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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO _____________
COMMISSION FILE NUMBER 1-584
FERRO CORPORATION
(Exact name of registrant as specified in its charter)
AN OHIO CORPORATION, IRS NO. 34-0217820
1000 LAKESIDE AVENUE CLEVELAND, OH 44114
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: 216/641-8580
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
At October 31, 2001 there were 34,272,865 shares of Ferro common stock,
par value $1.00, outstanding.
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FERRO CORPORATION AND SUBSIDIARIES
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
2001 2000 2001 2000
---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Sales from Ongoing Operations........................ $ 365,310 $ 359,173 $ 1,091,193 $ 1,070,267
Sales from Businesses Sold........................... -- 513 -- 15,858
-------------- -------------- --------------- ---------------
Total Net Sales...................................... $ 365,310 $ 359,686 $ 1,091,193 $ 1,086,125
Cost of Sales........................................ 279,668 263,164 822,773 788,122
Selling, Administrative and General Expenses......... 73,334 62,039 206,502 190,004
Other Charges (Credits):
Interest Expense.................................. 8,737 6,551 24,016 17,885
Net Foreign Currency (Gain) Loss.................. (17,128) (1,292) (17,477) (2,124)
Other Expense - Net............................... 1,190 643 2,998 1,034
-------------- -------------- --------------- ---------------
Income Before Taxes............................ 19,509 28,581 52,381 91,204
Income Tax Expense................................... 7,257 10,391 19,151 34,462
-------------- -------------- --------------- ---------------
Net Income........................................... 12,252 18,190 33,230 56,742
Dividend on Preferred Stock, Net of Tax.............. 763 846 2,333 2,626
-------------- -------------- --------------- ---------------
Net Income Available to Common Shareholders.......... $ 11,489 $ 17,344 $ 30,897 $ 54,116
============== ============== =============== ===============
Per Common Share Data:
Basic Earnings.................................... $ 0.34 $ 0.50 $ 0.90 $ 1.56
Diluted Earnings.................................. 0.33 0.48 0.88 1.49
Shares Outstanding:
Average Outstanding............................... 34,249,361 34,495,234 34,216,688 34,681,555
Average Diluted................................... 37,071,799 37,593,916 37,081,281 37,848,300
Actual End of Period.............................. 34,259,867 34,328,186 34,259,867 34,328,186
See Accompanying Notes to Condensed Consolidated Financial Statements
1
CONDENSED CONSOLIDATED BALANCE SHEET
FERRO CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
--------------------------
(UNAUDITED) (AUDITED)
2001 2000
---- ----
ASSETS
(DOLLARS IN THOUSANDS)
Current Assets:
Cash and Cash Equivalents........................................................... $ 33,989 $ 777
Net Receivables..................................................................... 235,737 189,014
Inventories......................................................................... 268,833 189,639
Other Current Assets................................................................ 101,679 63,798
--------------- ---------------
Total Current Assets............................................................. 640,238 443,228
Net Property, Plant & Equipment........................................................ 583,548 425,728
Unamortized Intangible Assets.......................................................... 438,351 196,279
Other Assets........................................................................... 87,794 61,770
--------------- ---------------
$ 1,749,931 $ 1,127,005
=============== ===============
LIABILITIES
Current Liabilities:
Notes and Loans Payable............................................................. $ 334,105 $ 65,865
Accounts Payable, Trade............................................................. 191,420 155,244
Other Current Liabilities........................................................... 236,764 143,986
--------------- ---------------
Total Current Liabilities........................................................ 762,289 365,095
Long - Term Debt....................................................................... 557,440 350,781
Other Liabilities...................................................................... 112,864 101,971
Shareholders' Equity................................................................... 317,338 309,158
--------------- ---------------
$ 1,749.931 $ 1,127,005
=============== ===============
See Accompanying Notes to Condensed Consolidated Financial Statements
2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FERRO CORPORATION AND SUBSIDIARIES
NINE MONTHS ENDED
-----------------
SEPTEMBER 30
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS) 2001 2000
---- ----
Net Cash Provided by Operating Activities. ............................................ $ 116,084 $ 73,915
Cash Flow from Investing Activities:
Capital Expenditures for Plant and Equipment ....................................... (34,959) (37,398)
Acquisitions and Divestitures, net of cash acquired ................................ (509,245) (114,483)
Other Investing Activities.......................................................... 3,180 574
----------- -------------
Net Cash Used for Investing Activities. ............................................... (541,024) (151,308)
Cash Flow from Financing Activities:
Net Borrowings (Payments) Under Short-term Facilities .............................. (46,055) 17,412
Net Borrowings Under Short-term Capital Markets Facility .......................... 300,000 --
Asset Securitization ............................................................... 30,274 79,100
Proceeds from Long-term Debt ....................................................... 455,000 44,831
Principal Payments on Long-term Debt ............................................... (250,229) --
Purchase of Treasury Stock ......................................................... (4,050) (26,161)
Cash Dividend Paid ................................................................. (17,655) (17,748)
Other Financing Activities ......................................................... (8,887) 2,055
------------ -------------
Net Cash Provided by Financing Activities ............................................. 458,398 99,489
Effect of Exchange Rate Changes on Cash ............................................... (246) (1,031)
----------- -------------
Increase in Cash and Cash Equivalents ................................................. 33,212 21,065
Cash and Cash Equivalents at Beginning of Period ...................................... 777 7,114
----------- -------------
Cash and Cash Equivalents at End of Period ............................................ $ 33,989 $ 28,179
=========== =============
Cash Paid During the Period for:
Interest, net of amounts capitalized ............................................... $ 17,418 $ 13,710
Income Taxes ....................................................................... $ 8,779 $ 21,475
----------- -------------
See Accompanying Notes to Condensed Consolidated Financial Statements
3
FERRO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated interim financial statements should be read
in conjunction with the consolidated financial statements and notes
thereto included in the Company's annual report on Form 10-K for the
fiscal year ended December 31, 2000. The information furnished herein
reflects all adjustments (consisting of normal recurring adjustments)
which are, in the opinion of management, necessary for fair
presentation of the results of operations for the interim periods. The
results of the nine months ended September 30, 2001 are not necessarily
indicative of the results expected in subsequent quarters or for the
full year.
