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Exhibit 13
what's next [GRAPHIC]
[LOGO] FERRO
1999 Annual Report
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A whole new approach
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to managing our portfolio for profitable growth.
[GRAPHIC]
Ferro Corporation is a major global producer of performance materials for
manufacturers. We are building on leading market positions as a supplier of
coatings for ceramics and metal, electronic materials, pigments, specialty
plastic compounds and colors, and polymer additives to create a portfolio of
business lines offering outstanding profitable growth potential. We are
targeting growth in performance and fine chemicals and electronic materials. Our
materials are used traditionally in the markets of building and renovation,
major appliances, household furnishings, transportation and industrial products.
Headquartered in Cleveland, Ohio, Ferro has operations in 18 countries.
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Financial Highlights
Ferro Corporation and subsidiaries
(dollars in thousands except per share data)
1999 1998 1997
- -----------------------------------------------------------------------------------------
Operating results
Net sales $ 1,355,283 1,361,844 1,381,280
Net income (loss) (a) $ 73,015 69,282 (37,277)
Per common share data (a)(b)
Basic earnings (loss) $ 1.97 1.80 (1.08)
Diluted earnings (loss) $ 1.85 1.67 (1.08)
Cash dividends $ 0.55 0.495 0.43
Other
Average shares outstanding (b) 35,197,243 36,419,090 38,131,631
Net cash provided by operations $ 127,155 80,031 130,283
Return on average shareholders' equity (a) 25% 25% --
Number of holders of common stock (year-end) 2,329 2,257 2,945
Number of employees (year-end) 6,881 6,693 6,851
(a) Included in 1997 results is a pre-tax realignment charge of $152.8 million,
or $2.52 per common share after taxes. Excluding the realignment charge,
the Company recorded net income for 1997 of $62.7 million, or $1.44 per
diluted common share.
(b) Basic earnings (loss) per share are based on a weighted average of common
shares outstanding. Diluted earnings per share reflect the potential
dilution of earnings per share assuming that certain stock options whose
exercise price is less than the average market price of the stock are
exercised and that convertible preferred shares are converted into common
shares. Outstanding shares and per share data are adjusted to reflect a
3-for-2 stock split in November 1997.
Contents
2 Financial Highlights
4 Letter to Shareholders
10 Ferro's Portfolio at a Glance
12 Improving the Mix
14 Growing Globally
16 Making Acquisitions
18 Financial Section
42 Directors and Officers
44 Corporate Information
45 Worldwide Operating Units
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Ferro is changing. We are reshaping ourselves into a Company with a
higher-growth profile by offering a broader range of products and technologies
to serve rapidly growing markets. In 1999, we developed ambitious new plans to
better manage our portfolio of businesses, increase our geographic presence and
seek acquisitions - all aimed at nurturing growth opportunities that will define
a new future for Ferro.
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To Our Shareholders
[picture]
Hector R. Ortino,
Chairman and Chief Executive Officer
The question on the cover of this annual report is one we ask ourselves
continually - what's next? We fully realize that to stay competitive we need to
constantly respond to that question and position ourselves for the future.
Accordingly, this letter and annual report focus on how we see Ferro's future.
But first, it is important to look at what we have accomplished in the four
years since we established some aggressive growth goals for ourselves. This look
back puts our plans for the future in context and should give you confidence in
our ability to achieve our new goals. It is also a source of personal pride for
me and the thousands of Ferro employees worldwide who have made our success
possible.
In 1996, our response to the "what's next" question was to concentrate our
efforts on improving our margins and cost structure, to lay the foundation for
growth and to position our businesses for the future. In 1999, we continued the
process of improving our performance by finishing another record year, setting
new goals for revenue growth and outlining our detailed plans for accomplishing
those goals.
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A TRACK RECORD OF SUCCESS
1999 was the target year for achieving two challenging goals for gross
margin improvement and earnings per share growth. In 1995, we had gross margins
of 24 percent, and in 1999 we reached our three-year goal to achieve 28 percent
gross margins, a significant accomplishment. We also set a goal to improve
earnings per share at an annual growth rate of 12 percent. With the all-time
record performance of $1.85 in 1999, we capped four record years and exceeded
our goal by achieving a compound annual growth rate in earnings per share of
15.5 percent.
These accomplishments are remarkable in the context of some very difficult
business conditions. We overcame soft economies in Europe, Asia-Pacific and
Latin America, where almost half of our sales are derived. We were able to
mitigate the significant negative impact of foreign currency translation, and we
continued to report record years despite a deflationary price environment. Our
track record has been called one of the best in the specialty chemical industry
over this time frame, and we are proud that we measure up so well against some
very good, well-managed companies.
The actions that drove that performance are what you've heard here before.
We lowered our cost structure by implementing a major plan to reduce the number
of facilities we operate worldwide, and we pruned low-margin product lines,
reorganized our marketing and R&D functions and upgraded our organizational
talent and incentive systems.
With the foundation for growth in place, in 1999 we continued to take
actions to improve. So let's review how we did in more detail.
1999 HIGHLIGHTS
For the year, we reached a new level of performance with record net income
of $73.0 million. Earnings per share of $1.85 also were an all-time record and
represented an 11 percent increase over the $1.67 achieved in 1998. Gross margin
improved to 28 percent, versus 27 percent in the prior year, and propelled our
earnings improvement.
[graph]
DILUTED EARNINGS PER SHARE
4-year CAGR = 15.5%
99 1.85
98 1.67
97 1.44*
96 1.21
95 1.04
*excludes realignment charge
[graph]
GROSS MARGIN
99 27.9
98 26.7
97 25.6
96 24.5
95 24.1
4/5
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Consolidated sales for the year were $1.36 billion, compared with $1.36
billion in 1998. Improved volumes and the contribution of acquisitions made
during 1999 were offset by lower selling prices, which were driven down by lower
raw material costs and the effects of a strong U.S. dollar. Currency translation
and lower prices due to raw materials have been recurring negative influences on
our revenues for several years now. In fact, we estimate that negative currency
translation has reduced our revenues by more than $100 million on an annualized
basis over the past four years. In addition, the deflationary price environment
for raw materials has had a significant negative impact on revenues over this
period.
We overcame most of these negative factors with our sales performance in
1999. We continued to lay the foundation for future growth. Most notable were
the acquisitions we made in our plastic compounding and electronic materials
businesses, the divestiture of our porous ceramics business and the announcement
of our intention to sell our flame retardants businesses.
In March, we acquired Advanced Polymer Compounding (APC) based in
Carpentersville, Illinois. APC produces a patented thermoplastic elastomer
called Alcryn(R). This acquisition broadened our product line in our already
successful plastic compounding business.
In July, we completed the acquisition of TAM Ceramics Incorporated (TAM).
TAM, based in Niagara Falls, New York, is a leading producer of dielectric
ceramic powders for electronic applications. This acquisition solidified our
position as the world leader in materials for the multi-layer ceramic capacitor
industry.
In March 1999, we sold our Filtros porous ceramics business, and in January
2000, we announced our intention to sell our Pyro-Chek(R) flame retardant
business. We will continue to divest selectively and concentrate our efforts on
what we consider to be core assets.
Our overall performance in 1999 was supported by solid results in each
group. Our plastics business recorded significant improvement for the year, with
sales up 6.8 percent and segment income up 13.5 percent. Our most international
segment, coatings, experienced sales declines due to the effects of currency and
raw material costs but made a strong contribution to our profitability with
segment income up 5.5 percent. Chemicals' results were mostly impacted by a
significant decline in sales and profits in our petroleum additives business.
However, we were encouraged by the improved performance in 1999 of polymer
additives, our main growth platform in chemicals.
Another positive sign for the future was our performance in Asia. We have
targeted this region as a significant growth area for our product lines, and in
1999 we saw the economy rebound. More importantly, though, we grew much faster
than the economy as a result of our continued investment in the region during
the down period of late 1997 and all of 1998. Today, we are positioned very well
for growth in Asia and we continue to invest there.
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We will remember 1999 as a year in which we cemented a solid foundation for
our growth plans to succeed.
However, the biggest frustration of 1999 - and one I am sure you share - was
the performance of our stock price, which closed the year down 15 percent. This
performance is inconsistent with a company that has generated four years of
record earnings performance. However, we were not alone. As the Standard and
Poor's Mid-Cap Chemical Index indicates, the stock actually performed in line
with our peers, with the index down 15 percent for the year. Many of the
companies in our industry are plagued by a market that appears to favor
large-cap companies and has not shown interest in specialty chemical companies.
Although the performance of the stock price is frustrating, we believe it is
a short-term setback, and we remain focused on driving improved performance in
the years ahead.
STRATEGIC DIRECTION
Our strong performance of the past several years will not stop here. We have
laid the foundation and have begun to take actions to drive further improvement.
Our focus has shifted, however. As a result, we have set demanding objectives
and goals to drive revenue growth of 6 to 8 percent over the next three years
and to maintain our earnings-per-share goal of at least 12 percent growth over
the long term.
We see growth coming from three main drivers - portfolio management,
geographic expansion and acquisitions - all of which overlap. I'll offer a brief
overview of these strategies here, and you will read more about them throughout
this report.
PORTFOLIO MANAGEMENT
For almost a year and a half now, we have been developing a new brand of
thinking among our management team about how we should run our businesses. We
call this new approach the Leadership Agenda. It helps us move away from being
fixated on current businesses and forces us to concentrate on the pipeline of
opportunities for future success. This approach also drives our investment of
capital.
New Goals
OVER THE NEXT THREE YEARS, WE ARE AIMING TO ACHIEVE:
1- Sales growth of 6 to 8 percent compounded annually long-term
(excluding large acquisitions and divestitures).
2- EPS growth of 12 percent compounded
annually long-term.
3- A shift in our portfolio so that we are more heavily weighted in springboard
businesses. The result will be a portfolio of businesses with greater growth and
profit potential.
Currently the mix is as follows:
- Foundation businesses, about 35 to 40 percent. These are mature
businesses that typically grow at about the rate of the economy.
- Platform businesses, 50 to 55 percent. These businesses grow at 1.5 to
two times the rate of the economy.
- Springboard businesses, almost 15 percent. Springboard businesses grow
at multiples of the rate of the economy.
[graph]
CURRENT
Springboard
Platform
Foundation
[graph]
GOAL
Springboard
Platform
Foundation
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We have categorized our businesses according to their stage in the life
cycle into what we call foundation, platform and springboard businesses (see
sidebar, page 7). For example, the operative philosophy for mature foundation
businesses will be to run efficiently and generate cash, while we will measure
the success of faster-growing or springboard businesses by their ability to
build larger core businesses. Platform businesses represent the largest portion
of our current portfolio, and they will be expected to achieve a balance of
profit and sales growth.
Our overall goal is to change the mix of businesses we have from being too
heavily weighted in foundation and platform businesses to being more evenly
weighted among all three categories. If we succeed, our businesses will be
capable of generating a higher growth rate.
To drive the desired performance in each business, we have also matched our
incentive system to this approach. Managers of foundation businesses will be
rewarded for generating cash, managers of platform businesses will be rewarded
for a balance of sales and profit growth and managers of springboard businesses
will be rewarded for growth. We have also added rewards for success in
acquisitions.
GEOGRAPHIC EXPANSION
Ferro's geographic breadth has long been a strength of the Company. In fact,
we've had international operations for most of our 80-year history. Our global
presence gives us balanced performance and a worldwide infrastructure to
leverage growth in several of our key businesses. Our chemicals and plastics
businesses have built leading positions in the United States for polymer
additives, plastic compounds and colorants. We believe we can repeat their
success internationally. In May 2000, we will open a new production facility for
plastic colorants in Asia. In businesses that have long been international, we
also see opportunities. Several of our businesses in Asia are running at full
capacity, and we are installing additional capacity to keep pace with demand for
our products in that region.
