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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
----------------------------
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1999
[ ] 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 July 31, 1999, there were 35,388,385 shares of Ferro common stock, par value
$1.00, outstanding.
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FERRO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
(Dollars in Thousands, Except Per Share Data) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------ ---------------------------------------
<S> <C> <C> <C> <C>
Segment Sales
Coatings, Colors, and Ceramics $195,987 $208,490 $395,181 $407,821
Chemicals 74,742 77,600 146,215 157,183
Plastics 66,306 61,914 127,120 122,763
------------------ ------------------ ------------------ ------------------
Total Net Sales $337,035 $348,004 $668,516 $687,767
Cost of Sales 240,576 255,453 479,841 505,075
Selling, Administrative and General Expenses 61,020 59,086 120,764 118,461
Other Charges (Credits):
Interest Expense 4,037 3,833 7,955 6,939
Net Foreign Currency Gain (241) (439) (410) (1,119)
Other Expense - Net 1,214 947 2,572 1,970
------------------ ------------------ ------------------ ------------------
Income Before Taxes 30,429 29,124 57,794 56,441
Income Tax Expense 11,255 10,722 21,519 20,984
------------------ ------------------ ------------------ ------------------
Net Income 19,174 18,402 36,275 35,457
Dividend on Preferred Stock, Net of Tax 939 948 1,891 1,892
------------------ ------------------ ------------------ ------------------
Net Income Available to Common Shareholders $18,235 $17,454 $34,384 $33,565
================== ================== ================== ==================
Per Common Share Data:
Basic Earnings $0.52 $0.47 $0.98 $0.90
Diluted Earnings $0.48 $0.44 $0.91 $0.83
Shares Outstanding:
Average Outstanding 35,232,350 36,955,301 35,121,772 37,171,745
Average Diluted 39,205,285 41,186,318 38,912,375 41,489,182
Actual End of Period 35,387,053 36,596,683 35,387,053 36,596,683
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements
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FERRO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
(Dollars in Thousands)
(Unaudited) (Audited)
ASSETS 1999 1998
- ------ ---------------- ----------------
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $9,005 $12,185
Net Receivables 259,367 249,771
Inventories 136,897 140,970
Other Current Assets 53,750 53,967
---------------- ----------------
Total Current Assets $459,019 $456,893
Unamortized Excess of Cost Over Net Assets Acquired 67,952 50,617
Other Assets 61,124 67,603
Net Plant & Equipment 297,795 274,052
---------------- ----------------
$885,890 $849,165
================ ================
LIABILITIES AND SHAREHOLDERS EQUITY
- -----------------------------------
Current Liabilities:
Notes and Loans Payable $55,225 $30,987
Accounts Payable, Trade 128,499 105,932
Income Taxes 12,632 4,006
Accrued Payrolls 20,661 19,762
Accrued Expenses and Other Current Liabilities 110,410 121,869
---------------- ----------------
Total Current Liabilities $327,427 $282,556
Long - Term Debt 157,722 156,283
ESOP Loan Guarantee - 4,067
Postretirement Liabilities 45,703 45,426
Other Liabilities 73,519 77,572
Shareholders' Equity 281,519 283,261
---------------- ----------------
$885,890 $849,165
================ ================
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements
<PAGE> 4
FERRO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30
(Unaudited) (Unaudited)
(Dollars in Thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Cash Provided from Operating Activities $73,187 $28,511
Cash Flow from Investing Activities:
Capital Expenditures for Plant and Equipment (48,233) (23,799)
Acquisition of Companies, net of cash acquired (37,443) --
Other Investing Activities (62) (1,524)
- -------------------------------------------------------------------------------------------------------------------
Net Cash Used for Investing Activities (85,738) (25,323)
Cash Flow from Financing Activities:
Net Borrowings Under-Short-Term Credit Facility 24,239 2,122
Proceeds from Issuance of Long-Term Debt 1,944 54,270
Purchase of Treasury Stock (9,850) (30,696)
Cash Dividend Paid (11,394) (11,001)
Other Financing Activities 4,612 2,739
- -------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 9,551 17,434
Effect of Exchange Rate Changes on Cash (180) (943)
- -------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents (3,180) 19,679
Cash and Cash Equivalents at Beginning of Period 12,185 16,337
- -------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $9,005 $36,016
- -------------------------------------------------------------------------------------------------------------------
Cash Paid During the Period for:
Interest, net of amounts capitalized $3,682 $5,894
Income Taxes $11,212 $20,856
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements
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FERRO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The condensed consolidated interim financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's annual report on Form 10-K for the fiscal year
ended December 31, 1998. The information furnished herein reflects all
adjustments (consisting solely of normal recurring adjustments) which are,
in the opinion of management, necessary for fair presentation of the
results for the interim periods. The results of the three and six months
ended June 30, 1999 are not necessarily indicative of the results expected
in subsequent quarters or for the full year.