2. COMPREHENSIVE INCOME
Comprehensive income represents net income adjusted for foreign
currency translation adjustments and pension liability adjustments.
Comprehensive income was $20.3 million and $6.6 million for the three
months ended September 30, 2001 and 2000, respectively. Comprehensive
income was $29.4 million and $42.2 million for the nine months ended
September 30, 2001 and 2000, respectively. Accumulated other
comprehensive income (loss) at September 30, 2001 and December 31, 2000
was ($89.5) million and ($85.7) million, respectively.
3. INVENTORIES
Inventories consisted of the following:
(dollars in millions)
September 30, December 31,
2001 2000
---- ----
Raw materials $ 88.8 $ 56.1
Work in Process 23.2 28.4
Finished Good 166.9 116.0
----------- ----------
278.9 200.5
LIFO Reserve ( 10.1) (10.9)
----------- ----------
Net Inventory $ 268.8 $ 189.6
=========== ==========
4. LONG-TERM DEBT
Long-term debt as of September 30, 2001 and December 31, 2000 was as
follows:
2001 2000
---- ----
Debentures, 7.125%, due 2028 $ 54,443 $ 54,427
Debentures, 7.625%, due 2013 24,831 24,824
Debentures, 8.0%, due 2025 49,451 49,434
Debentures, 7.375%, due 2015 24,949 24,947
Revolving credit agreements 400,000 195,510
Other 4,872 3,349
-------- --------
558,546 352,491
Less current portion 1,106 1,710
-------- --------
Total $557,440 $350,781
======== ========
In connection with the acquisition of certain businesses of dmc(2) (see
note 8), the Company entered into new unsecured senior credit
facilities to fund the acquisition, pay off certain borrowings under
its former revolving credit facility and provide for its ongoing
working capital and other financing requirements. The new credit
facilities include (1) a $373 million five-year revolving credit
facility, (2) a $300 million capital markets 180-day term loan facility
and (3) a $187 million 364-day revolving credit facility. At the
Company's option, the borrowings under the revolving credit facilities
bear
4
FERRO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. LONG-TERM DEBT (CONTINUED)
interest at a rate equal to (1) the London Interbank Offered Rate
adjusted for eurocurrency reserve requirements ("LIBOR"), or (2) the
greater of the prime rate established by National City Bank, Cleveland,
Ohio and the Federal Funds effective rate plus 0.5% (collectively
referred to under the credit facilities as the "Prime Rate"); plus, in
each case, applicable margins based upon a combination of the Company's
index debt rating and the ratio of the Company's total debt to EBITDA.
The capital markets term facility bears interest, at the Company's
option, at a rate equal to (1) LIBOR plus 2% or (2) the Prime Rate.
At its option and so long as no default or event of default has
occurred or is continuing, the Company may extend the capital markets
term facility for an additional 180 days and the 364-day revolving
facility for an additional one year, which facility will then be
converted into a term loan. The capital markets term facility margins
will be subject to a 1% increase for the first month following the
earlier of a downgrade in its index debt rating or the term loan
remaining outstanding past its maturity date, plus additional increases
of 0.50% for each additional month thereafter.
The Company may prepay borrowings under the credit facilities from time
to time without premium or penalty, subject to certain restrictions on
competitive bid loans and customary breakage costs. The Company will be
required to make mandatory prepayments under the credit facilities with
100% of the proceeds from certain asset sales and certain sales of debt
or equity securities. These mandatory prepayments will result in
reductions in the lenders' borrowing commitments in accordance with the
terms of the credit facilities. The Company is also required to make
mandatory prepayment upon a change in control or in the event its
principal borrowings under the credit facilities exceed the commitment
amounts.
The credit facilities contain customary restrictions on the Company's
ability to engage in certain activities, including restrictions on its
ability to dispose of certain assets, consummate certain acquisitions,
consolidate or merge, engage in certain sales and leaseback
transactions, pay dividends in certain situations, repurchase or redeem
its capital stock under certain circumstances, incur certain
indebtedness, create liens, enter into agreements with certain negative
pledge clauses, enter into transactions with affiliates or change its
business. Several of the covenants contain additional restrictions
based upon the ratio of the Company's total debt to EBITDA or in the
event its debt ceases to be rated investment grade by both Moody's
Investor Service, Inc. and Standard & Poor's Rating Group. The credit
facilities also contain financial covenants relating to maximum
leverage based on total debt to EBITDA and minimum fixed charge
coverage ratios over certain periods of time.