ACQUISITIONS
Part of our success in achieving our goals will depend on our ability to
acquire businesses that broaden our product offering to high-growth markets. We
are much more proactive today in aggressively pursuing our acquisition targets
and 1999 provided an early indication of how successful our strategy can be. We
are pursuing both large and small transactions.
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[photo]
Small or add-on acquisitions will play a role in broadening the product
offerings or technologies of our existing businesses, entering new markets and
geographies and in speeding the development of new products. We will also
consider larger, company-transforming acquisitions, which will only be
considered if they can help us accelerate our growth plans and reshape our
portfolio.
We have the appetite and the capacity to pursue our acquisition plans. We
generate strong cash flows, our balance sheet can handle more leverage and we
have supplemental plans for divestitures as a source of funds.
MANAGEMENT AND BOARD CHANGES
Although we continued to add to our management strengths in 1999, we also
lost a key member of our team to retirement. After 40 remarkable years of
service, Jim Fisher, Senior Vice President, Ceramics and Colorants, retired from
Ferro. Jim spent his whole professional life with the Company. Jim's kindness,
leadership and counsel will be missed by all Ferro employees but perhaps by no
one more than me.
We are also losing a key member of the Board this year. Rex Sebastian will
no longer serve on the board following the annual meeting in April. Rex has
served on the Board since 1986. He has overseen many changes in the Company in
this time and has been instrumental in our success. The value of his
contributions will be missed. In July 1999, we elected William B. Lawrence,
Executive Vice President, Law, Corporate Development and Government Affairs for
TRW, Incorporated of Cleveland, Ohio, to our Board of Directors. We are excited
to add Bill's experience and skills, notably in the area of acquisitions.
A LOOK AHEAD
So what is next for Ferro? Hopefully what I have said here and the details
that fill the pages of our annual report will go a long way to answering that
question for you. We believe it's a bright future with continued strong
performance. We'll keep asking this question of ourselves to stay ahead of the
changing tides of our markets and our competitive environment. With the
dedication of all of our employees, I look forward to next year when I can
report on our progress. My personal thanks go to our employees for their
continuing contributions to our success, and to you, our shareholders, for your
confidence in Ferro.
/s/ Hector R. Ortino
Hector R. Ortino
Chairman and Chief Executive Officer
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Ferro's portfolio at a glance
[graph]
1999 SALES BY SEGMENT
Coatings 60%
Chemicals 21%
Plastics 19%
[graph]
1999 SALES BY REGION
Asia-Pacific 7%
Latin America 7%
Europe 32%
United States and 54%
Canada
[photo]
Business Units
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Coatings Tile, Specialty Glazes and Specialty Ceramics
Specialty Colors
Electronic Materials
Industrial Coatings
- --------------------------------------------------------------------------------
Chemicals Polymer Additives
Performance and Fine Chemicals
- --------------------------------------------------------------------------------
Plastics Plastic Colorants
Liquid Coatings and Dispersions
Filled and Reinforced Plastics
[photo]
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[photo]
Products Key Markets Locations
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Ceramic glaze coatings, ceramic colors, Tile, sanitaryware, fine china, industrial and North America,
decorative materials, kiln furniture, commercial machinery, electronics, Europe, Latin
grinding media, structural ceramics, wear- transportation equipment, telecommunications America, Asia-Pacific
resistant monolithics
Inorganic pigments, forehearth color, Paint and plastics, glass packaging, table- North America,
glass decorating enamels ware, appliances, automotive, architectural Europe, Latin
America, Asia-Pacific
Electronic and specialty glasses, ceramic Consumer electronics, telecommunications, North America,
dielectric powders, thick film pastes and computers, automotive, ophthalmic lenses/ Europe, Asia-Pacific
tapes, surface finishing compounds precision optics, military and defense, aerospace
Powder coatings, porcelain enamel coatings Appliances, cookware, sanitaryware, North America,
architectural, automotive, industrial Europe, Latin
America, Asia-Pacific
Heat and light stabilizers, epoxy plasticizers, Household furnishings, automotive, industrial, North America,
lubricant additives architectural, construction Europe, Asia-Pacific
Performance and fine chemicals, lubricant Electronics, automotive, petrochemicals, North America,
additives and petroleum additives pharmaceutical, agriculture, polymers Europe
Color concentrates/masterbatch Appliances, automotive, packaging, recreation North America,
Europe
Gel coats, liquid and paste color dispersions Boats, RVs and trucks, sanitaryware, North America,
swimming pools, architectural, industrial Europe
Filled and reinforced thermoplastic Appliances, automotive, household North America,
compounds, polyolefin alloys, thermoplastic furnishings, recreation, industrial, lawn and Europe
elastomers/melt processable rubber garden equipment
Sanders and other tools rely on Ferro's novel plastic compounds
and colorants for enhanced appearance and durability. Automobiles are often
equipped with an array of Ferro materials, from industrial coatings on the
outside to polymer additives on the inside. Silicon wafers are polished during
the fabrication of integrated circuits using Ferro's precision surface finishing
materials.
[photo]
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improving the mix
Many of the changes at Ferro will come from elevating
our portfolio to a faster-growing, higher-margin mix of businesses. We are
seizing opportunities in everything from our foundation businesses - traditional
businesses on which we've built our success, to our platform businesses -
steadily growing businesses which will drive our near-term performance, to our
springboard businesses - fast-growing business lines which are currently small
but offer the greatest potential to transform Ferro for the future.
Our new approach improves the way we manage operations and allocate
resources among businesses. Overall, we are maximizing efficiencies in
foundation businesses to generate excess cash and investing that cash in
high-growth opportunities in existing and new businesses - through R&D,
marketing initiatives, strategic acquisitions and geographic expansion.
For example, in our longest-running businesses, such as tile and color, we
are aggressively pursuing process improvements to enhance productivity. What's
more, we are identifying new ways to expand our market leadership, including new
products and growth in new regions.
In many of our platform businesses, we will spur growth through creative
product line extensions that enable us to participate in higher-potential
markets. In 1999, we continued to expand our popular line of plastic compounds
that offer customers high performance at lower cost than standard materials. In
addition, we added a new technology with the acquisition of Advanced Polymer
Compounding (APC), a supplier of high-performance thermoplastic elastomers
(TPEs).
We are also investing in newer springboard businesses that serve rapidly
growing markets, such as electronic materials and performance and fine
chemicals, with significant future sales and profit potential for Ferro. For
example, because of our synthesis capabilities and proprietary compounds, we
expect our chemicals business to benefit from the trend in the high-growth
pharmaceutical market toward outsourcing production of key fine organic
chemicals. We plan on being a strong niche player in certain key technologies
within this market.
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Building on our strengths, Ferro is increasingly targeting
value-added chemical intermediates and services used in the production of
pharmaceuticals.
[photo]
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[photo]
growing globally
Ferro also expects to grow by broadening its geographic
presence. We are exploring new plant locations, capacity expansions and export
activity, as well as acquisitions, to develop new markets in virtually all of
our businesses.
We are already one of the most geographically diverse specialty chemical
companies, with approximately half of our sales coming from outside the United
States. However, we still have strong opportunities to grow beyond our current
markets. For example, two of our core businesses, plastics and chemicals, have
very little presence in Europe and almost none in Asia - two markets with strong
demand for these products.
Our 1999 acquisition of APC brought increased international scope to our
plastics business. Through Alcryn(R), a patented TPE product, we now have
extended our export business to Mexico, Europe, China and Australia. We are
currently expanding capacity for this product, which enjoys one of the highest
growth rates in the plastics industry.
This year, we will begin production of plastic colorants in a new facility
in Asia, giving that line entry in the large and growing Asian marketplace. We
are also expanding our sales force and successful operations for our industrial
coatings in Asia, building off our existing base in Ningbo, China.
Even businesses considered relatively mature in traditional markets offer
significant growth potential in other geographies, which we intend to pursue. In
tile, Ferro's most global business, we are increasing capacity in Asia, to
solidify our solid market position and capitalize on double-digit volume growth
in that region.
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Our Alcryn(R) TPE product, which is experiencing double-digit
growth rates, gives plastic appliance handles a rubber-like feel and soft grip.
It also offers the performance advantages and ease of processing of a plastic
material.
[photo]
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[photo]
making acquisitions
Ferro has the financial capacity, the appetite and a very focused strategy
for acquisitions. We are looking for both small and large acquisitions to meet
our growth goals and speed the process of reshaping our portfolio. For example,
we are intent on making acquisitions that will help turn our electronic
materials business into a core business serving rapidly growing markets. In
1999, we acquired TAM Ceramics Incorporated (TAM), a supplier of dielectric
powders for the electronics industry. TAM strengthened our leading position in
dielectric ceramic powders for the passive and discrete component market,
expanded our geographic presence and broadened our technology in electronic
materials. Further acquisitions will enable us to offer full solutions for our
customers and increase our position in other markets such as semiconductors.
Another major target for acquisitions is performance and fine chemicals, as
we seek to build a much larger presence as a producer of value-added fine
organic chemicals and custom synthesis for the high-growth pharmaceutical
industry. Here our approach will focus on being a niche provider and
differentiating ourselves by offering proprietary technologies rather than being
a full solution provider.
Smaller, bolt-on acquisitions will help us gain a foothold in new markets.
For example, our plan is for small acquisitions to play an important role in
growing our polymer additives business in the European market.
Smaller acquisitions will also be used to complement or broaden existing
product lines. For instance, acquisitions in specialty plastics - similar to our
APC acquisition - should bolster our strategy to form unique alloys with
superior performance characteristics and extend our technology.
We plan to accomplish our acquisition plans while maintaining the strong
financial discipline for which Ferro is known. The acquisitions we made in 1999
are already performing to our expectations and making a solid
contribution.
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[photo]
Ferro is the world's largest manufacturer of thick film electrode
materials for polycrystalline silicon photovoltaic cells in an industry expected
to enjoy rapid growth through 2010.
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[picture]
Bret W. Wise, Senior Vice President and
Chief Financial Officer
Financials
19 Management's Discussion and Analysis
23 Financial Statements
27 Notes to Financial Statements
38 11-Year Summary of Financial Data
41 Independent Auditors' Report
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Management's Discussion and Analysis
Ferro Corporation and subsidiaries
Ferro Corporation is a worldwide producer of performance materials for
manufacturers. Ferro produces a variety of coatings, chemicals and plastics by
utilizing organic and inorganic chemistry. The Company's materials are used
extensively in the markets of building and renovation, major appliances,
household furnishings, transportation and industrial products. Ferro's products
are sold principally in the United States and Europe; however, operations
extend to Latin America and are increasingly focused on Asia-Pacific. See Note
12 to the consolidated financial statements for segment operating data.
1999 RESULTS OF OPERATIONS
Consolidated net sales of $1.36 billion for 1999 were 0.5% lower than
1998 net sales. Sales declined 0.9% in the Coatings segment and 5.0% in the
Chemicals segment, while the Plastics segment increased sales by 6.8%.
The increase in sales volume for the Company was led by the Plastics
segment and strong improvement in the tile and electronic materials businesses.
Acquisitions made during 1999 also contributed strongly to sales. Increased
volumes and acquisitions together added 5.5% to sales, offset by a decline in
sales attributable to lower selling prices in correlation with a decline in raw
material costs. The strengthening of the U.S. dollar against foreign currencies
also reduced sales by 2.0% during 1999. Divestitures also had a modest impact in
reducing sales.