2. Comprehensive Income
Comprehensive income represents net income adjusted for foreign currency
translation adjustments and pension liability adjustments. Comprehensive
income was $12.1 million and $22.9 million for the three months ended June
30, 1999 and 1998, respectively and $10.1 million and $35.6 million for the
six months ended June 30, 1999 and 1998, respectively. Accumulated other
comprehensive income (loss) at June 30, 1999 and December 31, 1998 was
($71.1) million and ($44.9) million, respectively.
3. Contingent Liabilities
The Company is party to judicial and administrative proceedings relating to
emissions from its plant in Hammond, Indiana. In these proceedings, the
State of Indiana and the United States Environmental Protection Agency
(U.S. EPA) are seeking to impose fines and possibly to alter or terminate
the Company's right to produce Pyro-Chek(R) at the Hammond plant (see the
description in Part II Item 1). The Company is vigorously contesting these
claims and evaluating alternatives for mitigating the impact should the
Company not prevail. If the State of Indiana or U.S. EPA were to prevail on
all of their claims, it could have a material adverse effect on the
Company.
At the prompting of several residents near Hammond, Indiana, U.S.
Congressional Representative Visclosky has requested the U. S. Department
of Health's Agency for Toxic Substances and Disease Registry (ATSDR) to
investigate a possible "cluster" of pediatric cancers of the central
nervous system found in the Hammond area and to assess whether operations
of the Company's Hammond facility pose an unreasonable risk to health or
the environment. The Company has had an initial meeting with
representatives of the ATSDR, and intends to cooperate with all reasonable
requests in connection with the evaluations.
There are also pending against the Company and its consolidated
subsidiaries various other lawsuits and claims. In the opinion of
management, the ultimate liabilities resulting from such other lawsuits and
claims will not materially affect the consolidated financial position or
results of operations or liquidity of the Company.
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4. Reporting for Segments
The Company's reportable segments are Coatings, Chemicals and Plastics.
Coatings products include ceramic glaze coatings, inorganic color, powder
and porcelain enamel coatings and electronic materials. Chemicals consists
of polymer additives, petroleum additives, flame retardants, and
performance and fine chemicals. The Plastics segment derives its revenues
mostly from plastic colorants and filled and reinforced plastics. The
Company measures segment profit for internal reporting purposes as net
operating profit before interest and tax. Excluded from net operating
profit are certain unallocated corporate expenses. A complete
reconciliation of segment income to consolidated income before tax is
presented below.
Sales to external customers are presented in the following chart.
Intersegment sales are not material.
Three Months Ended Six Months Ended
June 30 June 30
(Dollars in Thousands) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
NET SALES 1999 1998 1999 1998
- --------- ---- ---- ---- ----
Coatings $195,987 $208,490 $395,181 $407,821
Chemicals 74,742 77,600 146,215 157,183
Plastics 66,306 61,914 127,120 122,763
- --------------------------------------------------------------------
Total $337,035 $348,004 $668,516 $687,767
- --------------------------------------------------------------------
Income and reconciliation to income before taxes follows:
Three Months Ended Six Months Ended
June 30 June 30
(Dollars in Thousands) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
SEGMENT INCOME 1999 1998 1999 1998
- -------------- ---- ---- ---- ----
Coatings $ 22,764 $ 22,425 $ 46,310 $ 43,041
Chemicals 8,628 9,166 17,066 18,212
Plastics 7,846 6,118 13,873 11,274
- ---------------------------------------------------------------------------
Total $ 39,238 $ 37,709 $ 77,249 $ 72,527
- ---------------------------------------------------------------------------
Unallocated Expenses 3,799 4,244 9,338 8,296
Interest Expense 4,037 3,833 7,955 6,939
Foreign Currency Gain (241) (439) (410) (1,119)
Other Expense - Net 1,214 947 2,572 1,970
- ---------------------------------------------------------------------------
Income Before Taxes 30,429 29,124 57,794 56,441
===========================================================================
Unallocated expenses consist primarily of corporate costs.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Comparison of the Three Months Ended June 30, 1999 and 1998.
- ------------------------------------------------------------
Second quarter 1999 net sales of $337.0 million were 3.2% less than the $348.0
million of the comparable 1998 period. Sales declined 6.0% in the Coatings
segment and 3.7% in the Chemicals segment. Plastics' sales increased 7.1%.
