<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.
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[ x ]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _________ To _________
Commission File Number 1-584
------------------------------------
FERRO CORPORATION
(Exact Name of Registrant as specified in its charter)
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 1997, there were 25,175,285 shares of Ferro common stock, par
value $1.00, outstanding.
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PART I - FINANCIAL INFORMATION
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ITEM 1 - FINANCIAL STATEMENTS
The Consolidated Balance Sheets as of September 30, 1997 (unaudited) and
December 31, 1996, and the Consolidated Statements of Income and Consolidated
Statements of Cash Flows for the three and nine months ended September 30, 1997
(unaudited) and 1996 (unaudited) of Ferro Corporation and subsidiaries are set
forth in Exhibit 99 which is incorporated herein by reference.
Those consolidated interim financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's annual report for the fiscal year ended December 31, 1996. 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 have been made.
The results for the three months ended September 30, 1997 are not necessarily
indicative of the results expected in subsequent quarters.
Cash dividends were paid at the rate of $0.155 in the third quarter of 1997 and
1996. Cash dividends on preferred shares were paid at the rate of $0.81 per
preferred share in the third quarter of 1997 and 1996.
Net sales and net income for the three months ended September 30, 1997 were
$339.0 million and $15.4 million ($0.53 fully diluted earnings per common share)
as compared with net sales and net income of $329.2 million and $13.2 million
($0.44 fully diluted earnings per common share) for the corresponding 1996
period.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Comparison Between Three Months Ended September 30, 1997 and 1996.
- ------------------------------------------------------------------
Net Sales. Third quarter 1997 net sales of $339.0 million were 3.0% greater than
the $329.2 million of the comparable 1996 period.
Sales increased 5% in both Coatings, Colors and Ceramics and Plastics but
declined 3% in the Chemicals segment. Coatings, Colors and Ceramics sales
improved primarily because volume increases more than offset the negative effect
of currency. In particular, continued improvement in the powder coatings
business and the ceramic glaze and color business contributed to the Coatings,
Colors and Ceramics improvement. Plastics sales increased mainly due to strong
demand for durable goods in the both the United States and Europe. The decline
in Chemicals sales is largely the result of a late 1996 divestiture.
Geographically, consolidated sales were up in the United States and Canada and
in Latin America, but essentially flat in Europe and Asia-
2
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Pacific. Sales volume increased in all regions but in Europe and Asia-Pacific
the relative strength of the United States dollar negatively impacted sales for
the quarter.
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 estimates that the 3.0%
increase in sales is comprised of the following: currency, -4.6%; volume, 9.1%;
price/mix, -1.8%; acquisitions 1.5% and divestitures -1.2%.
Cost of Sales. Gross profit as a percent of sales was 25.6% as compared with
23.9% for the comparable 1996 period. Improvement in gross margins were evident
in each segment and in each geographic region. Significant volume increases
augmented by manufacturing efficiencies and controlled spending levels were the
main reasons for improvement.
Selling, administrative and general expenses. Such expenses as a percentage of
sales were 17.2% in the third quarter of 1997 and 16.5% in the 1996 period. The
increase was primarily driven by an additional provision for incentive bonuses
made in the 1997 quarter.
Interest expense. The decrease in interest expense from $3.4 million to $3.0
million is primarily attributable to lower interest recorded by various
international subsidiaries.
Net foreign currency gain or loss. The net foreign currency loss of $0.2 million
compares to a gain of $0.2 million in the third quarter of 1996.
Other income/expense. Net other expense was $1.0 million as compared with net
other income of $0.2 million in the prior year's quarter, comprised of numerous
income and expense items.
Income taxes. The effective tax rate declined to 36.9% from the comparable 1996
third quarter rate of 37.3%, reflecting worldwide tax planning and utilization
of tax loss carryforwards in various subsidiaries.
Geographic discussion. Consolidated sales increased in the United States and
Canada and in Latin America, but remained essentially flat in Europe and
Asia-Pacific. Operating profit increased in all regions. Chemicals was the
biggest contributor to improved operating profit, especially in the United
States. Performance also was driven by improvements in ceramic glaze and color
in Europe and improvement in the Powder Coatings business in the United States
and Europe. Strong demand in the United States for all businesses helped
operating profits in the quarter.
Comparison Between Nine Months Ended September 30, 1997 and 1996.