Coatings segment sales were $810.4 million, 0.9% lower than in 1998.
Volume improvement for the segment was driven by improved performance in the
tile and electronic materials businesses. Acquisitions also made a strong
contribution to sales, in particular the TAM Ceramics Incorporated (TAM)
acquisition in electronic materials, which was completed in July. Offsetting
these improvements were lower selling prices, which correlated with a decline in
the underlying price of major raw materials, and the effect of the stronger U.S.
dollar. The Coatings segment is the Company's most international segment.
Negative foreign currency translation and price/mix, combined, reduced sales by
just over $50.0 million for the segment.
Chemicals segment sales were $290.0 million, down 5.0% compared with
1998. Sales were negatively impacted by volume declines in the United States,
particularly in the petroleum additives business, and lower selling prices
related to raw material price declines. Sales also were impacted negatively by
currency translation.
For the Plastics segment, sales improved 6.8% over 1998, reaching $254.9
million for the year. Strong domestic volume improvement was most evident in the
filled and reinforced plastics business. The Advanced Polymer Compounding (APC)
acquisition, completed in March 1999, also made a positive contribution to
sales. Overall, increased volume, and the acquisition, added 12.4% and were
partially offset by lower selling prices driven by a decline in raw material
costs.
Gross margins improved from 26.7% in 1998 to 27.9% in 1999. The major
contributions to gross margin expansion came from a better mix of products sold
and manufacturing efficiencies from productivity improvement initiatives. Lower
raw material costs and acquisitions also contributed to margin improvement.
Sales, administrative and general expenses increased to $241.8 million
compared with $235.2 million in 1998, primarily due to acquisitions completed in
1999.
Segment income improved to $153.6 million compared with $147.9 million in
1998. A reconciliation of segment income to income before taxes is shown in Note
12 to the consolidated financial statements, "Reporting for segments."
Coatings segment income increased 5.5% to $94.2 million. Significant
gross margin improvement, driven by a combination of manufacturing efficiencies
and improvement in the mix of products sold, was the main factor contributing to
the improvement in segment income. The electronic materials business was
particularly strong and included the contribution of the TAM acquisition. The
Coatings segment has benefited the most from plant consolidation and has
increased sales of higher-margin products by concentrating on new product
development.
Chemicals segment income of $34.2 million declined 6.0% compared with
1998. The decline in segment income was driven by reduced sales, particularly in
the petroleum additives business.
Plastics segment income of $25.2 million set a record and represented a
13.5% improvement over the previous record established in 1998. The Plastics
segment has improved margins through the introduction of new products and the
contribution of the APC acquisition. Additionally, improved manufacturing
efficiencies and lower costs for raw materials had a positive impact on margins
for the segment.
18/19
22
The increase in interest expense from $15.3 million in 1998 to $18.3
million in 1999 is primarily attributable to the funding of two acquisitions
made in 1999.
Foreign currency gains, which vary depending on relative changes in
exchange rates, were $1.6 million in 1999, representing gains on option
contracts used to hedge the earnings of selected foreign subsidiaries. For
further information, see Note 13 to the consolidated financial statements.
The Company's performance in 1999 set new
all-time records for net income and earnings per
share. Net income increased to $73.0 million compared with $69.3 million
recorded in 1998. Diluted earnings per share increased by 10.8% to $1.85
compared with $1.67 in 1998.
1998 RESULTS OF OPERATIONS
Consolidated net sales of $1.36 billion for 1998 were 1.4% lower than
1997 net sales. Sales increased 0.3% in both the Coatings segment and in the
Plastics segment, while the Chemicals segment declined by 6.9%.
The strengthening of the U.S. dollar against foreign currencies and
divestitures were the main factors contributing to the sales decline. Combined,
negative foreign currency translation and divestitures reduced sales by $24.1
million.
In addition, sales volumes were lower than the prior year, particularly
in the Chemicals segment. Partially offsetting these declines were positive
price/mix and the contribution of an acquisition.
Coatings segment sales were $817.8 million, 0.3% greater than 1997 sales.
The slight improvement in sales was largely due to improved performance in the
powder coatings business worldwide and the electronics business domestically.
Additionally, continued improvement in European results had a positive impact on
sales. The effect of the stronger U.S. dollar had a major negative impact on
sales.
Chemicals segment sales were $305.3 million, down 6.9% compared with
1997. Sales were negatively impacted by volume declines in the United States,
particularly in the petroleum additives business. Additionally, sales were
impacted negatively by currency translation and the divestiture of a joint
venture operation in Asia.
For the Plastics segment, sales improved 0.3% over 1997, reaching $238.7
million for the year. Strong domestic volume improvement was evident in the
plastic colorants and filled and reinforced plastics businesses. However, this
was offset by a weak domestic price environment impacted by declining raw
material costs.
Gross margins improved from 25.6% to 26.7%. Gross margin improvement was
broad-based across all segments and regions. The major contributions to gross
margin expansion came from a better mix of products sold and manufacturing
efficiencies from continuous productivity improvement initiatives, including
benefits from the Company's previously announced plant consolidation plan. New
product introductions in the Plastics and Coatings segments, particularly in the
ceramic tile and powder coatings businesses, helped improve sales of
higher-margin products and develop business in new markets.
Sales, administrative and general expenses increased to $235.2 million
compared with $233.7 million in 1997.
Segment income improved 9.8% to $147.9 million compared with $134.7
million in 1997. A reconciliation of segment income to income before taxes is
shown in Note 12 to the consolidated financial statements, "Reporting for
segments."
Coatings segment income increased 6.1% to $89.3 million. Improvements
were led by strong European results for the ceramic tile business and by the
powder coatings business worldwide. A combination of manufacturing efficiencies
and improvement in the mix of products sold were the main factors contributing
to the improvements in ceramic tile. New product introductions for the tile
market have broadened the product line in this business and generated additional
high-margin business.
Income for the Chemicals segment improved 12.3% to establish a new record
of $36.4 million. The improvement was largely due to outstanding performance in
the domestic industrial chemicals business and continued improvement in polymer
additives. Overall, the Chemicals segment has benefited from productivity
improvements and an improvement in the mix of products sold through careful key
account management and improved sales of higher-margin products.
Plastics segment income of $22.2 million set a new record, 22.7% above
the previous record established in 1997. Margin improvement resulted from
excellent performance in both the plastic colorants business and the filled and
reinforced plastics busi-
23
ness. The Plastics segment improved margins through the introduction of new
products for new applications at several key accounts. Additionally, improved
manufacturing efficiencies and lower costs for raw materials had a positive
impact on margins.
The increase in interest expense from $12.2 million to $15.3 million in
1998 is primarily attributable to the issuance of $55.0 million 71/8% debentures
in March 1998.
Foreign currency gains amounted to $0.9 million in 1998, largely
attributable to the strengthening of the U.S. dollar versus foreign currencies.
Foreign currency gains accrue from option contracts purchased to hedge the
earnings of selected foreign subsidiaries. For further information, see Note 13
to the consolidated financial statements.
Net income and diluted earnings per share for 1998 were records of $69.3
million and $1.67, respectively, compared with a net loss of $37.3 million and a
loss of $1.08 in 1997. The 1997 loss was due to a second-quarter pre-tax
realignment charge of $152.8 million. Excluding the effects of this charge, net
income and diluted earnings per share for 1997 would have been $62.7 million and
$1.44, respectively. Thus, excluding the charge, net income was up 10.5% and
earnings per share were up 16.0% for 1998.
Other Items
IMPACT OF THE EURO CONVERSION
On January 1, 1999, 11 of 15 member countries of the European Economic
and Monetary Union (the "EMU") established fixed conversion rates between their
existing legacy currencies and the European Union's common currency, the Euro.
Since that date, the Euro has traded on currency exchanges and been used in
business transactions. The legacy currencies remain legal tender in the
participating countries for a transition period up to January 1, 2002, when new
Euro-denominated bills and coins will be issued. Legacy currencies will be
withdrawn from circulation during the first six months of 2002.
In each of its affected businesses, the Company is able to process and
has processed transactions in both the Euro and local currencies. Plans are well
advanced in Europe to adapt computer and financial systems which do not
currently accommodate the Euro as the standard reporting currency. The Company
does not anticipate that remaining system conversion costs to allow the use of
the Euro as the reporting currency will be material.
ENVIRONMENTAL
The Company has received "Notices of Violation" from the United States
Environmental Protection Agency in 1999 alleging that the Company violated
various requirements of the Clean Air Act and related State laws in modifying
and operating the Pyro-Chek(R) process at its facility in Hammond, Indiana. See
the description in Note 8 to the consolidated financial statements. The Company
has announced its intention to sell the assets relating to the Pyro-Chek(R)
process and cease production of Pyro-Chek(R) at Hammond. Following the sale of
the assets and cessation of Pyro-Chek(R) production, the Company will continue
to be responsible for any claims relating to all past operations at Hammond,
including Pyro-Chek(R) production. The Company is vigorously contesting these
claims. If the matter cannot be resolved through negotiation, and the United
States pursues and recovers the maximum potential penalties on all of its
claims, it could have a material adverse affect on the Company. However, the
Company believes that it will resolve this matter in a manner that will not have
a material adverse affect.
Additionally, governmental agencies have identified several disposal
sites for clean-up under the Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA," or the Superfund) and similar laws to which the
Company has been named a "potentially responsible party." The Company is
participating in the cost of certain clean-up efforts. However, the Company's
share of such costs has not been material and is not expected to have a material
adverse impact on the Company's financial condition or results of operations.
ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and for hedging activities. This Statement,
as amended by Financial Accounting Standards No. 137, is effective for all
quarters of fiscal years beginning after June 15, 2000, or the Company's fiscal
year 2001. While the Company has not yet determined the effects the Statement
will have on its financial position or results of operations, it does not
anticipate a material impact.
20/21
24
MARKET RISK MANAGEMENT
The Company's consolidated cash flows and earnings are subject to
fluctuations due to changes in foreign currency exchange rates. The Company
attempts to limit its exposure to changing foreign currency exchange rates
through operational and financial market actions.
Exposures to changing foreign currency exchange rates in selective
currencies are managed by financial market transactions, principally through the
purchase of put options on currencies and forward foreign exchange contracts.
Put options are purchased to offset the exposure of foreign currency-denominated
earnings to a depreciation in the value of the local currency versus the U.S.
dollar. The Company's primary foreign currency put option market exposure is the
Euro. Foreign subsidiaries also hedge their exposure to the cost of raw
materials denominated in U.S. dollars through the forward purchase of dollars to
cover the future payable.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow provided by operations increased to $127.2 million compared
with $80.0 in 1998 and $130.3 million in 1997. The improvement in operating cash
flows in 1999 is primarily due to a net working capital reduction of $9.9
million (excluding acquisitions) compared with a net working capital increase in
1998. Cash provided by operations was more than sufficient to enable the Company
to meet its liquidity requirements, which include working capital requirements,
capital investments and interest expense in 1999.
The increase in net cash used for investing activities in 1999 is
associated with a higher level of capital expenditures and acquisitions. Capital
expenditures were $76.2 million in 1999, $60.3 million in 1998 and $45.1 million
in 1997. Capital expenditures for 2000 are estimated to be $70.0 million to
$75.0 million.
The higher level of capital expenditures in 1999 and 2000 includes some
of the expenditures for the ongoing implementation of a global enterprise-wide
management information system, capacity increases in several product lines to
support geographic expansion and investments in new product lines.
The change in net cash flow from financing activities was driven by
long-term borrowings to fund acquisitions and a lower level of share repurchases
in 1999.