The decline in sales was attributable to lower selling prices in many of the
Company's businesses in correlation with lower raw material prices. Currency
translation also contributed to lower sales, as currencies in Europe and Latin
America were weaker than the second quarter of 1998. Sales volumes increased
slightly and acquisitions added $6.2 million to sales in the quarter.
Gross margin grew to 28.6% of sales as compared to 26.6% for the comparable 1998
period. The improvement in margins was driven by lower raw material costs, a
shift in the mix of products sold towards higher margin products and improved
manufacturing efficiencies.
Selling, administrative and general expenses increased by 3.3% compared to the
same quarter in 1998, primarily as a result of acquisitions made within the past
year.
Net income for the quarter climbed to $19.2 million, a quarterly earnings
record, compared to $18.4 million for the second quarter of 1998. Earnings of
$0.48 (diluted) per share, increased 9.1% compared to the $0.44 earned in the
1998 second quarter, constituting an all-time quarterly record.
COATINGS
Second quarter sales for the Coatings segment fell 6.0% to $196.0 million
compared to the 1998 second quarter sales of $208.5 million. Negative currency
translation, lower selling prices and softness in the European and Latin
American economies, all played a role in the decline. The Coatings segment has
the most international sales of any segment within the Company. Therefore,
weaker foreign currencies had a major impact in reducing the dollar value of
sales. In addition, selling prices declined in correlation with a drop in prices
for key raw materials in certain businesses. Segment income increased slightly
to $22.8 million from $22.4 million recorded in the 1998 second quarter, driven
by strong gross margin improvement. Lower raw material prices and increased
sales of higher margin products, including several new product introductions in
the ceramic tile business, offset the impact of the sales decline on profits.
CHEMICALS
Chemicals' sales were $74.7 million, down 3.7% from sales of $77.6 million in
the second quarter of 1998. The primary reason for the decline was continued
weakness in the petroleum additives market that has negatively impacted results
since the second quarter of 1998. Segment income declined 5.9% to $8.6 million
compared to $9.2 million in the second quarter of 1998. Segment income closely
tracked the drop in sales, as strong performance by the polymer additives
business unit was not enough to offset the weakness in petroleum additives.
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PLASTICS
The Plastics segment recorded sales of $66.3 million, an increase of 7.1% over
second quarter 1998 sales of $61.9 million. Sales improvement included a strong
contribution from the Advanced Polymer Compounding (APC) acquisition, which was
completed in March 1999, and increased volumes in the Company's existing
Plastics businesses. Segment income rose 28.2% to $7.8 million, a quarterly
record for the segment, compared to $6.1 million in the second quarter of 1998.
The increase in segment income was attributable to profit contribution from APC,
a higher volume of value-added products, such as glass-filled polypropylene
compounds, continued productivity improvements and lower raw material costs. The
ongoing industry trend to replace more costly materials with the products of the
filled and reinforced plastics business unit is driving sales growth for this
segment.
GEOGRAPHIC SALES
Sales in the United States were $187.2 million for the three months ended June
30, 1999 compared to $189.1 million for the three months ended June 30, 1998.
International sales were $149.8 million for the three months ended June 30,
1999, compared to $158.9 million in the three months ended June 30, 1998. The
decline in international sales is primarily due to negative foreign currency
translation, lower prices influenced by declining raw material prices and
weakness in the economies of Europe and Latin America.
Comparison of the Six Months Ended June 30, 1999 and 1998.
- ----------------------------------------------------------
For the six months ended June 30, 1999 net sales of $668.5 million were 2.8%
less than the $687.8 million of the comparable 1998 period. Sales declined 3.1%
in the Coatings segment and 7.0% in the Chemicals segment. Plastics' sales
increased 3.5%.
The decline in sales was attributable to lower selling prices in many of the
Company's businesses, affected by lower costs for raw materials. The
strengthening of the United States dollar against foreign currencies also
contributed to lower sales, in particular, currencies in Europe and Latin
America were substantially weaker than the 1998 period. Divestitures also had
some impact in reducing sales. Partially offsetting those factors were a slight
increase in sales volumes and the addition of $11.0 million to sales through
acquisitions in the 1999 period.
Gross margin as a percent of sales was 28.2% as compared to 26.6% for the
comparable 1998 period. This improvement was driven by lower raw material costs,
a shift in the mix of products sold toward higher margin products and improved
manufacturing efficiencies that have resulted from continuous productivity
improvement initiatives throughout the Company.
Selling, administrative and general expenses increased by 1.9% versus the first
half of 1998 due to acquisitions made within the past year.
Interest expense increased to $8.0 million compared to $6.9 million in the first
half of 1998. The increase in interest expense is primarily attributable to a
higher level of short-term domestic borrowing associated with the acquisition of
APC.
