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Exhibit 13
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[LOGO]
focused on
PROFITABLE GROWTH
1997 annual report
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our vision
To achieve market leadership positions through a customer-centered and highly
creative organization committed to delivering top-quality products and
outstanding services to customers worldwide and superior returns to
shareholders.
All of Ferro's resources are directed toward a single objective -- achieving
profitable growth. This strategic focus is what drives Ferro's success and
benefits the Company's shareholders. The close-up view of the lawnmower on the
cover highlights Ferro's custom-formulated, mineral-filled polypropylene. The
material meets stringent performance standards for high-gloss finish, impact
resistance and superior weather and color stability. Similarly, Ferro is
committed to meeting its own high performance standards that contribute to
profitable growth. The foundation for achieving the Company's goals lies in
realizing its vision.
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contents
1 Financial highlights
2 Letter to shareholders
5 Questions and answers
8 Growing sales
9 Products and markets
10 New focus
12 New opportunities
14 New products
17 New efficiencies
18 Management's discussion
and analysis
23 Financial statements
27 Notes to financial
statements
37 Independent auditors' report
38 11-year summary of
financial data
40 Directors and officers
41 Corporate information
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FERRO CORPORATION is a major global producer of performance materials for
manufacturers. Ferro is the world's largest supplier of ceramic glaze and
porcelain enamel coatings. The Company also holds leading positions in powder
coatings, inorganic pigments and colorants, specialty plastic compounds and
colorants, and polymer additives. Its materials are used extensively in the
markets of building and renovation, major appliances, household furnishings,
transportation and industrial products. Headquartered in Cleveland, Ohio, the
Company has operations in 19 countries and sells its products in more than 100
countries. Ferro employs more than 6,800 men and women on five continents.
Financial Highlights
Ferro Corporation and subsidiaries
(dollars in thousands except per share data)
1997 1996 1995
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Operating results
Net sales $ 1,381,280 1,355,685 1,322,954
Net income (loss)(a) $ (37,277) 54,586 49,254
Per common share data(a)(b)
Basic earnings (loss) $ (1.08) 1.29 1.10
Diluted earnings (loss) $ (1.08) 1.21 1.04
Cash dividends $ 0.43 0.39 0.36
Other
Average shares outstanding(b) 38,131,631 39,506,572 41,419,578
Net cash provided by operations $ 130,283 111,572 107,753
Return on average shareholders' equity -- 14% 13%
Number of holders of common stock (year-end) 2,945 3,090 3,278
Number of employees (year-end) 6,851 6,912 6,914
(a) Included in 1997 numbers 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, 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 (loss) 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.
1997 sales by segment
Plastics 17%
Chemicals 24%
Coatings, Colors and Ceramics 59%
1997 sales by region
Asia-Pacific 6%
Latin America 8%
Europe 32%
United States and Canada 54%
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To our shareholders
[PHOTO]
Albert C. Bersticker, Chairman and Chief Executive Officer
Ferro's focus on profitable growth certainly paid off in 1997.
I am delighted to discuss your Company's 1997 performance with you. 1997
was a year of opportunity and challenge, and our people responded extremely well
to both conditions. The Company grew, and our status among global specialty
chemical producers was enhanced in many respects. We took some bold but
well-thought-out steps to accelerate our never-ending pursuit of profitable
growth and increased value for you, our shareholders.
Ferro's focus on profitable growth certainly paid off in 1997. We achieved
record sales and, excluding the effects of the second-quarter realignment
charge, record net income and earnings per share. Including the realignment
charge, we reported a loss for the year. Volumes showed strong growth in all
regions, but sales gains were largely offset by negative currency effects.
Long-established hedging strategies preserved and contributed to earnings.
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"Our employees have fully embraced
our
focus on profitable growth and are proceeding with a renewed sense of urgency."
OUR PROGRESS TOWARD PROFITABLE GROWTH
The year's exceptional performance was a direct result of our success in
implementing our strategies for profitable growth. Importantly, these
strategies are designed to ensure we not only reach our goals, but do so
consistently, year after year. Our strategies, which form the framework of this
annual report, involve focusing on strengthening our organization, improving our
marketing expertise, capitalizing on our technological capabilities and
continuously boosting productivity. We are confident that, guided by these
strategies, we can continue to grow sales and earnings and meet our financial
goals.