In October 1995, the Company filed a $300.0 million Shelf Registration
with the Securities and Exchange Commission. This registration will enable the
Company to offer, either separately or together, debt securities, common stock
and/or preferred stock, warrants, stock purchase contracts, depositary shares
and stock purchase units. Proceeds may be used for general corporate purposes.
In March 1998, the Company issued $55.0 million 71/8% debentures under
this registration. The debentures have a 30-year maturity.
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 has borrowed $80.0 million
under this facility as of December 31, 1999 pursuant to acquisitions made during
the year. The Company is actively pursuing its acquisition strategy and may,
from time to time, use its revolving credit facility or alternate financing
arrangements, including divestitures, to fund acquisitions. The Company also has
$245.0 million of availability under the previously mentioned shelf
registration.
CAUTIONARY NOTE ON FORWARD-LOOKING
STATEMENTS
Certain statements contained in this Management's Discussion and Analysis
and elsewhere 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, 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: the level of the Company's success
with its acquisition program; changes in customer requirements, markets or
industries served; changing economic conditions globally; foreign exchange
rates, especially in Europe; changes in the prices of major raw materials; and
significant technological or competitive developments.
25
Consolidated Statements of Income
Ferro Corporation and subsidiaries
(dollars in thousands except per share data)
Years ended Decmeber 31 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Net sales $1,355,283 1,361,844 1,381,280
Cost of sales 976,877 997,583 1,028,069
Selling, administrative and general expense 241,830 235,155 233,674
Realignment charge -- -- 152,790
Other charges (income):
Interest expense 18,343 15,284 12,163
Interest earned (1,554) (2,936) (2,286)
Foreign currency transactions (1,561) (944) (2,246)
Miscellaneous - net 5,234 7,221 7,586
- ---------------------------------------------------------------------------------------------------------------------------
20,462 18,625 15,217
Income (loss) before taxes 116,114 110,481 (48,470)
Income tax expense (benefit) 43,099 41,199 (11,193)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) 73,015 69,282 (37,277)
Dividend on preferred stock, net of tax 3,747 3,789 3,757
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) available to common shareholders $ 69,268 65,493 (41,034)
Per common share data
Basic earnings (loss) $ 1.97 1.80 (1.08)
Diluted earnings (loss) 1.85 1.67 (1.08)
===========================================================================================================================
See accompanying notes to consolidated financial statements.
22/23
26
Consolidated Balance Sheets
Ferro Corporation and subsidiaries
(dollars in thousands)
December 31 1999 1998
- ----------------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 7,114 12,185
Accounts and trade notes receivable after deduction of
$8,801 in 1999 and $9,737 in 1998 for possible losses 261,501 249,771
Inventories 170,663 140,970
Other current assets 51,251 48,202
- ----------------------------------------------------------------------------------------------------
Total current assets 490,529 451,128
Property, plant and equipment
Land 21,055 14,583
Buildings 151,355 140,117
Machinery and equipment 543,317 485,627
- ----------------------------------------------------------------------------------------------------
715,727 640,327
Less accumulated depreciation and amortization 385,334 367,592
- ----------------------------------------------------------------------------------------------------
Net property, plant and equipment 330,393 272,735
Other assets
Unamortized intangibles 93,412 50,617
Miscellaneous other assets 57,416 74,685
- ----------------------------------------------------------------------------------------------------
Total assets $971,750 849,165
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes and loans payable $ 45,939 30,987
Accounts payable 131,923 105,932
Income taxes 6,777 4,006
Accrued payroll 19,246 19,762
Accrued expenses/other current liabilities 133,748 121,869
Total current liabilities 337,633 282,556
Other liabilities
Long-term debt, less current portion 236,794 156,283
Postretirement liabilities 49,712 45,426
Other non-current liabilities 50,616 81,639
Shareholders' equity
Serial convertible preferred stock, without par value.
Authorized 2,000,000 shares; 1,520,215 shares issued 70,500 70,500
Guaranteed ESOP obligation -- (4,067)
Common stock, par value $1 per share.
Authorized 300,000,000 shares; 47,323,053 shares issued 47,323 47,323
Paid-in capital 17,482 7,954
Retained earnings 503,309 453,265
Accumulated other comprehensive income (74,459) (44,927)
Other (8,714) (6,758)
- ----------------------------------------------------------------------------------------------------
555,441 523,290
Less cost of treasury stock:
Common-12,153,584 shares-1999 and 11,995,955 shares-1998 240,506 226,076
Preferred-386,860 shares-1999 and 300,881 shares-1998 17,940 13,953
- ----------------------------------------------------------------------------------------------------
Total shareholders' equity 296,995 283,261
Commitments and contingencies
- ----------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $971,750 849,165
====================================================================================================
See accompanying notes to consolidated financial statements.
27
Consolidated Statements of Shareholders' Equity
Ferro Corporation and subsidiaries
Years ended December 31 (dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------------
Accumulated
other com- Common Preferred Total
Guaranteed prehensive stock stock share-
Preferred ESOP Common Paid-in Retained income (loss) held in held in holders'
stock obligation stock capital earnings (a)(b) treasury treasury Other equity
- ---------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996 $70,500 (22,592) 31,549 14,107 463,177 (27,804)(132,595) (8,408) (3,730) 384,204
Comprehensive income (loss)
Net income (loss) (37,277) (37,277)
Other comprehensive income
(loss), net of tax(a)
- ---------------------------------------------------------------------------------------------------------------------------
Foreign currency
translation adjustment (27,467) (27,467)
Minimum pension
liability adjustment 868 868
Other comprehensive income (loss) (26,599)
Comprehensive income (loss) (63,876)
Cash dividends:
Common (16,428) (16,428)
Preferred (4,229) (4,229)
Federal tax benefits 525 525
Transactions involving benefit plans 8,777 3,589 7,871 (2,750) (1,268) 16,219
Three-for-two stock split 15,774(15,788) (14)
Purchase of treasury stock (43,250) (43,250)
- ---------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997 $70,500 (13,815) 47,323 1,908 405,768 (54,403)(167,974) (11,158) (4,998) 273,151
Comprehensive income
Net income 69,282 69,282
Other comprehensive income
(loss), net of tax(a)
Foreign currency
translation adjustment 11,005 11,005
Minimum pension
liability adjustment (1,529) (1,529)
Other comprehensive income 9,476
Comprehensive income 78,758
Cash dividends:
Common (18,072) (18,072)
Preferred (4,038) (4,038)
Federal tax benefits 325 325
Transactions involving benefit plans 9,748 6,046 6,082 (2,795) (1,760) 17,321
- ---------------------------------------------------------------------------------------------------------------------------
Purchase of treasury stock (64,184) (64,184)
- ---------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1998 $70,500 (4,067) 47,323 7,954 453,265 (44,927)(226,076) (13,953) (6,758) 283,261
Comprehensive income
Net income 73,015 73,015
Other comprehensive income
(loss), net of tax(a)
Foreign currency
translation adjustment (30,161) (30,161)
Minimum pension
liability adjustment 629 629
Other comprehensive income (loss) (29,532)
Comprehensive income 43,483
Cash dividends:
Common (19,383) (19,383)
Preferred (3,779) (3,779)
Federal tax benefits 191 191
Transactions involving benefit plans 4,067 9,528 5,626 (3,987) (1,956) 13,278
Purchase of treasury stock (20,056) (20,056)
- ---------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1999 $70,500 -- 47,323 17,482 503,309 (74,459)(240,506) (17,940) (8,714) 296,995
===========================================================================================================================
(a) Income tax (expense) benefits related to the components of other
comprehensive income (loss) were $(729), $679 and $340 in 1999, 1998 and
1997, respectively.
(b) Accumulated translation adjustments were $(70,927), $(40,766), $(51,771)
and $(24,304) and accumulated minimum pension liability adjustments were
$(3,532), $(4,161), $(2,632) and $(3,500) at December 31, 1999, 1998,
1997 and 1996, respectively.
See accompanying notes to consolidated financial statements.
24/25
28
Consolidated Statements of Cash Flows
Ferro Corporation and subsidiaries
(dollars in thousands)
Years ended December 31 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income (loss) $ 73,015 69,282 (37,277)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation and amortization 48,501 43,122 44,975
Change in deferred income taxes 5,078 4,652 (48,823)
Realignment charge -- -- 152,790
Changes in current assets and liabilities,
net of effects of acquisitions
Accounts and trade notes receivable 603 (14,687) (1,119)
Inventories (4,126) (13,357) 23,544
Other current assets 5,520 (902) (10,939)
Accounts payable 20,408 (5,290) (2,238)
Accrued expenses and other current liabilities (12,459) (3,037) 11,414
Other operating activities (9,385) 248 (2,044)
- -----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 127,155 80,031 130,283
Cash flow from investing activities
Capital expenditures for plant and equipment (76,244) (60,274) (45,129)
Acquisition of companies, net of cash acquired (119,477) (4,146) --
- -----------------------------------------------------------------------------------------------------
Proceeds from sale of assets 8,966 2,860 7,332
Other investing activities (4,798) (12) 1,250
- -----------------------------------------------------------------------------------------------------
Net cash used by investing activities (191,553) (61,572) (36,547)
Cash flow from financing activities
Net borrowings (payments) under short-term lines 14,952 7,718 (25,290)
Proceeds from long-term debt 117,207 54,297 760
Principal payments on long-term debt (36,464) (1,254) (1,938)
Proceeds from sale of stock 7,162 5,084 4,801
Purchase of treasury stock (20,056) (64,184) (43,250)
Cash dividends paid (23,162) (22,110) (20,657)
Other financing activities (223) (590) (1,560)
- -----------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 59,416 (21,039) (87,134)
Effect of exchange rate changes on cash (89) (1,572) (4,291)
- -----------------------------------------------------------------------------------------------------
Increase (Decrease) in cash and cash equivalents (5,071) (4,152) 2,311
Cash and cash equivalents at beginning of period 12,185 16,337 14,026
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 7,114 12,185 16,337
====================================================================================================
Cash paid during the period for
Interest $ 14,795 13,879 8,473
Income taxes $ 23,200 40,909 36,917
See accompanying notes to consolidated financial statements.
29
Notes to Consolidated Financial Statements
Ferro Corporation and subsidiaries
Years ended December 31, 1999, 1998 and 1997
1. Summary of significant accounting policies
NATURE OF OPERATIONS
Ferro Corporation is a worldwide producer of performance materials for
manufacturers. Ferro produces a variety of coatings, chemicals and plastics by
utilizing organic and inorganic chemistry. The Company's materials are used
extensively in the markets of building and renovation, major appliances,
household furnishings, transportation, and industrial products. Ferro's products
are sold principally in the United States and Europe; however, operations extend
to the Latin America and Asia-Pacific regions.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all of its subsidiaries after elimination of significant intercompany
accounts, transactions and profits.
Certain amounts in the 1998 and 1997 financial statements and the
accompanying notes have been reclassified to conform to the 1999 presentation.
Financial results for acquisitions are included in the consolidated
financial statements from the date of acquisition.
TRANSLATION OF FOREIGN CURRENCIES
Except for international companies whose functional currency is the U.S.
dollar, financial statements of international companies are translated to U.S.
dollar equivalents at the following exchange rates: (1) balance sheet accounts
at year-end rates; (2) income statement accounts at exchange rates weighted by
the monthly volume of transactions occurring during the year. Translation gains
or losses are recorded in shareholders' equity as a component of accumulated
other comprehensive income, and transaction gains and losses are reflected in
net income.
For countries where the U.S. dollar is the functional currency,
remeasurement and transaction gains or losses are reflected in net income.