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Net income for the six months ended June 30, 1999 reached $36.3 million, up 2.3%
from the $35.5 million recorded in the first half of 1998. Earnings rose to
$0.91 (diluted) per share, up 9.6% from the $0.83 for the 1998 first half.
COATINGS
For the first six months of 1999, sales in the Coatings segment fell 3.1% to
$395.2 million compared to sales of $407.8 million in the 1998 period. Lower
selling prices and negative foreign currency translation both had a negative
impact on sales. Selling prices declined in correlation with a drop in prices
for key raw materials in certain businesses. Segment income increased 7.6% to
$46.3 million from $43.0 million recorded in the first six months of 1998. Lower
raw material prices, increased sales of higher margin products and continuing
manufacturing efficiencies all played a role in offsetting the impact of the
sales decline on profits.
CHEMICALS
Chemicals' sales were $146.2 million down 7.0 % from sales of $157.2 million for
the six months ended June 30, 1998. The primary reasons for the decline include
continued weakness in the petroleum additives market that has impacted results
since the second quarter of 1998 and reduced selling prices in correlation with
declines in key raw material costs. Segment income declined 6.3% to $17.1
million compared to $18.2 million in the first half of 1998. The decline in
segment income was driven by reduced sales as margins held fairly stable.
PLASTICS
The Plastics segment recorded sales of $127.1 million, an increase of 3.5%
compared to sales of $122.8 million for the six months ended June 30, 1999.
Sales improvement was most notable in the second quarter and included a strong
contribution from the APC acquisition, which was completed in March 1999. The
segment experienced increased volumes in the Company's existing Plastics
businesses, which were offset by price declines in correlation with lower raw
material costs. Segment income, increased by 23.1% to $13.9 million compared to
segment income of $11.3 million for the same period in 1998. The segment income
improvement was attributable to the profit contribution from APC, a higher
volume of value-added products, continued productivity improvements and lower
raw material costs.
GEOGRAPHIC SALES
Sales in the United States were $369.5 million for the six months ended June 30,
1999 compared to $379.7 million for the six months ended June 30, 1998. United
States sales were primarily impacted by lower selling prices, which correlated
with a decline in raw material prices, and divestitures. International sales
were $299.0 million for the six months ended June 30, 1999, compared to $308.1
million in the six months ended June 30, 1998. Lower selling prices driven by
lower raw material costs were the primary reason for the decline. Additionally,
foreign currency translation and divestitures had a negative impact on sales.
Liquidity and Capital Resources
- -------------------------------
Net cash provided from operating activities for the six months ended
June 30, 1999, was $73.2 million compared to the $28.5 million recorded in the
first half of 1998. The improvement in operating cash flows in 1999 is primarily
due to a net working capital reduction
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in the first half of 1999 compared to a net working capital increase in the 1998
period. The increase in net cash used for investing activities, for the first
half of 1999, is associated with a higher level of capital expenditures for
plant and equipment and acquisitions. The change in net cash from financing
activities is driven by changes in both short- and long-term borrowings and a
lower level of cash used to repurchase common stock.
The Company's liquidity requirements include capital investments, working
capital requirements, acquisitions, and to a lesser extent, interest expense.
The Company expects to be able to meet its working capital requirements and
capital investment needs from cash and cash equivalents, cash flow from
operations and, if necessary, use of its revolving credit facility or long-term
borrowings. The Company has available to it a $150.0 million five-year revolving
credit facility with four domestic banks. The Company had borrowed $35.0 million
under this facility as of June 30, 1999. The Company is actively pursuing its
acquisition strategy and may, from time to time, use its existing revolving
credit facility or alternate financing arrangements, including divestitures, to
fund acquisitions. The Company also has $245.0 million of availability under a
universal shelf registration pursuant to which various types of public
securities may be issued.
Environmental
- -------------
The Company is party to judicial and administrative proceedings relating to
emissions from its plant in Hammond, Indiana. In these proceedings, the State of
Indiana and the United States Environmental Protection Agency (U.S. EPA) are
seeking to impose fines and possibly to alter or terminate the Company's right
to produce Pyro-Chek(R) at the Hammond plant. See the description in Part II
Item 1. The Company is vigorously contesting these claims and evaluating
alternatives for mitigating the impact should the Company not prevail. If the
State of Indiana or U.S. EPA were to prevail on all of their claims, it could
have a material adverse effect on the Company.
At the prompting of several residents near Hammond, Indiana, U.S. Congressional
Representative Visclosky has requested the U. S. Department of Health's Agency
for Toxic Substances and Disease Registry (ATSDR) to investigate a possible
"cluster" of pediatric cancers of the central nervous system found in the
Hammond area and to assess whether operations of the Company's Hammond facility
pose an unreasonable risk to health or the environment. The Company has had an
initial meeting with representatives of the ATSDR, and intends to cooperate with
all reasonable requests in connection with the evaluations.