The Company's obligations under the credit facilities are not secured
and are unconditionally guaranteed, jointly and severally, by Ferro
Electronic Materials, Inc. and Ferro Pfanstiehl Laboratories, Inc.,
both of which are domestic wholly owned subsidiaries. Although its
credit facilities are unsecured, if its debt ceases to be rated as
investment grade, the Company and its material subsidiaries must grant
security interests in its principal manufacturing properties, pledge
100% of the stock of its domestic material subsidiaries and pledge 65%
of the stock of foreign material subsidiaries, in each case, in favor
of its lenders under such facilities. In that event, liens on the
Company's principal domestic manufacturing properties and the stock of
its domestic subsidiaries will be shared with the holders of its senior
notes and trust notes and trust certificates issued under its asset
defeasance program.
5
FERRO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. EARNINGS PER SHARE COMPUTATION
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------ ------------
2001 2000 2001 2000
---- ---- ---- ----
Average Basic Shares Outstanding............ 34,249,361 34,495,234 34,216,688 34,681,555
Adjustments for Assumed Conversion of
Convertible Preferred Stock and
Common Stock Options.................... 2,822,438 3,098,682 2,864,593 3,116,745
-------------- --------------- -------------- ---------------
Average Diluted Shares...................... 37,071,799 37,593,916 37,081,281 37,848,300
Basic earnings per share is computed as net income available to common
shareholders divided by average basic shares outstanding. Diluted
earnings per share is computed as net income adjusted for the tax
effect associated with assumed conversion of preferred stock to common
stock divided by average diluted shares outstanding.
6. CONTINGENT LIABILITIES
As discussed in the Company's annual report on Form 10-K for the fiscal
year ended December 31, 2000 and incorporated herein by reference, the
Company is involved in a number of sites involving the Comprehensive
Environmental Response, Compensation and Liability Act and similar
laws. 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. The Company determines such
costs based on the Company's stated or estimated contribution to each
site and the estimated total clean-up costs of each site. The costs are
not discounted due to the uncertainty with respect to the timing of
related payments. The Company actively monitors the actual and
anticipated spending at each site in which it is involved, and adjusts
related accruals when circumstances indicate a change from previously
stated or estimated amounts.
On May 4, 1999, and December 16, 1999, the United States Environmental
Protection Agency (U.S. EPA) issued Notices of Violation (NOVs)
alleging that the Company violated various requirements of the Clean
Air Act and related state laws in modifying and operating the Pyro-Chek
process. The U.S. EPA has also submitted requests seeking information
from the Company related to the alleged violations. The Company
completed the sale of assets relating to the Pyro-Chek process and
ceased production of Pyro-Chek in June 2000. The Company has been
meeting with the U.S. EPA, the State of Indiana and local authorities
and is engaged in negotiations intended to resolve the issues raised in
the NOVs. The Company believes that it will resolve this matter in a
manner that will not have a material adverse effect on the Company's
financial position or results of operations.
In 2000, a wrongful death lawsuit was filed against Keil Chemical, a
division of the Company, and is now pending in Federal court in
Indiana. Three negligence suits were filed against Keil Chemical, also
in Federal court in Indiana. These complaints generally allege that the
Company was negligent and/or reckless in failing to control emissions,
misrepresenting emissions levels to regulatory agencies, failing to
warn nearby residents of the hazards posed by its emissions, and in
emitting carcinogenic chemicals without a permit. The Company believes
it has valid defenses to the allegations made in these suits, is
vigorously defending its position, and believes it will resolve these
matters in a manner that will not have a material adverse effect on the
Company's financial position or results of operations.
6
FERRO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. REPORTING FOR SEGMENTS
The Company's reportable segments are Coatings and Performance
Chemicals. Coatings products include ceramics and color, industrial
coatings and electronic materials. Performance Chemicals consists of
polymer additives, performance and fine chemicals, plastic compounds
and plastic colorants. The Company measures segment profit for internal
reporting purposes as net operating profit before interest and taxes.
Excluded from net operating profit are certain unallocated corporate
expenses. A complete reconciliation of segment income to consolidated
income before tax is presented below.
Sales to external customers are presented in the following chart.
Inter-segment sales are not material.
FERRO CORPORATION AND SUBSIDIARIES
SEGMENT DATA (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------ ------------
(DOLLARS IN THOUSANDS) 2001 2000 2001 2000
- ---------------------- ---- ---- ---- ----
SEGMENT SALES
Coatings............................................ $ 220,930 $ 218,927 $ 642,601 $ 664,164
Performance Chemicals............................... 144,380 140,759 448,592 421,961
------------ ---------- ----------- ----------
Total (1)............................................... $ 365,310 $ 359,686 $ 1,091,193 $1,086,125
============ ========== =========== ==========
SEGMENT INCOME
Coatings............................................ $ 13,202 $ 25,833 $ 52,857 $ 76,576
Performance Chemicals............................... 7,298 12,492 30,541 42,832
------------ ---------- ----------- ----------
Total ............................................... 20,580 38,325 83,398 119,408
Unallocated expenses (2)................................ 8,272 3,842 21,480 11,409
Interest expense........................................ 8,737 6,551 24,016 17,885
Foreign currency (gain)................................. (17,128) (1,292) (17,477) (2,124)
Other (income) expense.................................. 1,190 643 2,998 1,034
------------ ---------- ----------- ----------
Income before taxes................................. $ 19,509 $ 28,581 $ 52,381 $ 91,204
============ ========== =========== ==========
GEOGRAPHIC SALES
United States....................................... $ 196,383 $ 220,400 $ 614,036 $ 643,788
International....................................... 168,927 139,286 477,140 442,337
------------ ---------- ----------- ----------
Total (1)............................................... $ 365,310 $ 359,686 $ 1,091,193 $1,086,125
============ ========== =========== ==========
- ---------------
(1) Sales for the three and nine months ended September 30, 2000 include
sales from businesses sold of $513 and $15,858, respectively.