CASH EQUIVALENTS
Cash Equivalents Consist of Highly Liquid Instruments With a Maturity of
Three Months or Less and are Carried At Cost, Which Approximates Market Value.
RISK MANAGEMENT DERIVATIVES
Derivatives primarily consist of foreign currency forward exchange
contracts and foreign currency options. Gains and losses related to qualifying
hedges of firm commitments are deferred and are recognized as adjustments of
carrying amounts when the hedged transaction occurs. Gains and losses on
derivative financial instruments that do not qualify as hedges are recognized as
foreign currency transaction gains or losses. Premiums paid on purchased options
are deferred and amortized over the life of the option.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
utilizing the first-in, first-out (FIFO) method, except for selected domestic
inventories where the last-in, first-out (LIFO) method is used.
LONG-LIVED ASSETS
In the case of goodwill and other intangibles, the excess cost over
equity in net assets of acquired companies is being amortized over periods
benefited, ranging from 15 to 40 years. Accumulated amortization was $32.0
million and $25.9 million at December 31, 1999 and 1998, respectively.
Property, plant and equipment is carried at cost. Depreciation of plant
and equipment is provided on a straight-line basis for financial reporting
purposes. The annual depreciation provision is based on the following estimated
useful lives:
Buildings 20 to 40 years
Machinery and equipment 5 to 15 years
26/27
30
Long-lived assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be recoverable. In
the event of impairment, a loss is recognized for the excess of the carrying
amount over fair value.
ENVIRONMENTAL COSTS
The Company expenses recurring costs associated with control and disposal
of hazardous materials in current operations. Costs associated with the
remediation of environmental pollution are accrued when it becomes probable that
a liability has been incurred and the costs can be reasonably estimated.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.
EARNINGS PER SHARE
Basic earnings per share are based on a weighted average of common shares
outstanding. Diluted earnings per share reflect the potential dilution of
earnings per share assuming that certain stock options whose exercise price is
less than the average market price of the stock are exercised and that
convertible preferred shares are converted into common shares.
2. Inventories
The portion of inventories valued by the LIFO method at December 31, 1999
and 1998 is as follows:
1999 1998
- ----------------------------------------------------------------
United States 40% 52%
Consolidated 20% 22%
================================================================
If the Fifo Method of Inventory Valuation Had Been Used Exclusively by
the Company, Inventories Would Have Been $11.7 Million and $14.5 Million Higher
Than Reported At December 31, 1999 and 1998, Respectively.
Since certain of the inventory costs are determined by use of the LIFO
dollar value method (under which the raw materials, work in process and finished
goods are included in one pool), it is not practicable to separate LIFO
inventory values among raw materials, work in process and finished goods.
3. Financing and long-term debt
Long-term debt at December 31, 1999 and 1998 are as follows:
(dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------
Debentures, 7.125%,
due 2028 $ 54,406 54,385
Debentures, 7.625%,
due 2013 24,816 24,808
Debentures, 8.0%,
due 2025 49,411 49,388
Debentures, 7.375%,
due 2015 24,943 24,939
Revolving credit agreement 80,000 --
Other 3,965 3,873
- --------------------------------------------------------------------------------
237,541 157,393
Less current portion(a) 747 1,110
- --------------------------------------------------------------------------------
Total $236,794 156,283
================================================================================
(a)Included in notes and loans payable.
The aggregate principal payments on long-term indebtedness for the next
five years are as follows:
(dollars in thousands)
- --------------------------------------------------------------------------------
2000 2001 2002 2003 2004
- --------------------------------------------------------------------------------
$747 2,133 542 80,260 283
================================================================================
At December 31, 1999, $1.8 million of long-term indebtedness was secured
by property, equipment and certain other assets with a net book value
approximating $2.5 million. At December 31, 1999, the Company had $155.0 million
principal amount outstanding under debentures which had an estimated fair market
value of $145.1 million.
31
In 1995, the Company filed a $300.0 million Shelf Registration with the
Securities and Exchange Commission. This registration will enable the Company to
offer, separately or together, debt securities, common stock and/or preferred
stock, warrants, stock purchase contracts, depositary shares and stock purchase
units. Proceeds from securities issued under the Shelf Registration may be used
for general corporate purposes.
In 1998, the Company issued $55.0 million 71/8% debentures due 2028 under
the 1995 Shelf Registration.
The Company has a five-year revolving credit agreement in the amount of
$150.0 million, which matures on August 1, 2003. The agreement permits the
maturity date to be extended for one year with the consent of the parties.
Interest on revolving credit borrowings is payable at floating prime or lower
rates based on Company options. There is a commitment fee of 3/16% per year. At
December 31, 1999, the Company had borrowed $80.0 million under this agreement.
There are no covenants in the revolving credit agreement which
significantly limit the dividend payment capability of the Company, and the
Company does not expect to include any such covenants in future offerings under
the Shelf Registration. In addition, there are no significant restrictions on
the payment of dividends by the subsidiaries and affiliates of the Company.
In 1989, the Company created an Employee Stock Ownership Plan (ESOP). The
ESOP borrowed $63.5 million at an interest rate of 8.5% and $7.0 million at an
adjustable interest rate in 10-year loans guaranteed by the Company. On June 30,
1999, the final principal payments on these obligations were made, repaying the
borrowings in full. Prior to 1999 the Company reflected the guaranteed ESOP
borrowings as a loan guarantee on its balance sheet with a like amount of
"Guaranteed ESOP Obligation" recorded as a reduction of shareholders' equity.
Capitalized interest was $1.3 million, $0.6 million and $0.5 million in
1999, 1998 and 1997, respectively.
The maintenance of minimum cash balances is informally agreed to with
certain banks as a result of loans, commitments and services rendered. Cash
balances maintained to meet operating needs on a daily basis are sufficient to
satisfy these informal agreements. These balances are available for use by the
Company and its subsidiaries at all times and do not contain legal restrictions.
Cash in excess of such operating requirements is invested in short-term
securities.
4. Stock plans
The Company maintains a stock option plan, a performance share plan and a
savings and stock ownership plan which includes an investment savings plan and
an ESOP for the benefit of its employees.
The stock option plan provides for the issuance of stock options at no
less than the then current market price. Stock options have a maximum term of 10
years and vest evenly over four years.
Information pertaining to these stock options is shown below:
1999 1998 1997
- --------------------------------------------------------------------------------
Options granted 648,557 642,935 682,942
Average option price $ 22.36 23.58 19.56
Options exercised 350,862 277,139 379,149
Average option price $ 16.05 12.96 11.18
Options which became
exercisable 520,263 461,739 363,454
Average option price $ 19.31 18.29 17.85
Options unexercised
at year-end 3,021,144 2,820,764 2,478,641
Option price range
per share $ 8.89 8.89 8.89
to $29.25 to 29.25 to 22.67
Options cancelled 89,409 23,673 25,304
Options available
for granting
future options 818,125 1,377,273 1,996,535
================================================================================
Significant option groups outstanding at December 31, 1999 and the
related weighted-average price for the exercisable options and remaining life
information are as follows:
Options Outstanding Options Exercisable
- -------------------------------------------------------
Range of Average Remaining Average
exercise exercise Life average exercise
prices Shares price (years) shares price
- -------------------------------------------------------
$26-30 142,017 $28.46 9.2 6,875 $28.66
22-26 694,445 22.98 6.9 347,828 22.88
18-22 1,376,410 20.29 6.9 633,839 19.96
10-18 764,715 15.79 4.6 669,735 15.79
8-10 43,557 8.89 1.0 43,557 8.89
- -------------------------------------------------------
$ 8-30 3,021,144 $19.99 6.3 1,701,834 $18.67
- -------------------------------------------------------
All options were granted at an exercise price equal to the fair market
value of the Company's common stock at the date of grant. The weighted-average
fair market value at date of grant for options granted during 1999, 1998 and
1997 was $8.39, $8.16 and $6.89 per
28/29
32
option, respectively. The fair value of options at date of grant was estimated
using the Black-Scholes model with the following weighted-average assumptions:
1999 1998 1997
- -------------------------------------------------------------------------------
Expected life (years) 8.1 8.5 8.5
Interest rate 5.42% 5.85 5.84
Volatility 33.50 25.25 25.25
Dividend yield 2.22 1.88 1.88
================================================================================
On a pro forma basis, had compensation cost for the Company's stock
option plan been determined based on the fair value at the grant date, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts shown below:
1999 1998 1997
- -------------------------------------------------------------------------------
Net income (loss)
as reported $73,015 69,282 (37,277)
Net income (loss)
pro forma 69,958 67,013 (39,138)
Income (loss) per share
(diluted) as reported $ 1.85 1.67 (1.08)
Income (loss) per share
(diluted) pro forma $ 1.76 1.61 (1.13)
================================================================================
The pro forma effects on net income (loss) are not representative of the
pro forma effects on net income in future years because they do not take into
consideration pro forma compensation expense related to grants made prior to
1996.
The Company maintains a performance share plan whereby awards,
expressed as shares of common stock of the Company, are earned only if the
Company meets specific performance targets over a three-year period. The plan
pays 50% cash and 50% common stock for the value of any earned performance
shares. Performance share awards in the amount of 769,337 shares, 832,007 shares
and 601,802 shares were outstanding at the end of 1999, 1998 and 1997,
respectively. The Company accrues amounts based on performance reflecting the
value of cash and common stock, which is anticipated to be earned. The effect of
the plan was to reduce income by $2.1 million, $3.5 million and $2.7 million in
1999, 1998 and 1997, respectively.
The ESOP provides for the Company to match eligible employee pre-tax
savings. Amounts expensed under the ESOP were $3.5 million, $3.5 million and
$3.3 million in 1999, 1998 and 1997, respectively.
5. Capital stock
In 1989, Ferro issued 1,520,215 shares of 7% Series A ESOP Convertible
Preferred Stock to National City Bank, trustee for the Ferro ESOP. The shares
were issued at a price of $46.375 per share for a total consideration of $70.5
million. Each share of ESOP convertible preferred stock is convertible into
2.5988 shares of common stock. As the loans are repaid by the trustee, preferred
shares are allocated to participating individual employee accounts. The Company
is required to repurchase at the original issue price, for cash or common stock
at the Company's option, the preferred shares allocated to an employee's ESOP
account upon distribution of such account to the employee unless such shares
have been converted to common stock. Each preferred share carries one vote,
voting together with the common stock on most matters.
The Company purchased 892,779 shares of common stock in 1999 at an
aggregate cost of $20.1 million; 2,595,482 shares of common stock in 1998 at an
aggregate cost of $64.2 million; and 1,346,627 shares of common stock in 1997 at
an aggregate cost of $43.3 million. At December 31, 1999, the Company had
remaining authorization to acquire 2,075,133 shares under the then current
treasury stock purchase program.
The Company maintains a Shareholder Rights Plan ("the Plan") whereby,
until the occurrence of certain events, each share of the outstanding common
stock represents ownership of one right (Right). The Rights become exercisable
only if a person or group acquires 20% or more of the Company's common stock
(10% under certain circumstances) or commences a tender or exchange offer upon
consummation of which such person or group would control 20% or more of the
common shares or is declared an Adverse Person (as defined in the Plan) by the
Board of Directors. The Rights, which do not have the right to vote or receive
dividends, expire on April 8, 2006. Rights may be redeemed by the Company at
$0.031/3 per Right at any time until the 15th day following public announcement
that a person or group has acquired 20% or more of the voting power, unless such
period is extended by the Board of Directors while the Rights are redeemable.