Encouraged by our strong financial position and growth prospects, in
October, your Board of Directors increased Ferro's quarterly common stock
dividend by 16.1 percent and announced a three-for-two common share split. In
January of this year, the Board authorized the repurchase of an additional 5
million shares of Ferro common stock. These actions demonstrate our dedication
to providing long-term shareholders an ever-growing return on their investment.
Also benefiting shareholders, the market value of all Ferro common shares
outstanding increased 25 percent over year-end 1996. This reflected Ferro's
strong performance and deep commitment to delivering more value to our
shareholders, as well as favorable conditions in the overall market.
STRATEGIES STRENGTHEN COMPETITIVE ADVANTAGES
We are resolute in our desire to be the strongest competitor in the
materials markets we serve, and, indeed, we are already there in a number of our
core businesses. Our strategies are designed to firmly maintain our leadership
positions or take us to that level as quickly as possible. And to do so, we are
capitalizing on the critical competitive advantages and skills that have been
and will remain the keys to our success.
For example, our capabilities in research and development and our expertise
in core technologies make Ferro a leader in product and process development
among competing materials and specialty chemical companies. Through our
strategic initiatives, we are targeting the development of breakthrough products
and processes that create substantial competitive advantages and command higher
margins.
In addition, we have long been a leader in developing an extensive global
presence, which enables us to leverage our technologies and product development
worldwide and to serve customers' increasingly global needs.
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Through customer-focused marketing efforts as well as selective
acquisitions, we are positioned to seize the many opportunities presented by
our growing product and geographic markets and to enhance our leadership
positions worldwide.
THE TALENT TO ACHIEVE OUR GOALS
In 1997, many of our strategic initiatives were supported by organizational
enhancements - from new key positions of worldwide responsibility in each of our
businesses to stepped-up training and teamwork opportunities across the Company.
To achieve our vision, we are working to create and nurture a worldwide
organizational structure and a team of employees with the ability and drive to
carry out our strategies and achieve our goals.
Our employees have fully embraced our focus on profitable growth and are
proceeding with a renewed sense of urgency. As a team, we are committed to
helping Ferro greet the new century with its goals realized. All of our team
members deserve congratulations for their ongoing successes.
Succession planning is an integral part of our organizational strategy. The
appointment of Hector R. Ortino as President and Chief Operating Officer in
1996, for example, initiated an orderly transition at the very top of our
organization. Similarly, outstanding successors have been identified and are in
place for all key management positions. Our organization at all levels is
stronger than ever before.
We will continue to invest in order to enhance the skills of our people.
With gratitude, we acknowledge the guidance and involvement of Paul S.
Brentlinger and A. James Freeman, who joined our Board of Directors in 1984 and
1986, respectively, and are retiring from the Board this year. We will certainly
miss their contributions but wish them every success and happiness in the
future.
Deserving special recognition, Milton F. Rosenthal is retiring as director
emeritus, concluding an extraordinary 31 years of service on Ferro's Board of
Directors. He retired from active service on the Board in 1984 and was
immediately named director emeritus. He has played an important role in Ferro's
history during a period when the Company grew tenfold.
We look forward to the contributions of two new directors, Michael H.
Bulkin and William J. Sharp, who joined the Board in January 1998. We welcome
the variety of domestic and international experiences and breadth of knowledge
these new members bring to Ferro's Board.
We extend special thanks to you, our investors, for continuing to support
us and demonstrate your confidence in Ferro. We are determined to achieve
sustained, profitable growth in order to fulfill your expectations.
/s/ Albert C. Bersticker
Albert C. Bersticker
Chairman and Chief Executive Officer
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ON FERRO'S GOALS, STRATEGIES AND FUTURE
"Much of our financial success can
be attributed to the strides we have made
in our key strategic areas."
[PHOTO]
Hector R. Ortino, President and Chief Operating Officer
WHAT WERE THE DRIVERS OF RECORD PERFORMANCE IN 1997?
With a focus on our performance goals and good execution of our strategies,
we were able to post significant increases in both gross margins and, excluding
the realignment charge, net income. Excluding the realignment charge, all
businesses contributed to these results as follows: The Chemicals and Plastics
businesses established annual operating profit records for the second year in a
row, due primarily to volume increases, continued productivity improvements and
a concentration on higher-margin products. Increased volume and manufacturing
efficiencies in powder coatings propelled improved operating profit in Coatings,
Colors and Ceramics. Market conditions in Europe and the United States, when
combined with improved marketing of our products, helped spur volume growth in
these regions.