(2) Unallocated expenses consist primarily of corporate costs, charges
associated with employment cost reduction programs and certain
integration costs related to the acquisition of certain businesses of
dmc(2).
7
FERRO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. ACQUISITIONS AND DIVESTITURES
On September 7, 2001, the Company acquired from OM Group, Inc. ("OMG")
certain businesses previously owned by dmc(2) Degussa Metals Catalysts
Cerdec AG ("dmc(2)") pursuant to an agreement to purchase certain
assets of dmc(2), including shares of certain of its subsidiaries. The
businesses acquired include the electronic materials, performance
pigments, glass systems and Cerdec ceramics businesses of dmc(2). The
Company paid to OMG in cash a purchase price for these businesses of
approximately $525 million.
A summary of the preliminary allocation of the purchase price follows:
(dollars in millions):
Cash consideration paid to OMG $ 525.0
Estimated fair value of net assets acquired 279.5
-------
Excess of purchase price over estimated fair
value of net assets acquired $ 245.5
=======
The preliminary purchase price allocation is subject to revisions, when
additional information becomes available to the Company, including the
fair values of certain acquired assets and their remaining useful
lives; valuation of actuarially-determined liabilities; measurement of
certain assumed liabilities; and plans to integrate the operations of
the acquired dmc(2) operations. These costs, once determinable, will be
accrued as part of the purchase price allocation and will result in
adjustments to the excess of purchase price over net assets acquired.
Additionally, the purchase price is subject to certain post-closing
adjustments with respect to working capital changes and levels of
acquired cash and debt. Any such adjustments will result in changes to
the preliminary allocation shown above.
The Company financed this transaction with proceeds from new credit
facilities, which are described in Note 4 herein.
The following unaudited proforma financial information for the nine
months ended September 30, 2001 and 2000 assumes the acquisition of
certain businesses of dmc(2) occurred as of January 1, 2000, after
giving effect to certain adjustments, including interest expense on
acquisition debt, depreciation based on the adjustments to fair market
value of the acquired property, plant and equipment, and related income
tax effects. The proforma results have been prepared for comparative
purposes only, reflect no potential synergies from the acquisition and
are not necessarily indicative of the results of operations that may
occur in the future or that would have occurred had the dmc(2)
acquisition been effected on the date indicated.
Nine months ended
September 30
2001 2000
---------- ---------
(dollars in millions except per share amounts)
Revenues - Proforma $1407.4 $1476.5
Net Income - Proforma 19.1 58.4
Earnings per share -- proforma
- Basic. 0.49 1.61
- Diluted 0.49 1.53
8
FERRO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. REALIGNMENT AND COST REDUCTION PROGRAMS
The following table summarizes the activities relating to the Company's
realignment and cost reduction programs:
Accrued costs as of December 31, 2000 $ 4,100
Charges through September 30, 2001 8,926
Cash payments made through September 30, 2001 (6,172)
---------
Accrued costs as of September 30, 2001 $ 6,854
=========
In the second quarter of 2001, the Company implemented an employment
cost reduction program as an element of an overall cost reduction
program in response to a slowdown in general economic conditions. The
program included the elimination of approximately 200 manufacturing and
general overhead positions and the closure of two small manufacturing
operations whose production was transferred to more efficient
locations. The Company continued the program during the third quarter
of 2001, and recorded further charges relating to the closure of
another small manufacturing facility whose production is being
integrated elsewhere, and the related termination of employees.
Pursuant to the programs, the Company incurred pre-tax charges of
$8.9 million through September of 2001, which included $7.8 million for
severance, $0.8 million for asset impairment and $0.3 million of other
costs. Severance costs were included in both cost of sales and selling,
administrative and general expenses for $2.9 million and $4.9 million,
respectively.
Through September 30, 2001, the amount of severance costs paid under
all realignment and cost reduction programs was $6.2 million and 247
employees had actually been terminated.
10. ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 141, "Business Combinations." Statement 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. The Company adopted certain provisions
of Statement 141 effective July 1, 2001, with respect to disclosures
and acquisitions consummated following that date. The adoption did not
have a material effect on the Company's financial position or results
of operations.
In June 2001, the Financial Accounting Standards Board (FASB) also
issued Statement No. 142 "Goodwill and Other Intangible Assets."
Statement 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized but, instead, tested for
impairment at least annually in accordance with the provisions of
Statement 142. The Company has adopted certain provisions of Statement
142 with respect to acquisitions consummated after June 30, 2001. The
adoption did not have a material impact on the Company's financial
position or results of operations.
As January 1, 2002, the Company expects to have unamortized goodwill of
approximately $435 million, which will be subject to the transition
provisions of Statements 141 and 142. Amortization expense related to
goodwill was approximately $5.6 million and $6.2 million for the year
ended December 31, 2000, and the nine months ended September 30, 2001,
respectively. The Company is currently studying the effects of adopting
the remaining provisions of Statements 141 and 142 (which are effective
January 1, 2002), including whether any transitional adjustments will
be required.
9
FERRO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In June 2001, the FASB issued Statement No. 143 "Accounting for Asset
Retirement Obligations." Statement 143 requires entities to record the
fair value of a liability for an asset retirement obligation in the
period in which it is incurred. When the liability is initially
recorded, the entity capitalizes the cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period and the capitalized cost is
depreciated over the remaining useful life of the related asset. Upon
settlement of the liability, the entity either settles the obligation
for the amount recorded or incurs a gain or loss. Statement 143 is
effective for fiscal years beginning after June 15, 2002. Management is
evaluating the effect of this statement on the Company's results of
operations and financial position.