If any person becomes the owner of 20% or more of the common stock (10%
under certain circumstances), or if the Company is the surviving corporation in
a merger with a 20% or more stockholder and its common shares are not changed or
converted, or if a
33
20% or more stockholder engages in certain self-dealing transactions with the
Company, then each Right not owned by such person or related parties will
entitle its holder to purchase shares of common stock at a purchase price of 50%
of the then current market price of the common stock up to a value of $73.33 per
Right.
In the event the Company engages in a merger or other business
combination transaction in which the Company is not the surviving corporation or
the Company is the surviving corporation but its common stock is changed or
exchanged or 50% or more of the Company's assets or earning power is sold or
transferred, each holder of a Right shall have the right to receive, upon
exercise thereof at the then current exercise price of the Right, that number of
shares of common stock of the surviving company which at the time of the
transaction would have a market value of two times the exercise price of the
Right.
6. Earnings per share computation
Information concerning the calculation of basic and diluted earnings per
share (EPS) is shown below:
(in thousands, except EPS) 1999 1998 1997
- --------------------------------------------------------------------------------
Basic EPS Computation
Numerator:
Net income (loss)
available $69,268 65,493 (41,034)
Denominator:
Weighted-average
common shares
outstanding 35,197 36,419 38,132
- --------------------------------------------------------------------------------
Basic EPS $ 1.97 1.80 (1.08)
- --------------------------------------------------------------------------------
Diluted EPS Computation
Numerator:
Net income (loss)
available $69,268 65,493 (41,034)
Convertible
preferred stock 2,371 2,205 (a)
Net income (loss)
assuming
conversion $71,639 67,698 (41,034)
Denominator:
Weighted-average
common shares
outstanding 35,197 36,419 38,132
Convertible
preferred stock 3,043 3,247 (a)
Options 567 813 (a)
Total shares 38,807 40,479 38,132
- --------------------------------------------------------------------------------
Diluted EPS $ 1.85 1.67 (1.08)
================================================================================
(a) Use basic EPS since conversion of preferred shares and options would be
anti-dilutive.
7. Acquisitions, divestitures and realignment
In July 1999, the Company purchased TAM Ceramics Incorporated (TAM),
based in Niagara Falls, New York. TAM is a leading supplier of dielectric
powders for the electronics industry and zircon-based ceramics powders for a
variety of uses.
In March 1999, the Company acquired Advanced Polymer Compounding Company
(APC), a supplier of high-performance thermoplastic elastomers and engineering
plastic compounds. APC is headquartered in Carpentersville, Illinois.
The aggregate cash purchase price for the above two acquisitions was
approximately $109.2 million. The purchase price was allocated based on the fair
value of assets and liabilities at the dates of acquisition, with approximately
$44.1 million being assigned to goodwill which is being amortized over 15 to 20
years.
In January 2000, the Company announced that it had reached an agreement
in principle to sell its Pyro-Chek(R) flame retardant business. The Company
expects to complete this transaction in the first half of 2000.
In March 1999, the Company sold its Filtros porous ceramics business,
based in East Rochester, New York.
In May 1998, the Company acquired the assets of Ningbo Powder Coatings
Company Ltd., located in the People's Republic of China.
In March 1998, the Company sold a majority of its shares in Ferro
Ecuatoriana S.A., located in Ecuador.
In July 1997, the Company sold the remaining interest in Nissan-Ferro
Organic Chemical Company, Ltd., located in Japan.
The Company sold or closed operations representing annual sales of $0.7
million, $5.1 million and $20.5 million in 1999, 1998 and 1997, respectively.
The above acquisitions and divestitures were not material to Ferro.
In the second quarter of 1997, the Company announced a program to
consolidate manufacturing facilities and reduce headcount worldwide. At that
time, the Company recorded a pre-tax charge of $152.8 million to recognize
impairment of assets, expected severance related to headcount reduction and
other related costs. In connection with this plan, the Company has closed, sold
or consolidated more than 20 facilities worldwide through December 1999 and
asset impairment charges have amounted to $94.7 million. In addition, the
Company has paid, or accrued, severance
30/31
34
and related costs of approximately $24.0 million to date under the program.
Other costs incurred amount to $16.0 million through December 1999, of which
$6.2 million was cash payments. The Company expects to complete the program in
the year 2000 and has $15.3 million remaining of the original reserve reflected
in other accrued liabilities. During 1999, the Company sold facilities provided
for under the realignment program and adjusted the reserves established on these
facilities to reflect the actual gain or loss on the sale.
8. Contingent liabilities
In 1994, the Company's Keil Chemical Division (Keil), located in Hammond,
Indiana, 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 Keil's 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.
On December 29, 1998, IDEM wrote to the Company alleging that because
Keil is in violation of the Agreed Order, operation of the Pyro-Chek(R) process
is prohibited, and that the Company will be subject to fines of up to $25,000
for each day of continued operation. The Company filed a petition for review
before the Indiana Office of Environmental Adjudication seeking to confirm that
operation of the Pyro-Chek(R) process has been and remains in compliance with
the Agreed Order. On February 24, 1999, IDEM withdrew its December 29, 1998
letter alleging that Keil was in violation of the Agreed Order and that the
Pyro-Chek(R) process is prohibited. On March 15, 1999, the Company's petition
for review was dismissed without objection.
On May 4, 1999, and December 16, 1999, the United States Environmental
Protection Agency (U.S. EPA) issued "Notices of Violation"(NOVs) alleging that
Keil violated various requirements of the Clean Air Act and related State laws
in modifying and operating the Pyro-Chek(R) process. The Company has met with
U.S. EPA and entered into negotiations intended to resolve the issues raised in
the NOVs. If the matter cannot be resolved through negotiation, and the United
States pursues and recovers the maximum potential penalties on all of its
claims, it could have a material adverse effect on the Company. However, the
Company believes that it will resolve this matter in a manner that will not have
a material adverse effect.
There are also pending against the Company and its consolidated
subsidiaries various other lawsuits and claims beyond those mentioned above. 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.
9. Research and development expense
Amounts expended for development or significant improvement of new and/or
existing products, services and techniques approximated $30.9 million, $29.4
million and $26.6 million in 1999, 1998 and 1997, respectively.
35
10. Retirement benefits
Information concerning the pension and other postretirement benefit plans
of the Company and consolidated subsidiaries is as follows:
Pension Benefits Other Benefits
- ---------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $267,148 231,547 $ 38,470 35,253
Service cost 8,489 7,199 971 777
Interest cost 16,683 15,996 2,569 2,515
Amendments 369 347 -- --
Effect of curtailment gain (loss) 12 (737) -- --
Plan participants' contributions 399 468 -- --
Benefits paid (11,297) (11,014) (2,148) (1,822)
Acquisitions 13,249 -- 3,240 --
Actuarial loss (gain) (30,788) 20,669 (1,098) 1,747
Exchange rate effect (8,366) 2,673 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 255,898 267,148 42,004 38,470
Change in plan assets:
Fair value of plan assets at beginning of year 238,036 220,575 -- --
Actual return on plan assets 26,805 21,702 -- --
Employer contribution 4,020 3,339 2,148 1,822
Plan participants' contributions 399 468 -- --
Benefits paid (11,297) (11,014) (2,148) (1,822)
Acquisitions 17,634 -- -- --
Exchange rate effect (8,953) 2,966 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 266,644 238,036 -- --
Funded status 10,746 (29,112) (42,004) (38,470)
Unrecognized net actuarial loss (gain) (33,337) 4,864 (7,185) (6,255)
Unrecognized prior service cost 4,355 4,703 (523) (701)
- ---------------------------------------------------------------------------------------------------------------------------
Net amount recognized $ (18,236) (19,545) $(49,712) (45,426)
Amounts recognized in the statement of financial
position consist of:
Prepaid benefit cost $ 4,604 3,099 $ -- --
Accrued benefit liability (24,725) (28,070) (49,712) (45,426)
Intangible asset 938 1,620 -- --
Accumulated other comprehensive income 947 3,806 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net amount recognized $ (18,236) (19,545) $(49,712) (45,426)
Weighted-average assumptions as of December 31
Discount rate 7.43% 6.50 7.93 6.84
Expected return on plan assets 8.20% 8.10 N/A N/A
Rate of compensation increase 3.9% 4.1 N/A N/A
===========================================================================================================================
32/33
36
For measurement purposes, a 9.0% increase in the cost of covered health
care benefits was assumed for 2000, gradually decreasing to 5.0% for 2008 and
later years.
Pension Benefits Other Benefits
(dollars in thousands) 1999 1998 1997 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Components of net periodic cost
Service cost $ 8,489 7,199 6,484 $ 971 777 671
Interest cost 16,683 15,996 15,198 2,569 2,515 2,479
Expected return on plan assets (18,626) (18,208) (16,513) -- -- --
Amortization of prior service cost 976 935 962 (177) (177) (177)
Net amortization and deferral 100 (425) (685) (169) (330) (507)
Curtailment effect 46 (609) -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net periodic pension cost $ 7,668 4,888 5,446 $3,194 2,785 2,466
- ---------------------------------------------------------------------------------------------------------------------------
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $21.9 million, $21.7 million and $13.0 million,
respectively, as of December 31, 1999 and $29.1 million, $28.8 million and $16.2
million, respectively, as of December 31, 1998.
A one-percentage point change in the assumed health care cost trend rates
would have the following effect:
1-Percentage 1-Percentage
(dollars in thousands) Point Increase Point Decrease
- --------------------------------------------------------------------------------
Effect on total of
service and interest
cost component $ 273 (250)
Effect on postretirement
benefit obligation $1,306 (2,396)
================================================================================
Costs for defined contribution pension plans were $0.6 million in 1999,
1998 and 1997.
The Company also maintains other supplemental retirement plans under
which it expensed $4.7 million, including $3.1 million settlement cost, $1.4
million and $1.7 million in the years ended December 31, 1999, 1998 and 1997,
respectively.
11. Income tax expense
INCOME TAX EXPENSE (BENEFIT) IS COMPRISED OF THE FOLLOWING COMPONENTS:
(dollars in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Current:
U.S. federal $13,708 19,583 21,958
Foreign 20,493 20,753 14,354
State and local 1,055 3,416 3,758
- --------------------------------------------------------------------------------
35,256 43,752 40,070
Deferred:
U.S. federal 6,565 (1,381) (25,173)
Foreign 212 (774) (21,908)
State and local 1,066 (398) (4,182)
- --------------------------------------------------------------------------------
7,843 (2,553) (51,263)
Total income tax $43,099 41,199 (11,193)
================================================================================
In addition to the 1999 income tax expense of $43,099, certain tax
benefits of $0.6 million were allocated directly to shareholders' equity.
The above taxes are based on earnings before income taxes. These
earnings (losses) aggregated $59.5 million, $60.7 million and $(14.5) million
for domestic operations and $56.6 million, $49.8 million and $(34.0) million for
foreign operations in 1999, 1998 and 1997, respectively.