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CAN YOU ELABORATE ON FERRO'S PERFORMANCE GOALS?
We have set high standards for our performance. Our goals are to achieve
earnings growth of 12 percent, compounded annually, and to expand gross margins
to 28 percent by year-end 1999. By focusing all our efforts on those goals, we
are confident we will achieve them.
For the full year 1997, net income excluding the realignment charge rose 15
percent over 1996.
In addition, by the end of 1997, we advanced toward our 28 percent goal for
consolidated gross margins, achieving 25.6 percent, compared with 24.5 percent
in 1996. Our progress is largely the result of internal actions to improve
productivity through manufacturing efficiencies and to gain higher-margin
business and create increased demand through enhanced marketing. Indeed, much of
our financial success can be attributed to the strides we have made in our key
strategic areas.
HOW DO YOU PLAN TO ACHIEVE YOUR PERFORMANCE GOALS?
We have four key strategies, all aimed at achieving sustainable, profitable
growth. They are to:
Strengthen our organization to ensure we
have the necessary talent with the responsibilities, training and incentives to
accomplish our goals.
Improve our marketing capabilities so we
are truly a customer-centered organization with excellent knowledge and
understanding of our customers and markets.
Capitalize on our technology to create higher- margin, value-added
products which differentiate us from our competition.
Achieve substantial productivity improvements that enable us to be a highly
efficient and responsive organization.
We are intent upon continued progress in these strategies in order to
achieve our ambitious goals.
WHAT ARE YOU DOING TO STRENGTHEN THE ORGANIZATION?
In 1996, we made considerable improvements to our organizational and
management structure, particularly at the levels of operating vice president and
regional president. This past year, in each core business we bolstered senior
ranks responsible for marketing, manufacturing and technology worldwide with
well-qualified managers. These managers bring exceptional leadership skills and
requisite experience to bear on the challenges and opportunities facing these
businesses. We now have the talent in place to grow profitably.
We have also modified our incentive plans to reward earnings growth. We
intend to increase participation in these pay-for-performance programs in the
coming years. In addition, we will continue to fortify our efforts to ensure all
our people have the necessary training to be successful.
HOW ARE YOU INCREASING FERRO'S MARKETING PROWESS?
We are building a systematic approach which enables us to zero in on
customer needs and identify growth opportunities. Over the past year, we focused
on giving our people the right marketing tools to do the job. This includes
efforts to align pricing to better reflect the value of our products and the
competitive nature of our markets, as well as
techniques to direct our sales and marketing resources toward the most
profitable opportunities.
In addition, we are taking a fresh approach to marketing our products by
better defining market segments and targeting areas that present greater
opportunity for growth.
These efforts have helped us to bring about immediate improvements in
certain areas and to gain insight to develop stronger long-term plans for our
businesses.
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HOW ARE YOU CAPITALIZING ON FERRO'S TECHNOLOGY?
Our world-class technology is the foundation of all our businesses, and we
are determined to get the greatest value from our technological capabilities. We
instituted a number of organizational and process improvements during 1997,
ranging from reorganizing the research and development function along product
lines -- with responsibility resting with each operating vice president -- to
instituting a "use-it-or-lose-it" policy to encourage our major business units
to take maximum advantage of research funding. We also refined the new product
development process to help businesses identify and capitalize on market
opportunities by, for example, drawing more effectively on the close-to-market
knowledge of our sales and marketing specialists.
Our increasing emphasis on high-value, high-margin products is bearing
fruit, and we discuss many of our new products later in this report. We will
continue to speed up commercialization efforts for recently developed products
and accelerate targeted research programs for new products with exciting
potential.
WHAT ARE YOU DOING TO IMPROVE PRODUCTIVITY?
The most obvious sign of our commitment to improve productivity is our
three-year realignment, which will reduce the number of our worldwide
manufacturing facilities from 80 to 50. We estimate that, upon completion in
1999, the program will add $30 million in operating profit annually and be a
major factor in achieving our 28 percent gross margin goal. What's more, it will
allow us to apply more corporate resources toward our growth-producing
strategies.
Other recent efforts to enhance productivity include setting a
corporate-wide goal of 5 percent in operating profit improvement per employee,
compounded annually -- representing the first in a series of targets for
continuous improvement in all functions of our business.