In August 2001, the FASB issued Statement No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets," effective prospectively
for fiscal years beginning after December 15, 2001. Statement 144
supersedes Statement No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the
accounting and reporting provisions of APB No. 30 "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment
of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions ("Opinion 30") for the disposal of a segment of
business (as previously defined under Opinion 30). The FASB issued
Statement No. 144 to establish a single accounting model for long-lived
assets to be disposed of by sale. Statement 144 broadens the
presentation of discontinued operations in the income statement to
include a component of an entity (rather than a segment of a business).
A component of an entity comprises operations and cash flows that can
be clearly distinguished, operationally and for financial reporting
purposes, from the rest of an entity. Statement 144 also requires that
discontinued operations be measured at the lower of the carrying amount
or fair value less cost to sell. The Company does not expect Statement
No. 144 to have a material impact on its financial position or results
of operations.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Third quarter 2001 net sales of $365.3 million were 1.6% higher than
the $359.7 million of sales for the comparable 2000 period. Sales
increased 0.9% in the Coatings segment and increased 2.6% in the
Performance Chemicals segment.
Overall volume increased 2.8% for the quarter, including the effect of
acquisitions. Core volumes were down in North America due to continued
weak economic conditions in the industrial sector, particularly in
durable goods markets such as plastics, PVC, appliances and automotive.
Volume growth in Europe and Asia was aided by the recent dmc(2)
acquisition, but was more than offset by the decline in North America.
Gross margins were 23.4% of sales compared with 26.8% for the
comparable 2000 period. This decline was due primarily to lower volumes
and capacity utilization, particularly in the United States, and the
Company's inventory reduction program which yielded a reduction in
inventory of approximately $25.9 million during the quarter. In
addition, certain integration and related inventory costs related to
the acquisition reduced gross margins in the 2001 period.
Selling, administrative and general expenses were $73.3 million in the
third quarter of 2001 compared with $62.0 million in the third quarter
of 2000. The increase was due to the addition of dmc(2) operating
expenses and certain integration costs related to the acquisition of
certain businesses of dmc(2).
Interest expense rose during the quarter due to additional debt
resulting from the dmc(2) acquisition, offset by declines in variable
interest rates and a debt reduction of more than $50 million made
during the quarter, before considering the debt financing impact of the
acquisition of certain of the business of dmc(2).
10
During the second quarter of 2001, forward contracts were initiated for
purposes of mitigating the effects of currency movements on the cash
flow requirements of the acquisition of certain businesses of dmc(2).
Subsequent strengthening of the Euro resulted in the realization of
approximately $16.9 million in foreign currency gains from the closing
of those contracts during the third quarter of 2001.
Earnings in the third quarter of 2001 were $0.33 per diluted common
share including the reductions for the aforementioned integration costs
and the benefit of the currency gains, compared with $0.48 for the
prior year period. dmc(2), for the one month of ownership, was slightly
dilutive to earnings in the third quarter, as expected.
QUARTERLY SEGMENT RESULTS
Sales for the Coatings segment were $220.9 million compared with $218.9
million in the third quarter of 2000. The increase reflects the growth
from acquisitions, offset to a large degree by the weakness in the
United States markets and electronics markets worldwide. Coatings
earnings were $13.2 million during the quarter compared with $25.8
million during the third quarter of 2000. The decline in earnings was
driven by lower capacity utilization primarily in the United States and
weakness of electronic material markets worldwide.
Performance Chemicals sales increased 2.6% to $144.4 million compared
with $140.8 million during the third quarter of 2000. Sales growth
stemmed primarily from acquisitions completed in 2000, offset by light
demand in the United States construction markets, especially for some
of the PVC and plastic additive products. Performance Chemicals segment
income for the quarter was $7.3 million compared with $12.5 million for
the third quarter of 2000, reflecting weakness in the United States
durable goods and construction markets.
GEOGRAPHIC SALES
Sales in the United States were $196.4 million for the three months
ended September 30, 2001, compared with $220.4 million for the three
months ended September 30, 2000. Sales declined in the region as a
result of weakness in the United States durable goods, construction and
electronic materials markets. International sales were $168.9 million
for the three months ended September 30, 2001, compared with $139.3
million for the three months ended September 30, 2000. The sales growth
was driven by sales added from acquisitions and continued volume growth
in Europe and Asia.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Sales for the nine months ended September 30, 2001, were $1,091.2
million compared with $1,086.1 million for the nine months ended
September 30, 2000. Sales from ongoing operations for the first nine
months of 2000, excluding sales from businesses sold, were $1,070.3
million. Sales for the 2001 period were aided by acquisition growth,
but were adversely impacted by wide spread weakness in the United
States durable goods, construction and electronic materials markets.
Gross margins as a percent of sales were 24.6% compared with 27.4% for
the 2000 period. Lower gross margins were a result of sales declines in
the United States, an inventory reduction program that reduced capacity
utilization, higher energy costs, charges related to employment cost
reduction programs, and integration and inventory costs related to
the acquisition of certain businesses of dmc(2).
Selling, administrative and general expenses were $206.5 million
compared with $190.0 million for the first nine months of 2000.
Selling, administrative and general costs associated with acquisitions
made during the past year, severance costs related to employment cost
reduction programs and integration costs resulted in higher expenses
during the 2001 period.