- -----------------------------------------------------------------
Net Sales. Consolidated net sales for the nine months ended September 30, 1997
were $1.04 billion, 2.2% greater than the comparable 1996 period. Coatings,
Colors and Ceramics sales increased 5.5% with improvements evident in all
regions, except Europe which remained flat. Chemical sales decreased 2.9%,
impacted by a late 1996
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divestiture and the impact of the strong United States dollar on international
sales. The 1.3% decline in Plastics sales is primarily associated with 1996
divestitures and negative translation effects outweighing volume improvements.
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 estimates that the 2.2%
increase in sales is comprised of the following: currency, -3.6%; volume, 7.5%;
price/mix, -1.2%; acquisitions 1.3% and divestitures -1.8%.
Cost of Sales. Gross profit as a percent of sales was 25.5% as compared with
24.3% for the comparable 1996 period. Improvements in gross margins were evident
in each segment and in each geographic region except Latin America. Significant
volume increases augmented by manufacturing efficiencies and controlled spending
levels were the main reasons for improvement.
Selling, administrative and general expenses. Such expenses as a percent of
sales remained stable at 16.7% in 1996 and 16.9% in 1997.
Realignment Expense. During the second quarter, the Company announced a major
three-year realignment plan that calls for consolidation of worldwide
manufacturing operations from approximately 80 to 50 facilities. As a result of
the plan, the Company took a charge to earnings of approximately $153 million.
Interest expense. The decrease in interest expense from $9.9 million to $9.0 is
primarily attributable to lower interest recorded by various international
subsidiaries.
Net foreign currency gain or loss. The increase in net foreign currency gain is
primarily attributable to unrealized currency gains on foreign currency option
contracts purchased by the parent company to hedge the earnings of some foreign
subsidiaries.
Other income/expense. Net other expense was $3.8 million as compared with net
other expense of $2.9 million in the prior year period, comprised of numerous
income and expense items.
Income taxes. Excluding the impact of the realignment charge, the effective tax
rate declined from 38.0% to 37.6% reflecting worldwide tax planning and
utilization of tax loss carryforwards in various subsidiaries.
Geographic discussion. Sales increased in all regions except Europe which
remained flat, as currency offset volume increases. Operating profit was up in
all regions. The United States was the biggest contributor to the improved
results, particularly the Chemicals business. Performance also was driven by
improvements in Ceramic Glaze and Color in Europe and improvement in the Powder
Coatings business in the United States and Europe.
4
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Liquidity and Capital Resources
- -------------------------------
Working capital. Net working capital was comparable to that at December 31,
1996.
Cash flow. Net cash provided from operating activities for the nine months ended
September 30, 1997 was $102.7 million which compares favorably with the $83.4
million for the 1996 period. Excluding the effect of the second quarter 1997
realignment charge, the increase in cash is primarily due to a combination of
higher earnings and a reduction in the level of inventories. The increase in Net
Cash used for Financing Activities is primarily due to the repayment of
short-term borrowings.
Financing requirements and resources. The long-term debt to equity ratio was
36.2% at September 30, 1997, excluding the loan guarantee of the Employee Stock
Ownership Plan adopted in April 1989. This compares to the 27.4% ratio at
December 31, 1996. 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 in October of 1995, under which various
types of debt or equity securities may be issued.
OTHER SIGNIFICANT DEVELOPMENTS
On October 24, the Board of Directors approved a 3-for-2 stock split and an
increase in the Company's quarterly common stock dividend. Certificates for the
additional shares are expected to be mailed December 1, 1997 to shareholders of
record November 14, 1997. Ferro will make cash payments for fractional shares
resulting from the split based upon the average of the high and low sales price
of the common stock on the record date as adjusted for the split. The dividend
action increases the quarterly cash dividend to $0.12 per share on an
after-split basis. The dividend will be payable December 10, 1997 to
shareholders of record November 14, 1997. The pre-split equivalent would have
been an increase in the quarterly cash dividend from $0.155 to $0.18 per share.
FORWARD LOOKING STATEMENTS
Certain statements contained in this report reflect the Company's current
expectations with respect to the future performance of the Company and may
constitute "forward-looking statements" within the meaning of the federal
securities laws. These statements are subject to a variety of uncertainties,
unknown risks and other factors concerning the Company's operations and business
environment, including, but not limited to: changes in customer requirements,
markets or industries served; changing economic conditions, particularly in
Europe or Latin America; foreign exchange rates; changes in the prices of major
raw materials, in particular polypropylene and titanium dioxide; and significant
technological or competitive developments.
5
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PART II - OTHER INFORMATION
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ITEM 1 LEGAL PROCEEDINGS. NO CHANGE.
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.
The Company has not filed any reports on Form 8-K for the
quarter ended September 30, 1997.