37
A reconciliation of the statutory federal income tax rate and the
effective tax rate follows:
1999 1998 1997
- --------------------------------------------------------------------------------
Statutory federal income
tax rate 35.0% 35.0 (35.0)
Foreign tax rate difference 0.8 2.3 1.6
U.S. taxes on dividends
from subsidiaries (0.7) 0.4 1.4
Foreign sales corporation (0.9) (1.0) (0.3)
State and local taxes
net of federal 1.5 1.8 3.9
Realignment charge -- -- 7.2
Miscellaneous 1.4 (1.2) (1.9)
- --------------------------------------------------------------------------------
Effective tax rate 37.1% 37.3 (23.1)
================================================================================
The components of deferred tax assets and liabilities at December 31
were:
(dollars in thousands) 1999 1998
Deferred tax assets:
Pension and other
benefit programs 28,824 29,502
Accrued liabilities 22,459 30,114
Net operating loss carryforwards 8,220 8,342
Inventories 2,446 3,730
Other 10,401 12,582
- --------------------------------------------------------------------
Total deferred tax assets $72,350 84,270
Deferred tax liabilities:
Property and equipment -
depreciation and amortization 22,948 14,211
Other 1,454 1,173
- --------------------------------------------------------------------
Total deferred tax liabilities $24,402 15,384
Net deferred tax asset before
valuation allowance 47,948 68,886
Valuation allowance (6,448) (6,475)
- --------------------------------------------------------------------
Net deferred tax assets $41,500 62,411
====================================================================
At December 31, 1999, the Company's foreign subsidiaries had deferred tax
assets relating to net operating loss carryforwards for income tax purposes of
$8.2 million that expire in years 2000 through 2004, and in two instances have
no expiration period. For financial reporting purposes, a valuation allowance of
$6.1 million has been recognized to offset the deferred tax assets relating to
the net operating loss carryforwards.
Of the total deferred tax assets, $29.2 million and $26.5 million were
classified as current at December 31, 1999 and 1998, respectively.
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $113.4 million. Deferred income taxes are not provided on these
earnings as it is intended that the majority of these earnings are indefinitely
invested in these entities.
12. Reporting for segments
In determining reportable segments, the Company considered its operating
and management structure and the types of information subject to regular review
by its "chief operating decision maker." On this basis, the Company's reportable
segments include Coatings, Chemicals and Plastics.
Principal products from which the Coatings segment derives its revenues
are ceramic glaze coatings, inorganic color, and powder and porcelain enamel
coatings and electronic materials. The Chemicals segment's principal products
include polymer additives as well as performance and fine chemicals. Revenues
for the Plastics segment result primarily from the sale of plastic colorants and
filled and reinforced plastics.
The accounting policies of the segments are consistent with those
described for the consolidated financial statements in the summary of
significant accounting policies (see Note 1). The Company measures segment
profit for internal reporting purposes as net operating profit before interest
and tax. Excluded from net operating profit are such items as realignment
charges and 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.
(dollars in millions) 1999 1998 1997
- ------------------------------------------------------------------------
Net sales
Coatings $ 810.4 817.8 815.4
Chemicals 290.0 305.3 328.0
Plastics 254.9 238.7 237.9
- ------------------------------------------------------------------------
Total $1,355.3 1,361.8 1,381.3
========================================================================
34/35
38
Income and reconciliation to income (loss) before taxes follows:
(dollars in millions) 1999 1998 1997
- ------------------------------------------------------------------------
Coatings $ 94.2 89.3 84.2
Chemicals 34.2 36.4 32.4
Plastics 25.2 22.2 18.1
- ------------------------------------------------------------------------
Segment income 153.6 147.9 134.7
Unallocated expenses 17.2 18.7 15.1
Realignment charge -- -- 152.8
Interest expense 18.3 15.3 12.2
Interest earned (1.6) (2.9) (2.3)
Foreign currency (1.6) (0.9) (2.2)
Miscellaneous-net 5.2 7.2 7.6
- ------------------------------------------------------------------------
Income (loss)
before taxes $116.1 110.5 (48.5)
===============================================================================
Unallocated expenses consist primarily of corporate costs.
Depreciation and amortization
(dollars in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Coatings $ 29.4 25.7 25.8
Chemicals 11.0 10.8 12.2
Plastics 6.2 4.6 5.2
- --------------------------------------------------------------------------------
Segment
depreciation and
amortization 46.6 41.1 43.2
Other 1.9 2.0 1.8
- --------------------------------------------------------------------------------
Total consolidated $ 48.5 43.1 45.0
===============================================================================
Assets
(dollars in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Coatings $557.2 452.4 403.9
Chemicals 157.1 163.2 163.5
Plastics 114.5 83.1 75.4
- --------------------------------------------------------------------------------
Segment assets 828.8 698.7 642.8
Other assets 143.0 150.5 142.9
- --------------------------------------------------------------------------------
Total consolidated $971.8 849.2 785.7
===============================================================================
Segment assets consist of trade receivables, inventories, intangibles,
and property, plant and equipment net of applicable reserves. Other assets
include cash, deferred taxes and other items.
Expenditures for long-lived assets (including acquisitions)
(dollars in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Coatings $108.9 38.7 29.0
Chemicals 10.9 9.0 11.2
Plastics 33.5 6.8 3.7
- --------------------------------------------------------------------------------
Total $153.3 54.5 43.9
===============================================================================
Geographic information follows:
Net sales
(dollars in millions) 1999 1998 1997
United States
and Canada $ 756.7 737.3 748.6
International 598.6 624.5 632.7
- --------------------------------------------------------------------------------
Total $1,355.3 1,361.8 1,381.3
===============================================================================
Geographic revenues are based on the region in which the customer invoice
is generated. The United States of America is the single largest country for
customer sales. No other single country represents greater than 10% of
consolidated sales.
Long-lived assets
(dollars in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
United States
and Canada $303.0 218.4 207.0
International 120.8 106.3 87.5
- --------------------------------------------------------------------------------
Total $423.8 324.7 294.5
===============================================================================
Except for the United States of America, no single country has greater
than 10% of consolidated long-lived assets.
13. Financial instruments
The carrying amounts of cash and cash equivalents, trade receivables,
other current assets, accounts payable and amounts included in investments and
accruals meeting the definition of a financial instrument approximate fair
value.
It is the Company's hedging policy to neutralize or mitigate the
potentially negative effects of currency movements and raw material prices. The
Company's use of derivative financial instruments is limited to the hedging of
underlying exposures. The Company does not engage in speculative transactions
for trading purposes.
39
The Company uses forward exchange contracts and currency options to hedge
its exposure to foreign currency fluctuations. Several of the Company's foreign
subsidiaries enter into forward contracts to protect against the risk of
increased cost of non-local currency-denominated raw materials. The most
prevalent transactions involve the purchase of U.S. dollars against the Euro.
The maturity of the hedge instruments is consistent with the underlying
exposure, generally not beyond one year. At December 31, 1999, the market value
of such forward contracts was $9.9 million, compared with a contract value of
$10.2 million.
The Company enters into foreign currency options to protect the U.S.
dollar value of profits generated by certain European operations. Such activity
involves the purchase of put options for the Euro against the U.S. dollar. The
maturity of the options is generally under one year. At December 31, 1999, the
face value or notional amount of all outstanding currency options was $11.1
million. If liquidated at year-end 1999, these options would have produced a
cash amount of $0.5 million versus an unamortized cost of $0.2 million.
The Company enters into selective foreign currency forward contracts to
protect the U.S. dollar value of certain intercompany loans or subsidiary
currency exposures. Such activities involve the forward sale of foreign
currencies against the U.S. dollar. The maturity date of the forward contract is
usually under one year. At December 31, 1999, the contract value of all
outstanding forward contracts was $22.3 million. If liquidated at year-end 1999,
these forward contracts would have produced a cash gain amount of $0.1 million.
All forward contract, option and hedging activity is executed with major
reputable multinational financial institutions. Accordingly, the Company does
not anticipate counterparty default.
14. Lease commitment
In 1995, in conjunction with an acquisition, the Company entered into a
five-year operating lease agreement for certain land, buildings, machinery and
equipment. The Company has the option to purchase the assets at the end of the
lease term for a price of $29.6 million. In the event the Company chooses not to
exercise this option, the Company is obligated to pay, or is entitled to receive
from the lessor, the difference between the net sales proceeds and the
outstanding lease balance.
Rentals are based on floating rates, and the total annual lease payments,
based on the amount outstanding as of December 31, 1999, are estimated to be
$1.8 million annually.
36/37
40
Selected Financial Data
Ferro Corporation and subsidiaries
Years ended December 31, 1989 through 1999
(dollars in thousands except per share data
and employee data) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Operating results(a)
Net sales $ 1,355,283 1,361,844 1,381,280 1,355,685 1,322,954
Income (loss) before taxes and cumulative
effect of changes in accounting principles 116,114 110,481 (48,470) 88,207 80,159
Income tax expense (benefit) $ 43,099 41,199 (11,193) 33,621 30,905
Net income (loss) $ 73,015 69,282 (37,277) 54,586 49,254
Income as a percent of sales before
cumulative effect of changes in
accounting principles 5.4% 5.1% -- 4.0% 3.7%
Return on average shareholders' equity 25.2% 24.9% -- 14.2% 13.2%
Per common share data(a,b)
Average shares outstanding 35,197,243 36,419,090 38,131,631 39,506,572 41,419,578
Basic earnings $ 1.97 1.80 (1.08) 1.29 1.10
Diluted earnings 1.85 1.67 (1.08) 1.21 1.04
Cash dividends 0.55 0.495 0.43 0.39 0.36
Book value 8.44 8.02 7.32 9.99 9.49
Financial condition at year-end
Current assets $ 490,529 451,128 427,030 416,522 433,530
Current liabilities 337,633 282,556 277,707 252,333 258,472
- -----------------------------------------------------------------------------------------------------------------------------------
Working capital 152,896 168,572 149,323 164,189 175,058
- -----------------------------------------------------------------------------------------------------------------------------------
Plant and equipment 715,727 640,327 561,181 683,129 653,352
Accumulated depreciation and amortization 385,334 367,592 321,001 375,746 364,064
- -----------------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 330,393 272,735 240,180 307,383 307,288
- -----------------------------------------------------------------------------------------------------------------------------------
Other assets 150,828 125,302 118,469 146,563 136,294
Total assets 971,750 849,165 785,679 870,468 872,112
Long-term debt 236,794 156,283 102,020 105,308 104,910
ESOP loan guarantee -- 4,067 13,815 22,592 30,470
Postretirement liabilities 49,712 45,426 44,462 44,846 43,570
Other non-current liabilities 50,616 77,572 74,524 61,185 57,540
Shareholders' equity 296,995 283,261 273,151 384,204 382,150
Plant and equipment
Capital expenditures and acquisitions 118,670 64,420 45,129 50,592 60,733
Depreciation 42,417 38,650 39,421 42,283 40,233
Employees
Number (year-end) 6,881 6,693 6,851 6,912 6,914
Sales per employee $ 196,960 203,473 201,617 196,135 191,344
===================================================================================================================================
41
1994 1993 1992 1991 1990 1989
1,194,247 1,065,748 1,097,793 1,056,940 1,124,833 1,083,573
74,306 89,289 97,689 20,349 43,509 83,764
26,912 31,784 38,861 15,532 24,090 34,016
47,394 36,955 58,828 4,817 19,419 49,748
4.0% 5.4% 5.4% 0.5% 1.7% 4.6%
13.1% 16.3% 18.1% 1.6% 6.4% 16.8%
42,745,959 43,601,090 43,301,822 42,689,787 43,074,468 45,695,063
1.02 0.77 1.29 0.04 0.38 1.04
0.97 0.73 1.18 0.04 0.35 0.97
0.36 0.34 0.30 0.29 0.29 0.27
8.79 8.21 7.95 7.11 7.18 6.80
415,415 411,253 414,927 405,740 386,704 408,692
228,336 198,958 205,043 212,575 221,155 210,059
187,079 212,295 209,884 193,165 165,549 198,633
601,594 538,188 497,561 511,605 519,044 446,290
313,005 280,367 269,998 276,885 263,114 226,268
288,589 257,821 227,563 234,720 255,930 220,022
97,372 98,820 54,055 31,465 43,029 40,417
801,376 767,894 696,545 671,925 685,663 669,131
77,611 79,349 53,210 55,658 58,047 60,764
37,503 44,076 50,897 57,229 62,649 68,020
42,076 40,096 -- -- -- --
49,106 46,618 42,422 41,176 38,210 33,219
366,744 358,797 344,973 305,287 305,602 297,069
63,404 75,037 48,761 39,005 61,408 53,471
37,076 33,812 33,451 32,686 30,389 27,574
6,817 6,627 6,535 7,266 8,205 8,045
175,187 160,820 167,990 145,460 137,090 134,690
====================================================================================================
(a) Included in 1997 is a pre-tax realignment charge of $152.8
million, which on an after-tax basis is $100.0 million, or $2.52 per common
share. Excluding the realignment charge, net income for 1997 would have been
$62.7 million, or $1.44 per common share. Included in 1993 is a pre-tax charge
of $3.0 million, which on an after-tax basis is $1.8 million, or $0.04 per
common share. Also included in 1993 is the cumulative effect of accounting
changes of $20.6 million, which on an after-tax basis is $0.47 per common share.