Interest expense for the nine month period of 2001 increased as
compared to the corresponding 2000 period due to additional debt
resulting from the dmc(2) acquisition, partially offset by declines in
variable interest rates and debt reduction made during the first
nine months of 2001, before considering the impact of the
acquisition of certain businesses of dmc(2).
11
During the second quarter of 2001, forward contracts were initiated for
purposes of mitigating the effects of currency movements on the cash
flow requirements of the acquisition of certain businesses of dmc(2).
Subsequent strengthening of the euro resulted in the realization of
approximately $16.9 million in foreign currency gains from the closing
of those contracts during the third quarter of 2001.
Diluted earnings per share were $0.88 for the nine month period ending
September 30, 2001, down from $1.49 for the first nine months of 2000.
NINE-MONTH SEGMENT RESULTS
For the first nine months of 2001, sales in the Coatings segment were
$642.6 million, compared with sales of $664.2 million for the 2000
period. Growth from acquisitions was offset by lower volume in North
America and weakness early in the year of the euro versus the U.S.
dollar. Foreign currency translation reduced segment sales by $17.3
million in the first nine months of 2001 versus the corresponding 2000
period. Segment income was $52.9 million compared with $76.6 million
reported in the first nine months of 2000. Lower segment earnings were
a result of lower volumes in the United States, weakening of the Euro
and reduced capacity utilization in connection with the Company's
inventory reduction programs.
Performance Chemicals sales were $448.6 million, up 6.3% from sales of
$422.0 million for the first nine months of 2000. Acquisitions
completed in 2000 were the primary driver of the higher sales for the
2001 period. Segment income was $30.5 million compared with $42.8
million for the first nine months of 2000. The decline in earnings
reflects lower capacity utilization and volumes in the United States
durable goods and construction markets.
GEOGRAPHIC SALES
Sales in the United States were $614.0 million for the nine months
ended September 30, 2001, compared with $643.8 million for the nine
months ended September 30, 2000. Sales in the region were driven by the
general slowing of the United States economy. International sales were
$477.1 million for the nine months ended September 30, 2001, compared
with $442.3 million for the nine months ended September 30, 2000.
International sales growth was aided by acquisitions and volume growth
in Europe and Asia, but was partially offset by the negative impact of
currency translation of $20.7 million.
OUTLOOK
In light of the ongoing macroeconomic conditions, the Company does not
anticipate that the markets for its products will recover to previous
levels in the near future. The Company's businesses have implemented,
and are continuing to implement, aggressive cost containment measures
and are managing to reduce working capital to mitigate, in part, the
impact of economic conditions on the results of operations. In the near
term, the primary focus of the Company will be to capitalize on the
synergies from integrating the acquired dmc(2) businesses with their
Ferro counterparts. The Company believes that significant cost savings
can be achieved through eliminating duplicate facilities, reducing
overhead and capitalizing on raw material sourcing synergies. The
Company expects that ongoing efforts to integrate the acquired dmc(2)
businesses will likely result in realignment charges in future
periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements include capital investments,
working capital requirements, acquisitions, and, to a lesser extent,
interest expense. The Company expects to be able to meet its working
capital requirements and capital investment needs from cash and cash
equivalents, cash flow from operations and use of its credit facilities
or long-term borrowings. The Company has available a $560.0 million
revolving credit facility, and had $400 million outstanding under this
facility as of September 30, 2001. The Company also has $245.0 million
available under a shelf registration pursuant to which various types of
public securities may be issued.
12
Net cash provided by operating activities for the nine months ended
September 30, 2001 was $116.1 million, compared to the $73.9 million
recorded in the first nine months of 2000. The increase in cash flows
reflects substantial reductions in working capital during the 2001
period. Cash used for investing activities was $541.0 million in the
2001 period (including $509.2 million for acquisitions) and $151.3
million in the 2000 period (including $114.5 million for
acquisitions/divestitures). The 2000 period reflects proceeds from the
sale of a business in the second quarter of 2000. Net cash provided by
financing activities was $458.4 million in the 2001 period compared to
$99.5 million in the 2000 period. The increase in 2001 reflects the
financing of the acquisition of certain businesses of dmc(2).
In connection with the acquisition of certain businesses of dmc(2), the
Company entered into new unsecured senior credit facilities to fund the
acquisition, pay off certain borrowings under its former revolving
credit facility and provide for its ongoing working capital and other
financing requirements. The new credit facilities include (1) a $373
million five-year revolving credit facility, (2) a $300 million capital
markets 180-day term loan facility and (3) a $187 million 364-day
revolving credit facility. The new credit facilities contain certain
terms and conditions including leverage and coverage ratios.
The capital markets facility expires on March 5, 2002 with a
six-month extension available at the Company's option so long as
no default or event of default has occurred or is continuing. The
Company is presently reviewing alternatives to retire the capital
markets facility during the initial term including: the sale of
long-term securities in the U.S. capital markets, using cash flows
from operations, using available borrowing on the revolving credit
facility and through asset sales. The Company believes that it will
have sufficient resources to repay the capital markets facility during
the initial term of the agreement.
ENVIRONMENTAL
Refer to Note 6 of the Condensed Consolidated Financial Statements
included herein for a description of the status of environmental
matters.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 141, "Business Combinations," and Statement No. 142,
"Goodwill and Other Intangible Assets." Statement 141 requires that
the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Statement 142 requires
that goodwill and intangible assets with indefinite useful lives no
longer be amortized but, instead, tested for impairment at least
annually in accordance with the provisions of Statement 142. The
Company has adopted certain provisions of Statements 141 and 142 as
discussed in Note 10 of the Condensed Consolidated Financial
Statements, and is required to adopt the remaining provisions of
Statements 141 and 142, effective January 1, 2002.