Forward-Looking Statements
- --------------------------
Certain statements contained in this quarterly report on Form 10-Q 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, and actual events or results may differ
materially from the results discussed in the forward-looking statements. Factors
that could cause or contribute to such differences include, but are not limited
to: changes in customer requirements, markets or industries served; changing
economic conditions, particularly in Europe, Asia-Pacific, Latin America and the
United States; foreign exchange rates, especially in
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Europe, Latin America and Asia-Pacific; changes in the prices of major raw
materials; significant technological or competitive developments; the Company's
conversion to a single European currency, the euro; disruption of operations
associated with certain computer-based systems that rely on date routines in
connection with the year 2000; and the impact of environmental proceedings
discussed herein under the heading "Environmental" in Management's Discussion
and Analysis.
Year 2000 Readiness Disclosure
- ------------------------------
Historically, many computer software programs were written to refer to years
only in terms of their final two digits. Such programs may mis-interpret the
year 2000 data to mean the year 1900. The Company is aware of the implications
and issues associated with this problem and could be faced with disruption of
operations and a corresponding impact on the Company's results of operations if
the Year 2000 issues are not resolved in a timely manner.
The Company currently operates multiple computer systems, including hardware and
software, in its global business operations. The Company believes it has
identified the issues that affect its global computer operations and is in the
process of implementing appropriate plans to address this problem. Local area
networks, telephone systems, business systems, financial systems, shop floor
devices, facility operations and end-user computing systems are being assessed
globally. In order to determine fully the readiness of its production and other
equipment with the Year 2000 issues, the Company has substantially completed a
comprehensive inventory of operations systems that it believes may be impacted.
The Company is using multiple strategies to address the Year 2000 issues. New
software is being purchased and installed, current software is being rewritten,
and hardware that is non-Year 2000 compliant is being replaced. The Company has
contracted with a third-party consultant with special expertise in this area to
assist the Company in its Year 2000 compliance program
The Company has completed the conversion or replacement of its major business,
financial, and operating systems that were not Year 2000 compliant. Preliminary
testing has been accomplished but on-going evaluation and testing of critical
systems will be performed throughout the year. In addition, the Company is in
the process of developing contingency plans in the event that these corrective
actions are not implemented in a timely manner as expected. The Company has
established watch teams to develop and coordinate contingency plans to be
implemented at Company sites. Readiness plans are being established to ensure
internal resources are in place from the second half of December 1999 through
the end of January 2000.
Based upon findings to date, the Company's total external costs (historical plus
estimated future costs) are currently estimated to be in the range of $11.0
million to $12.0 million, of which approximately $9.4 million has been incurred
and the majority of which has been capitalized in accordance with Statement of
Position No. 98-1 "Accounting for Costs of Computer Software Developed or
Obtained for Internal Use." The Company does not separately track internal costs
for Year 2000 compliance, which are primarily for payroll and related costs of
information systems personnel.
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The Company is assessing the plans and progress of key suppliers and customers
in addressing the Year 2000 problem. To the extent that these key suppliers and
customers are impacted by their failure to address the Year 2000 problem, such
disruption could have a direct impact on the Company. The Company is exploring a
variety of contingency plans to minimize the impact to the Company of
third-party failures. These plans will focus on availability of raw materials,
energy and other resources critical to maintaining operations.
The Company's expectations outlined above with respect to the Year 2000 are
subject to uncertainties and are forward-looking statements that express the
Company's current expectations or forecasts of future events. The Company
believes that it has identified the Year 2000 issues that affect its global
computer operations. However, if the Company is unsuccessful in identifying or
solving all Year 2000 issues in its critical operations, or if the Company is
materially and adversely affected by the inability of its key suppliers and
customers to identify and solve their Year 2000 issues, the Company's results of
operations or financial condition could be materially impacted.
Furthermore, the total costs that the Company will incur with respect to Year
2000 issues will be influenced by the Company's ability to successfully identify
and solve Year 2000 issues, the extent and complexity of programming required to
fix affected programs, the related labor and consulting costs the Company will
incur and the ability of third parties with whom the Company has business
relationships to successfully identify and solve their own Year 2000 issues.
These and other unforeseen factors could have a material adverse effect on the
Company's results of operations or financial condition.
OTHER DEVELOPMENTS
Organizational Announcements
- ----------------------------
On June 21, 1999, the Company announced that Bret W. Wise had been named Senior
Vice President and Chief Financial Officer. Mr. Wise is responsible for overall
financial management, which includes accounting, treasury, tax, budgeting and
investor relations, and will be heavily involved in acquisition activity and the
strategic planning process. He will report directly to Hector R. Ortino,
Chairman and Chief Executive Officer of the Company.
