cash Flow from Financing Activities:
Net Borrowings (Payments) Under Short-Term Lines 190 (3,716) 314 4,810
Proceeds from Long-Term Debt 0 0 1,615 49,322
Purchase of Treasury Stock (12,553) (13,278) (26,687) (14,114)
Cash Dividend Paid (5,177) (4,858) (14,619) (14,643)
Other Financing Activities 85 205 359 83
- ------------------------------------------------------------------------------------------------- ----------------------------
Net Cash (Used for) Provided by Financing Activities (17,455) (21,647) (39,018) 25,458
Effect of Exchange Rate Changes on Cash 370 (451) 351 (664)
- ------------------------------------------------------------------------------------------------- ----------------------------
Increase in Cash and Cash Equivalents 11,094 34,568 5,532 46,023
Cash and Cash Equivalents at Beginning of Period 11,133 31,277 16,695 19,822
- ------------------------------------------------------------------------------------------------- ----------------------------
Cash and Cash Equivalents at End of Period $22,227 $65,845 $22,227 $65,845
================================================================================================= ============================
Cash Paid During the Period for:
Interest $1,178 $1,901 $7,539 $8,095
Income Taxes $8,506 $10,170 $25,385 $24,492
================================================================================================= ============================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000035214
<NAME> FERRO CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 22,227
<SECURITIES> 0
<RECEIVABLES> 235,546
<ALLOWANCES> 0
<INVENTORY> 146,548
<CURRENT-ASSETS> 437,200
<PP&E> 672,615
<DEPRECIATION> 370,060
<TOTAL-ASSETS> 878,084
<CURRENT-LIABILITIES> 263,021
<BONDS> 105,043
<COMMON> 31,549
0
0
<OTHER-SE> 354,269
<TOTAL-LIABILITY-AND-EQUITY> 878,084
<SALES> 1,022,111
<TOTAL-REVENUES> 1,022,111
<CGS> 773,630
<TOTAL-COSTS> 944,347
<OTHER-EXPENSES> 12,181
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,861
<INCOME-PRETAX> 65,583
<INCOME-TAX> 24,890
<INCOME-CONTINUING> 40,693
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,693
<EPS-PRIMARY> 1.42
<EPS-DILUTED> 1.35
</TABLE>