Included in 1991 is a pre-tax restructuring charge of $45.3 million, which on an
after-tax basis is $31.7 million, or $0.74 per common share. A litigation charge
of $12.0 million is included in 1990, which on an after-tax basis $7.9 million,
or $0.18 per common share. Excluding the charges in 1991 and 1990, net income
for 1991 would have been $36.5 million, or $0.78 per common share, and net
income for 1990 would have been $27.3 million, or $0.56 per common share.
(b) Basic earnings per share are based on a weighted average of common shares
outstanding. Diluted earnings per share further reflect the potential dilution
of earnings per share, assuming that certain stock options whose exercise price
is less than the average market price for the stock are exercised and that
convertible preferred shares are converted into common shares. Book value is
based on outstanding common shares and net worth at the end of the year.
Outstanding common shares and per share data are adjusted to reflect the 3-for-2
stock split in August 1989, 3-for-2 stock split in August 1992 and 3-for-2 stock
split in November 1997.
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42
Quarterly Data (Unaudited)
Ferro Corporation and subsidiaries
(dollars in thousands except per share data)
Per common share
- ---------------------------------------------------------------------------------------------------------------------------
Gross Net Basic Diluted Cash Common stock
Quarter Net sales profit income earnings earnings dividends price range
- ---------------------------------------------------------------------------------------------------------------------------
1999 1 $ 331,481 92,216 17,101 0.46 0.43 0.135 $28.000-20.125
2 337,035 96,459 19,174 0.52 0.48 0.135 30.938-23.750
3 338,035 93,329 18,066 0.48 0.45 0.135 28.375-20.563
4 348,732 96,402 18,674 0.51 0.48 0.145 22.250-19.188
- ---------------------------------------------------------------------------------------------------------------------------
Total $1,355,283 378,406 73,015 1.97 1.85 0.550
- ---------------------------------------------------------------------------------------------------------------------------
1998 1 $ 339,763 90,141 17,055 0.43 0.40 0.120 $30.125-22.438
2 348,004 92,551 18,402 0.47 0.44 0.120 29.750-23.875
3 334,388 89,965 16,762 0.44 0.41 0.120 25.875-18.000
4 339,689 91,604 17,063 0.46 0.42 0.135 29.250-18.563
- ---------------------------------------------------------------------------------------------------------------------------
Total $1,361,844 364,261 69,282 1.80 1.67 0.495
===========================================================================================================================
The common stock of the Company is listed on the New York Stock Exchange. Ticker
Symbol: FOE
At January 31, 2000, the Company had 2,315 holders of its common stock.
43
Independent Auditors' Report
Ferro Corporation and subsidiaries
To the Shareholders and Board of Directors of Ferro Corporation
We have audited the accompanying consolidated balance sheets of Ferro
Corporation and subsidiaries as of December 31, 1999 and 1998 and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Ferro
Corporation and subsidiaries at December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
KPMG LLP
Cleveland, Ohio
January 25, 2000
40/41
44
board of directors
[photos 1-5]
1 Hector R. Ortino
(1993) Chairman and Chief Executive Officer of Ferro, Age 57 [3]
2 Michael H. Bulkin
(1998) Private investor; Retired Director, McKinsey & Company, a management
consulting firm, Age 61 [2, 3]
3 John C. Morley
(1987) President, Evergreen Ventures, Ltd.; Retired Director, President and
Chief Executive Officer, Reliance Electric Company, a manufacturer of
industrial motors and controls, mechanical power transmission products and
specialty telecommunication systems and products, Age 68 [1, 3, 4]
4 William J. Sharp
(1998) President, North American Tire, The Goodyear Tire & Rubber Company, a
worldwide manufacturer of tires, chemicals and engineered products, Age 58
[1, 4]
5 Sandra Austin Crayton
(1994) President, PhyServ Solutions, Inc., a wholly owned subsidiary of
National Data Corporation; also President and CEO of Austin Associates, a
management consulting firm, Age 52 [2, 3, 4]
6 Albert C. Bersticker
(1978) Retired Chairman of Ferro. Age 65
7 William E. Butler
(1992) Retired Chairman and Chief Executive Officer, Eaton Corporation, a
manufacturer of engineered products for automotive, industrial, commercial
and military markets, Age 68 [2, 3]
8 Dr. Glenn R. Brown
(1988) Science advisor to the Governor of the State of Ohio; Retired Senior
Vice President and Director, Standard Oil Company, Age 69 [1, 2]
9 Dennis W. Sullivan
(1992) Executive Vice President, Parker Hannifin Corporation, a manufacturer
of fluid power products, Age 61 [1, 4]
10 Rex A. Sebastian
(1986) Private investor; Retired Senior Vice President, Operations, Dresser
Industries, a producer of energy and industrial-related products and
services, Age 70
11 William B. Lawrence
(1999) Executive Vice President, Law, Corporate Development and Government
Affairs, TRW Inc., a global provider of products and services for the
automotive, aerospace and information systems markets, Age 55
Note: Figures in parentheses indicate the year the Director was elected to the
Board. Figures in brackets indicate the Committee(s) on which a Director serves.
[1] Audit
[2] Compensation & Organization
[3] Executive
[4] Finance
42/43
45
[photos 6-11]
Corporate Officers
David G. Campopiano
(1989) Vice President,
Mergers and Acquisitions, Age 50
Mark A. Cusick
(1995) Secretary
Principal Occupation:
Partner, Squire, Sanders & Dempsey
LLP, Attorneys at Law, Age 51
R. Jay Finch
(1991) Senior Vice President,
Specialty Plastics, Age 58
J. Larry Jameson
(1996) Senior Vice President,
Industrial Coatings, Age 62
Kent H. Lee, Jr.
(1996) Senior Vice President,
Specialty Chemicals, Age 58
Hector R. Ortino
(1971) Chairman and
Chief Executive Officer, Age 57
Millicent W. Pitts
(1998) Vice President,
Global Operations Support, Age 45
Paul V. Richard
(1983) Vice President,
Human Resources, Age 40
Robert A. Rieger
(1998) Vice President, Ceramics, Colors
and Electronic Materials, Age 49
Bret W. Wise
(1999) Senior Vice President and
Chief Financial Officer, Age 39
Note: Figures in parentheses indicate the year the Officer joined the
Corporation.
46
Corporate Information
Automatic Dividend Reinvestment and Stock Purchase Plan
This Plan provides an opportunity for shareholders to purchase additional
shares of Ferro common stock by automatic reinvestment of dividends and by
optional additional periodic cash payments, without paying service charges or
brokerage commissions. These costs will be paid by Ferro.
The Plan is administered by National City Bank.
Any questions or correspondence about the Plan should be addressed to:
National City Bank Corporate
Trust Department
P.O. Box 92301
Cleveland, Ohio 44193-0900
216-476-8573
Toll free: 800-622-6757
Brokerage Accounts
To reduce communication delays that exist for some Ferro shareholders who
hold their stock in brokerage accounts, the Company will send its various
printed communications directly to these shareholders. If you would like to take
advantage of this service, please write to: Treasury Department, Ferro
Corporation, 1000 Lakeside Avenue, P.O. Box 147000, Cleveland, Ohio 44114-7000,
U.S.A., indicating the number of Ferro shares owned and the name and address of
the brokerage firm that administers your account.
Stock Transfer Agent/Registrar
and Dividend Disbursing Agent
National City Bank
P. O. Box 5756
Cleveland, Ohio 44101-0756
Trustee 7 3/8%, 7 5/8%, 7 1/8% and
8% Debentures
Chase Manhattan Trust Company
National Association
Chase Financial Tower
250 West Huron Road, Suite 220
Cleveland, Ohio 44113
Independent Auditors
KPMG LLP
1500 National City Center
1900 East Ninth Street
Cleveland, Ohio 44114
Exchange Listing
New York Stock Exchange
Common Stock
Stock symbol: FOE
Form 10-K
Ferro Corporation's Form 10-K filed with the Securities and Exchange
Commission for the year ended December 31, 1999 is available to shareholders
upon written request to:
Investor Relations
Ferro Corporation
1000 Lakeside Avenue
P.O. Box 147000
Cleveland, Ohio 44114-7000
call 216-641-8585 ext. 2100
or email: investor@ferro.com
Investor Contact
Aidan Gormley, Manager
Investor Relations
216-875-7155
email: gormley@ferro.com
Annual Meeting
April 28, 2000, 9:00 a.m.
Great Lakes Science Center
Auditorium
601 Erieside Avenue
Cleveland, Ohio 44114
Executive Offices
Ferro Corporation
1000 Lakeside Avenue
P.O. Box 147000
Cleveland, Ohio 44114-7000
216-641-8580
For more information, visit the
Company's Web site at www.ferro.com
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Worldwide Operating Units
United States
Coatings
California, Georgia, New York, Ohio, Pennsylvania, Tennessee
Plastics
Illinois, Indiana, New Jersey, Ohio
Chemicals
Indiana, Louisiana, Ohio, Texas
Europe
France
Ferro France S.a.R.L.
Ferro Chemicals S.A.
Germany
Ferro (Deutschland) GmbH.
Ruhr-Pulverlack GmbH
Great Britain
Ferro (Great Britain) Ltd.
Holland
Ferro (Holland) B.V.
Italy
Ferro (Italia) S.R.L.
Portugal
Ferro Industries Quimicas, S.A.
Spain
Ferro Enamel Espanola, S.A.
Turkey
Ege-Ferro Kimya A.S. (49.9%)
Latin America
Argentina
Ferro Enamel Argentina, S.A.I.C.y.M.
Minera Loma Blanca, S.A.
Procesadara de Boratos Argentinos, S.A. (50%)
Brazil
Ferro Enamel do Brasil I.C.L.
Mexico
Ferro Mexicana S.A. de C.V.
Venezuela
Ferro de Venezuela, C.A. (51%)
Asia-Pacific
Australia
Ferro Corporation (Australia) Pty. Ltd.
Indonesia
P.T. Ferro Mas Dinamika (95%)
People's Republic of China
Ferro (Ningbo) Powder Coatings, Ltd.
Taiwan, Republic of China
Ferro Industrial Products Limited
Ferro Toyo Co., Ltd. (60%)
Thailand
Ferro (Thailand) Co. Ltd. (49%)
Note: Percentages in parentheses indicate Ferro's ownership.
[LOGO]FERRO, Alcryn and Pyro-Chek are registered trademarks of Ferro
Corporation.
Design: Dix & Eaton Incorporated, Photography: The Reuben Group
48
Ferro Corporation 1000 Lakeside Avenue Cleveland Ohio 44114 www.ferro.com