TAM Acquisition
- ---------------
On July 30, 1999, the Company completed the acquisition of TAM Ceramics
Incorporated, headquartered in Niagara Falls, New York. TAM is a supplier of
dielectric powders for the electronics industry and zircon-based ceramic powders
for a variety of uses.
TAM is a leading worldwide manufacturer of dielectric powders for Multi-Layer
Ceramic Capacitors (MLCCs). Other TAM products include specialty ceramic powders
for the refractory, investment casting and automotive industries.
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TAM will become part of Ferro Electronic Materials, a major business unit within
Ferro's Coatings group. Ferro Electronic Materials products include systems of
thick film pastes and complementary materials for the worldwide hybrid
microelectronics, electronic packaging and electronic components industries.
Ferro also produces materials for passive electronic components and surface
polishing compounds. In addition, the Company produces passivation and sealing
glasses for electronic circuitry and other applications.
TAM's manufacturing facility is in Niagara Falls, New York, where its research
and administrative facilities are also located. TAM has technical service
laboratories in Sun Valley, California, a warehouse in Pt. Weller, Ontario,
Canada, and a sales office in Tokyo, Japan.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FACTORS.
There have been no material changes in market risk exposures during the first
six months of 1999 that effect the disclosures presented in the Company's Annual
Report to Shareholders on Form 10-K for the year ended December 31, 1998, which
disclosure is incorporated here by reference.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
In 1994, the Company's Keil Chemical Division (Keil) settled an enforcement
proceeding brought by the Indiana Department of Environmental Management (IDEM)
concerning air emissions from Keil's Pyro-Chek(R) process. The settlement was in
the form of an Agreed Order with IDEM. The Agreed Order confirmed the Company's
plans to install additional controls and imposed certain aggregate limitations
on air emissions from the Pyro-Chek(R) production process while the Company
applied for and obtained a construction and operating permit for the existing
air source. The control equipment was installed, but the Company has had a
continuing disagreement with the agency over whether it has been in compliance
with the Agreed Order, including which methods should be used to demonstrate
compliance.
In November 1998, IDEM filed suit in Indiana state court seeking to shut down
operation of the Pyro-Chek(R) process. At a hearing held on December 4, 1998,
the court denied IDEM's request for a preliminary injunction, and later
dismissed the claim for a permanent injunction on grounds that the dispute
arising out of the Agreed Order should be addressed before the Indiana Office of
Environmental Adjudication. The day before this hearing, IDEM denied Keil's
application for a permit for air emissions for the Pyro-Chek(R) process. The
Company appealed IDEM's denial of Keil's permit application to the Indiana
Office of Environmental Adjudication. A hearing date before the Indiana Office
of Environmental Adjudication is expected to be scheduled early in the year
2000.
The Company is actively pursuing settlement negotiations with IDEM and the local
environmental agency, the Hammond Department of Environmental Protection (HDEM),
to resolve disagreements over methods of demonstrating compliance with the
Agreed Order, and to complete issuance of the requested construction and
operating permits.
13
<PAGE> 14
Until recently, the United States Environmental Protection Agency (U.S. EPA) had
given the enforcement lead to IDEM. Following requests for information from the
Company, some of which are ongoing, the U.S. EPA served the Company with a
Notice of Violation (NOV) on May 5, 1999, alleging that the Company violated
various pre-construction review requirements in building and modifying the
Pyro-Chek(R) process between 1980 and 1991, and has been operating without
necessary permits. The allegations in the NOV are essentially the same as those
made by U.S. EPA in 1993 when U.S. EPA, IDEM and HDEM pursued enforcement
against the Company, resulting in settlements with IDEM and HDEM in the Agreed
Order. The Company is continuing discussions with U.S. EPA regarding the NOV.
The Company intends to vigorously contest the allegations in the NOV.
With respect to the claims of IDEM, HDEM and U.S. EPA, the Company cannot
determine at this time whether any potential liability exists, and if it does,
what that liability might be. If either the U.S. EPA or the State of Indiana
were to prevail on all of their claims, it could have a material adverse effect
on the operating results and financial condition of the Company.
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.
(a) The exhibits listed in the attached Exhibit Index are filed pursuant
to Item 6(a) of the Form 10-Q.
(b) The Company has not filed any reports on Form 8-K for the quarter
ended June 30, 1999
14
<PAGE> 15
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: August 16, 1999
/s/ Hector R. Ortino
--------------------
Hector R. Ortino
Chairman and Chief Executive Officer
Date: August 16, 1999
/s/ Bret W. Wise
----------------
Bret W. Wise
Senior Vice President and Chief Financial Officer
15
<PAGE> 16
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. (Asterisk denotes exhibits filed with this report).