Exhibits 3 (a) (b) and (c) referenced in Ferro Corporation's
Form 10-K for year ended December 31, 1996 are incorporated
herein by reference.
Exhibits 4(a) through 4(j) referenced in Ferro Corporation's
Form 10-K for the year ended December 31, 1996 are
incorporated herein by reference.
Exhibit 11 - Statement Regarding Computation of Earnings Per Share.
Exhibit 27 - Financial Data Schedule (Electronic Filing Only)
Exhibit 99 - The Consolidated Balance Sheets as of
September 30, 1997 (Unaudited) and December 31,
1996 of Ferro Corporation and Subsidiaries.
-The Consolidated Statements of Income for the
three and nine months ended September 30, 1997
(unaudited) and 1996 (unaudited) of Ferro
Corporation and Subsidiaries.
-The Consolidated Statements of Cash Flows for
the three and nine months ended September 30,
1997 (unaudited) and 1996 (unaudited) of Ferro
Corporation and Subsidiaries.
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, 1997
/s/ Hector R. Ortino
------------------------------
Hector R. Ortino
President and
Chief Operating Officer
Date: November 13, 1997
/s/ Gary H. Ritondaro
------------------------------
Gary H. Ritondaro
Vice President and
Chief Financial Officer
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EXHIBIT 11
FERRO CORPORATION AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Nine Months Ended
(Dollars in Thousands) September 30
1997 1996
---- ----
PRIMARY:
<S> <C> <C>
Weighted average shares and common stock equivalents 25,995,024 26,711,778
Net Income (Loss) ($ 53,388) $ 40,693
Less Preferred Stock Dividend, Net of Tax (2,817) (2,799)
------------ ------------
Income (Loss) Available to Common Shareholders ($ 56,205) $ 37,894
PRIMARY EARNINGS (LOSS) PER COMMON SHARE ($ 2.16) $ 1.42
FULLY DILUTED:
Weighted average shares and common stock equivalents 25,995,024 26,711,778
Adjustments (primarily assumed conversion of
convertible preferred stock) 2,330,477 2,412,873
------------ ------------
28,325,501 29,124,651
Net Income (Loss) ($ 53,388) $ 40,693
Additional ESOP Contribution, Net of Tax (1,388) (1,432)
------------ ------------
Adjusted Net Income (Loss) ($ 54,776) $ 39,261
FULLY DILUTED EARNINGS (LOSS) PER SHARE ($ 1.93) $ 1.35
</TABLE>
Note: Due to the anti-dilutive effect of the net loss in 1997,
Primary Earnings Per Share is reported for both Primary and
Fully Diluted Earnings Per Share.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000035214
<NAME> FERRO CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 41,705
<SECURITIES> 0
<RECEIVABLES> 246,709
<ALLOWANCES> 0
<INVENTORY> 120,961
<CURRENT-ASSETS> 454,823
<PP&E> 595,471
<DEPRECIATION> 354,869
<TOTAL-ASSETS> 809,124
<CURRENT-LIABILITIES> 285,226
<BONDS> 103,417
0
0
<COMMON> 31,549
<OTHER-SE> 254,210
<TOTAL-LIABILITY-AND-EQUITY> 809,124
<SALES> 1,044,199
<TOTAL-REVENUES> 1,044,199
<CGS> 778,113
<TOTAL-COSTS> 954,506
<OTHER-EXPENSES> 163,519
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,021
<INCOME-PRETAX> (73,826)
<INCOME-TAX> (20,438)
<INCOME-CONTINUING> (53,388)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (53,388)
<EPS-PRIMARY> (2.16)
<EPS-DILUTED> (1.93)
</TABLE>
<PAGE> 1
EXHIBIT 99
FERRO CORPORATION
Consolidated Balance Sheets
As of September 30, 1997 (unaudited) and December 31, 1996
Consolidated Statements of Income
For the Three and Nine Months Ended
September 30, 1997 (unaudited) and 1996 (unaudited)
Consolidated Statements of Cash Flows
For the Three and Nine Months Ended
September 30, 1997 (unaudited) and 1996 (unaudited)
<PAGE> 2
CONSOLIDATED BALANCE SHEET
FERRO CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
(Dollars in Thousands)
(Unaudited) (Audited)
ASSETS 1997 1996
- ------ -------------- --------
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 41,705 $ 14,026
Net Receivables 246,709 214,131
Inventories 120,961 149,343
Other Current Assets 45,448 39,022
--------- ---------
Total Current Assets $454,823 $416,522
Unamortized Excess of Cost Over Net Assets Acquired 55,369 93,302
Other Assets 58,330 53,261
Net Plant & Equipment 240,602 307,383
--------- ---------
$809,124 $870,468
======== ========
LIABILITIES
- -----------