As January 1, 2002, the Company expects to have unamortized goodwill of
approximately $435 million, which will be subject to the transition
provisions of Statements 141 and 142. Amortization expense related to
goodwill was approximately $5.6 million and $6.2 million for the year
ended December 31, 2000, and the nine months ended September 30, 2001,
respectively. The Company is currently studying the effects of
adopting the remaining rules (which are effective January 1, 2002),
including whether any transitional adjustments will be required.
In June 2001, the FASB issued Statement No. 143 "Accounting for Asset
Retirement Obligations." Statement 143 requires entities to record the
fair value of a liability for an asset retirement obligation in the
period in which it is incurred. When the liability is initially
recorded, the entity capitalizes the cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period and the capitalized cost is
depreciated over the remaining useful life of the related asset. Upon
settlement of the liability, the entity either settles the obligation
for the amount recorded or incurs a gain or loss. Statement 143 is
effective for fiscal years beginning after June 15, 2002. Management
13
is evaluating the effect of this statement on the Company's results
of operations and financial position.
In August 2001, the FASB issued Statement No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets," effective prospectively
for fiscal years beginning after December 15, 2001. Statement 144
supersedes Statement No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the
accounting and reporting provisions of APB No. 30 "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment
of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions ("Opinion 30") for the disposal of a segment of
business (as previously defined under Opinion 30). The FASB issued
Statement No. 144 to establish a single accounting model for long-lived
assets to be disposed of by sale. Statement 144 broadens the
presentation of discontinued operations in the income statement to
include a component of an entity (rather than a segment of a business).
A component of an entity comprises operations and cash flows that can
be clearly distinguished, operationally and for financial reporting
purposes, from the rest of an entity. Statement 144 also requires that
discontinued operations be measured at the lower of the carrying amount
or fair value less cost to sell. The Company does not expect Statement
No. 144 to have a material impact on its financial position or results
of operations.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Discussion and Analysis and
elsewhere in this quarterly report on Form 10-Q reflect the Company's
current expectations with respect to the future performance and may
constitute "forward-looking statements" within the meaning of 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 which are difficult to predict and
are beyond the control of the Company. Factors that could cause actual
results of the Company to differ materially from those matters
expressed or implied in such forward-looking statements include the
following:
- The effects of the September 11, 2001 terrorist attacks on
the United States and current economic conditions;
- The success of the Company's integration of the recent dmc(2)
acquisition;
- The risks related to fluctuating currency rates and differing
legal, political and regulatory requirements and social and
economic conditions of many jurisdictions.
- Access to capital primarily in the U.S. capital markets, and
any restrictions placed on the Company by current or future
financing arrangements.
The risks and uncertainties identified above are not the only risks the
Company faces. Additional risks and uncertainties not presently known
to the Company or that it currently believes to be immaterial also may
adversely affect the Company. Should any known or unknown risks and
uncertainties develop into actual events, these developments could have
material adverse effects on the Company's business, financial condition
and results of operation.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FACTORS
The Company's exposure to market risks is primarily limited to interest
rate and foreign currency fluctuation risks. The Company's exposure to
interest rate risk relates primarily to its debt portfolio. Its
interest rate risk management objectives are to limit the effect of
interest rate changes on earnings, cash flows and overall borrowing
costs. To limit interest rate risk on borrowings, the Company maintains
a percentage of fixed and variable debt within defined parameters. In
managing the percentage of fixed versus variable rate debt,
consideration is given to the interest rate environment and the
Company's forecasted cash flows. This policy limits exposure from
rising interest rates and allows the Company to benefit during periods
of falling rates. The Company's interest rate exposure is generally
limited to its revolving credit facilities. (See note 4 to the
Condensed Consolidated Financial Statements.)
14
The Company manages exposures to changing foreign currency exchange
rates 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 to the U.S. dollar. The Company's
primary foreign currency put option market exposure is the euro.
Foreign subsidiaries also mitigate the risk of currency fluctuations on
the cost of raw materials denominated in U.S. dollars through the
purchase of dollars to cover the future payable.
At September 30, 2001, $700 million remains outstanding under the
facilities at interest rates based on LIBOR. At December 31, 2000, the
Company had $195.5 million outstanding under similar arrangements. The
increase in variable rate debt obligations increases the Company's risk
to changes in market interest rates. The $700 million outstanding at
September 30, 2001 carried an average interest rate of 5.03% and
matures as follows: $300 million in 2002, $142 million in 2003 and $258
million in 2006.
In total, the Company has $153.6 million of fixed rate debt outstanding
with an average interest rate of 7.5%, all maturing after 2006. The
fair value of these debt securities approximated the carrying amount at
September 30, 2001.
In addition, in September 2001, the Company completed the acquisition
of certain businesses of dmc(2) (note 8 to the Condensed Consolidated
Financial Statements). This acquisition increases the Company's
exposure to fluctuations in foreign currencies versus the U.S. dollar,
particularly in Europe and Asia. At September 30, 2001, the Company had
forward contracts to sell euros for U.S. dollars in a notational amount
of $8 million at an average rate of $.916/euro and outstanding put
options to sell euros for US dollars having a notational amount of $11
million and an average strike price of $.89/euro. These forward and
futures contracts have a fair value of approximately $135,000.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS.