Exhibit:
(3) Articles of Incorporation and by-laws
(a) Eleventh Amended Articles of Incorporation (Reference is made to
Exhibit 3 (a) to Ferro Corporation's Form 10-Q for the three
months ended June 30, 1998, which Exhibit is incorporated here
by reference.)
(b) Certificate of Amendment to the Eleventh Amended Articles of
Incorporation of Ferro Corporation filed December 28, 1994
(Reference is made to Exhibit 3 (b) to Ferro Corporation's Form
10-Q for the three months ended June 30, 1998, which Exhibit is
incorporated here by reference.)
(c) Certificate of Amendment to the Eleventh Amended Articles of
incorporation of Ferro Corporation filed June 23, 1998
(Reference is made to Exhibit 3 (c) to Ferro Corporation's Form
10-Q for the three months ended June 30, 1998, which Exhibit is
incorporated here by reference.)
(d) Amended Code of Regulations (Reference is made to Exhibit 3 (d)
to Ferro Corporation's Form 10-Q for the three months ended June
30, 1998, which Exhibit is incorporated here by reference.)
(4) Instruments defining rights of security holders, including indentures
(a) Revolving Credit Agreement by and between Ferro and four
commercial banks dated August 22, 1990. (Reference is made to
Exhibit 10 to Ferro Corporation's Form 10-Q for the three months
ended September 30, 1990, which Exhibit is incorporated here by
reference.)
(b) Amendment Number 1 dated May 31, 1991, to the Revolving Credit
Agreement by and between Ferro and four commercial banks.
(Reference is made to Exhibit 4(b)(1) to Ferro Corporation's
Quarterly Report on Form 10-Q for the three months ended June
30, 1991, which Exhibit is incorporated here by reference.)
(c) Amendment Number 2 dated July 30, 1991, to the Revolving Credit
Agreement by and between Ferro and four commercial banks.
(Reference is made to Exhibit 4(b)(2) to Ferro Corporation's
Form 10-Q for the three months ended June 30, 1991, which
Exhibit is incorporated here by reference.)
(d) Amendment Number 3 dated December 31, 1991, to the Revolving
Credit Agreement by and between Ferro and four commercial banks.
(Reference is made to
16
<PAGE> 17
Exhibit 4 to Ferro Corporation's Form 10-K for the year ended
December 31, 1991, which Exhibit is incorporated here by
reference.)
(e) Amendment Number 4 dated July 21, 1992, to the Revolving Credit
Agreement by and between Ferro and four commercial banks.
(Reference is made to Exhibit 4 to Ferro Corporation's Form 10-Q
for the three months ended June 30, 1992, which Exhibit is
incorporated here by reference.)
(f) Amendment Number 5 dated April 20, 1993, to the Revolving Credit
Agreement by and between Ferro and four commercial banks.
(Reference is made to Exhibit 4(b)(4) to Ferro Corporation's
Form 10-Q for the three months ended June 30, 1993, which
Exhibit is incorporated here by reference.)
(g) Amendment Number 6 dated June 22, 1995, to the Revolving Credit
Agreement by and between Ferro and four commercial banks.
(Reference is made to Exhibit 4(b)(4) to Ferro Corporation's
Form 10-Q for the three months ended June 30, 1995, which
Exhibit is incorporated here by reference.)
(h) Amendment Number 7 dated October 25, 1995 to the Revolving
Credit Agreement by and between Ferro Corporation and four
commercial banks.(Reference is made to Exhibit 4(b)(4) to Ferro
Corporation's Form 10-Q for the three months ended September 30,
1995, which Exhibit is incorporated here by reference.)
(i) Amendment Number 8 dated July 24, 1997 to the Revolving Credit
Agreement by and between Ferro Corporation and four commercial
banks.(Reference is made to Exhibit 4(k) to Ferro Corporation's
Form 10-Q for the three months ended June 30, 1997, which
Exhibit is incorporated here by reference.)
(j) Shareholder Rights Agreement between Ferro Corporation and
National City Bank, Cleveland, Ohio, as Rights Agent, dated as
of March 22, 1996 . (Reference is made to the Exhibit to the
Registration Statement on Form 8-A dated May 15, 1996 which
Exhibit is incorporated here by reference.)
(k) The rights of the holders of Ferro's Debt Securities issued and
to be issued pursuant to an Indenture between Ferro and Society
National Bank, as Trustee, are described in the form of
Indenture dated May 1, 1993 filed as Exhibit 4(j) to Ferro
Corporation's Form 10-Q for the three months ended June 30,
1993. Said Exhibit is incorporated here by reference.
(l) The rights of the holders of Ferro's Debt Securities issued and
to be issued pursuant to a Senior Indenture between Ferro and
Chase Manhattan Trust Company, National Association, as Trustee,
are described in the Senior Indenture, dated March 25, 1998.