Current Liabilities:
Notes and Loans Payable $ 30,154 $ 30,200
Accounts Payable, Trade 112,075 113,156
Income Taxes 8,074 10,597
Accrued Payrolls 18,758 16,559
Accrued Expenses and Other Current Liabilities 116,165 81,821
--------- ---------
Total Current Liabilities $285,226 $252,333
Long-Term Debt 103,417 105,308
ESOP Loan Guarantee 16,075 22,592
Postretirement Liabilities 46,520 44,846
Other Liabilities 72,127 61,185
Shareholders' Equity 285,759 384,204
--------- ---------
$809,124 $870,468
======== ========
</TABLE>
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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, except per share data) 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Segment Sales
Coatings, Colors, and Ceramics $ 198,775 $ 188,921 $ 613,168 $ 581,145
Plastics 59,650 57,044 180,142 182,531
Chemicals 80,532 83,247 250,889 258,435
------------ ------------ ------------ ------------
Total Net Sales $ 338,957 $ 329,212 $ 1,044,199 $ 1,022,111
Cost of Sales 252,179 250,497 778,113 773,630
Selling, Administrative and General Expenses 58,323 54,170 176,393 170,717
Realignment Expense 0 0 152,790 0
Interest Expense 2,951 3,447 9,021 9,861
Net Foreign Currency (Gain) Loss 161 (208) (2,139) (555)
Other Expense - Net 989 218 3,847 2,875
------------ ------------ ------------ ------------
Income Before Taxes 24,354 21,088 (73,826) 65,583
Income Tax Expense (Benefit) 8,990 7,861 (20,438) 24,890
------------ ------------ ------------ ------------
Net Income (Loss) 15,364 13,227 (53,388) 40,693
Dividend on Preferred Stock, Net of Tax 936 937 2,817 2,799
------------ ------------ ------------ ------------
Net Income (Loss) Available to Common Shareholders $ 14,428 $ 12,290 ($ 56,205) $ 37,894
============ ============ ============ ============
Per Common Share Data:
Primary Earnings (Loss) $ 0.55 $ 0.46 ($ 2.16) $ 1.42
Fully Diluted Earnings (Loss) $ 0.53 $ 0.44 ($ 2.16) $ 1.35
Shares Outstanding:
Average Outstanding 25,998,451 26,442,282 25,995,024 26,711,778
Average Fully Diluted 28,271,606 28,805,666 28,325,501 29,124,651
Actual End of Period 25,440,404 26,069,470 25,440,404 26,069,470
</TABLE>
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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) 1997 1996 1997 1996
===================================================================================================================================
<S> <C> <C> <C> <C>
Net Cash Provided from Operating Activities $ 40,203 $ 40,072 $ 102,711 $ 83,418
Cash Flow from Investing Activities:
Capital Expenditures for Plant and Equipment (9,680) (11,420) (30,376) (35,746)
Acquisition of Companies, net of cash acquired 0 0 0 (6,800)
Proceeds From Divestitures 4,623 0 4,623 2,191
Other Investing Activities 1 (473) 3,276 1,136
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash (Used for) Investing Activities (5,056) (11,893) (22,477) (39,219)
Cash Flow from Financing Activities:
Net Borrowings (Payments) Under Short-Term Lines (504) 190 (18,403) 314
Purchase of Treasury Stock (10,660) (12,553) (20,374) (26,687)
Cash Dividend Paid (4,992) (5,177) (15,084) (14,619)
Other Financing Activities 707 85 2,786 1,974
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash (Used for) Financing Activities (15,449) (17,455) (51,075) (39,018)
Effect of Exchange Rate Changes on Cash (195) 370 (1,480) 351
- -----------------------------------------------------------------------------------------------------------------------------------
Increase in Cash and Cash Equivalents 19,503 11,094 27,679 5,532
Cash and Cash Equivalents at Beginning of Period 22,202 11,133 14,026 16,695
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 41,705 $ 22,227 $ 41,705 $ 22,227
===================================================================================================================================
Cash Paid During the Period for:
Interest, net of amounts capitalized $ 920 $ 1,178 $ 7,466 $ 7,539
Income Taxes $ 9,135 $ 8,506 $ 23,623 $ 25,385
===================================================================================================================================
</TABLE>