Legal proceedings were reported in the Company's Form 10-Q for the
quarter ended March 31, 2000 and are substantially unchanged since that
time.
ITEM 2 - CHANGE IN SECURITIES.
No change.
15
ITEM 3 - DEFAULT UPON SENIOR SECURITIES.
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5 - OTHER INFORMATION.
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.
(a) The exhibits listed in the attached Exhibit Index are filed
pursuant to Item 6(a) of the Form 10-Q.
(b) The Company filed a Current Report on Form 8-K dated September
7, 2001, reporting that the Company purchased from OM Group,
Inc. the electronic materials, performance pigments, glass
systems and Cerdec ceramics businesses that were previously
owned by dmc(2) Degussa Metals Catalysts Cerdec A.G.
16
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FERRO CORPORATION
(Registrant)
Date: November 14, 2001
/s/ Hector R. Ortino
---------------------------------------------
Hector R. Ortino
Chairman and Chief Executive Officer
Date: November 14, 2001
/s/ Bret W. Wise
---------------------------------------------
Bret W. Wise
Senior Vice President and Chief Financial Officer
17
EXHIBIT INDEX
The following exhibits are filed with this report or are incorporated here by
reference to a prior filing in accordance with Rule 12b-32 under the Securities
and Exchange Act of 1934. (Asterisk denotes exhibits filed with this report).
EXHIBIT:
(3) Articles of Incorporation and by-laws
(a) Eleventh Amended Articles of Incorporation. (Reference is made to
Exhibit (3)(a) to Ferro Corporation's Quarterly Report on Form 10-Q for
the three months ended June 30, 1998, which Exhibit is incorporated
here by reference.)
(b) Certificate of Amendment to the Eleventh Amended Articles of
Incorporation of Ferro Corporation filed December 28, 1994. (Reference
is made to Exhibit (3)(b) to Ferro Corporation's Quarterly Report on
Form 10-Q for the three months ended June 30, 1998, which Exhibit is
incorporated here by reference.)
(c) Certificate of Amendment to the Eleventh Amended Articles of
Incorporation of Ferro Corporation filed January 19, 1998. (Reference
is made to Exhibit (3)(c) to Ferro Corporation's Quarterly Report on
Form 10-Q for the three months ended June 30, 1998, which Exhibit is
incorporated here by reference.)
(d) Amended Code of Regulations. (Reference is made to Exhibit (3)(d)
to Ferro Corporation's Quarterly Report on Form 10-Q for the three
months ended June 30, 1998, which Exhibit is incorporated here by
reference.)
(4) Instruments defining rights of security holders, including indentures
(a) Amended and Restated Shareholder Rights Agreement between Ferro
Corporation and National City Bank, Cleveland, Ohio, as Rights Agent,
dated as of December 10, 1999. (Reference is made to Exhibit 4(k) to
Ferro Corporation's Form 10-K for the year ended December 31, 1999,
which Exhibit is incorporated here by reference.)
(b) The rights of the holders of Ferro's Debt Securities issued and to
be issued pursuant to an Indenture between Ferro Corporation and
Society National Bank, as Trustee, are described in the form of
Indenture dated May 1, 1993. (Reference is made to Exhibit 4(j) to
Ferro Corporation's Form 10-Q for the three months ended June 30, 1993,
which Exhibit is incorporated here by reference.)
(c) The rights of the holders of Ferro's Debt Securities issued and to
be issued pursuant to a Senior Indenture between Ferro Corporation and
Chase Manhattan Trust Company, National Association, as Trustee, are
described in the Senior Indenture, dated March 25, 1998. (Reference is
made to Exhibit 4 (c) to Ferro Corporation's Quarterly Report on Form
10-Q for the three months ended March 31, 1998, which Exhibit is
incorporated here by reference.)
(d) Form of Security (7 1/8% Debentures due 2028). (Reference is made
to Exhibit 4(a-1) to Ferro Corporation's Form 8-K filed March 31, 1998,
which Exhibit is incorporated here by reference.)
18
(10) Material Agreements
(a) OMG-Ferro Purchase Agreement dated August 31, 2001 (Reference is
made to Exhibit 2.0 to Ferro Corporation's Current Report on Form 8-K
dated September 7, 2001, which Exhibit is incorporated here by
reference.)
*(b) Credit Agreement, dated as of August 31, 2001, among Ferro
Corporation, as Borrower, Various Financial Institutions, as Lenders,
Credit Suisse First Boston, as the Syndication Agent and a Joint Lead
Arranger, National City Bank, as the Administrative Agent, the Swing
Line Lender, the Letter of Credit Issuer and a Joint Lead Arranger,
Citicorp U.S.A., Inc. and Key Bank National Association, as the
Co-Documentation Agents.
*(c) 364-Day Credit Agreement, dated as of August 31, 2000, among Ferro
Corporation, as Borrower, Various Financial Institutions, as Lenders,
Credit Suisse First Boston, as the Syndication Agent and a Joint Lead
Arranger, National City Bank, as the Administrative Agent and a Joint
Lead Arranger, Citicorp U.S.A., Inc. and Key Bank National Association,
as the Co-Documentation Agents.
*(d) Amendment No. 1 to Amended and Restated Participation Agreement,
dated as of August 31, 2001, by and among Ferro Corporation, State
Street Bank & Trust Company, as Trustee, the financial institutions
named therein, and Citibank, N.A., as Agent.
*(11) Computation of Earnings Per Share
*(12) Ratio of Earnings to Fixed Charges
19