(Reference is made to Exhibit 4 (c) to Ferro Corporation's
Quarterly Report on Form 10-Q for the three months ended March
31, 1998.)
17
<PAGE> 18
(m) Form of Security (7 1/8% Debentures due 2028). (Reference is
made to Exhibit 4(a-1) to Ferro Corporation's Form 8-K filed
March 31, 1998, which Exhibit is incorporated here by
reference.)
*(11) Statement Regarding Computation of Earnings per Share.
*(12) Ratio of Earnings to Fixed Charges.
*(27) Financial Data Schedule for the Quarter Ended June 30, 1999
18
<PAGE> 1
EXHIBIT 11
FERRO CORPORATION AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
3 Months 3 Months 6 Months 6 Months
(Dollars in thousands, except per share data) JUNE JUNE JUNE JUNE
1999 1998 1999 1998
---- ---- ---- ----
BASIC:
<S> <C> <C> <C> <C>
Weighted Average Common Shares Outstanding 35,232,350 36,995,301 35,121,772 37,171,745
Net Income 19,174 18,402 36,275 35,457
Less Preferred Stock Dividend, Net of Tax (939) (948) (1,891) (1,892)
----------- ----------- ------------ ------------
Net Income Available to Common Shareholders $ 18,235 $ 17,454 $34,384 $33,565
BASIC EARNINGS PER COMMON SHARE $0.52 $0.47 $0.98 $0.90
DILUTED:
Weighted Average Common Shares Outstanding 35,232,350 36,955,301 35,121,772 37,171,745
Adjustments for assumed conversion of convertible
preferred stock and common stock options 3,972,935 4,229,972 3,790,603 4,317,437
----------- ----------- ------------ ------------
39,205,285 41,185,273 38,912,375 41,489,182
Net Income $19,174 $18,402 $36,275 $35,457
Additional ESOP Contribution, Net of Tax (349) (406) (710) (818)
----------- ----------- ------------ ------------
Adjusted Net Income $18,825 $17,996 $35,565 $34,639
DILUTED EARNINGS PER SHARE $0.48 $0.44 $0.91 $0.83
</TABLE>
<PAGE> 1
EXHIBIT 12
FERRO CORPORATION AND SUBSIDIARIES
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
JUNE JUNE
(DOLLARS IN THOUSANDS) 1999 1998
-------------------- --------------------
<S> <C> <C>
EARNINGS:
PRE-TAX INCOME 57,794 56,441
ADD: FIXED CHARGES 10,185 8,642
LESS: INTEREST CAPITALIZATION (954) (283)
-------------------- --------------------
TOTAL EARNINGS 67,025 64,800
==================== ====================
FIXED CHARGES:
INTEREST EXPENSE 7,955 6,939
INTEREST CAPITALIZATION 954 283
INTEREST PORTION OF RENTAL EXPENSE 1,276 1,420
-------------------- --------------------
TOTAL FIXED CHARGES 10,185 8,642
==================== ====================
TOTAL EARNINGS 67,025 64,800
DIVIDED BY:
TOTAL FIXED CHARGES 10,185 8,642
-------------------- --------------------
RATIO 6.58 7.50
</TABLE>
NOTE: PREFERRED DIVIDENDS ARE EXCLUDED. AMORTIZATION OF DEBT EXPENSE AND
DISCOUNTS AND PREMIUMS WERE DEEMED IMMATERIAL TO THE ABOVE CALCULATION.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000035214
<NAME> FERRO CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 9,005
<SECURITIES> 0
<RECEIVABLES> 259,367
<ALLOWANCES> 0
<INVENTORY> 136,897
<CURRENT-ASSETS> 459,019
<PP&E> 654,591
<DEPRECIATION> 356,796
<TOTAL-ASSETS> 885,890
<CURRENT-LIABILITIES> 327,427
<BONDS> 159,722
0
0
<COMMON> 47,323
<OTHER-SE> 234,196
<TOTAL-LIABILITY-AND-EQUITY> 885,890
<SALES> 668,516
<TOTAL-REVENUES> 668,516
<CGS> 479,841
<TOTAL-COSTS> 600,605
<OTHER-EXPENSES> 10,117
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,955
<INCOME-PRETAX> 57,794
<INCOME-TAX> 21,519
<INCOME-CONTINUING> 36,275
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,275
<EPS-BASIC> 0.98
<EPS-DILUTED> 0.91
</TABLE>