Each of our businesses also continues to identify and pursue projects to
simplify processes and reduce costs in its operations, supported by
corporate-wide training in business process redesign. The realignment and other
productivity improvement actions are already contributing positively to margin
expansion.
HOW IS FERRO POSITIONED FOR THE FUTURE?
In short, extremely well. The entire organization is focused on our key
strategies. And, as you can see, our financial results reflect the soundness of
our strategies and the intensity of our dedication. Simply put, we are acting on
our pledge to achieve profitable growth and deliver the type of enhanced value
our investors deserve.
We anticipate further revenue growth and performance improvements in 1998
and beyond as we work to implement our growth strategies. Our confidence in our
continued strong performance should become even clearer as you read the next
sections on the growth opportunities that exist in our major markets, as well as
those we are creating for ourselves through aggressive internal actions.
/s/Hector R. Ortino
Hector R. Ortino
President and Chief Operating
Officer
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[PHOTO]
GROWING SALES
HEALTHY AND GROWING MARKETS, PLUS ADDITIONAL GROWTH OPPORTUNITIES
Ferro's focus is on profitable growth -- specifically, on increasing
earnings long-term at 12 percent compounded annually and on achieving gross
margins of 28 percent by the end of 1999. A significant part of earnings growth
is anticipated to come from Ferro's ability to increase sales at an accelerated
pace in the long term.
Ferro currently serves a number of markets that are healthy and growing.
Within those markets, the Company's portfolio of products has had an overall
growth rate of 6 percent. Ferro is emphasizing a mix of these products that
could command even better growth.
Beyond these market growth rates, Ferro expects several opportunities to
generate additional growth in sales.
First, Ferro is targeting markets and market segments that have not been
emphasized in the past. The most significant opportunities are in the ceramic
glaze and colors and powder coatings businesses. Most notably, Ferro is
dedicating its resources to expanding its business in the high-margin end of the
ceramic tile market and in the general industrial finishing segment of the
powder coatings market. More information about how Ferro's marketing initiatives
are uncovering opportunities is detailed in the pages ahead.
Second, new products are expected to contribute to sales growth. More
targeted R&D has resulted in the development of new products that will increase
demand and command higher margins. Many examples of key new products follow in
this report.
Geographic expansion is a third market-driven opportunity for gaining
sales. Taking product lines global is a long-established growth strategy at
Ferro. The Company plans to expand its ceramic glaze and colors business in
Asia, particularly in China, and to target new geographic markets for its powder
coatings business beyond its traditional markets in the United States and
Europe. It also plans to expand its plastics business further in Europe and to
penetrate other markets outside the United States. And the Company intends to
significantly increase the international presence of the chemical business.
Finally, Ferro will pursue acquisitions that promote geographic and market
segment expansion and bolster sales. Ferro seeks only companies that fit within
its core businesses or technologies. Other criteria for acquisition candidates
include the retention of strong management, no long-term dilution, annual sales
greater than $50 million and the ability to establish or enhance a preferred
market share.
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PRODUCTS AND MARKETS
[PHOTO]
PRODUCTS END-USE MARKETS
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Building and Major Household Transporta- Industrial
renovation appliances furnishings tion products Other*
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Specialty coatings,
colors and ceramics
Ceramic glaze coatings X X X X
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Porcelain enamel coatings X X X X
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Powder coatings X X X X X X
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Pigments and colorants X X X X X X
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Electronic materials X X X X
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Specialty ceramics X X X
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Specialty plastics
Plastic colorants X X X X X X
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Filled and reinforced plastics X X X X X X
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Liquid coatings and dispersions X X X X X
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Specialty chemicals
Polymer additives X X X X X
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Industrial specialties X
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Petroleum additives X X
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*Packaging, leisure products and miscellaneous end-use markets.
Specialty chemicals represent an area of significant growth potential
for Ferro, with applications ranging from consumer products to PVC piping to
lithium batteries.
[PHOTO]
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NEW FOCUS
AN ORGANIZATION DESIGNED FOR PROFITABLE GROWTH
Having the right talent in the right position to make a difference ...
Rewarding results ... Nurturing a growth-oriented culture. These initiatives
have a singular goal: to build a foundation for achieving profitable growth.
Indeed, positioning each business for growth is a high priority within
Ferro. A redesigned organizational structure gives operating vice presidents,
who oversee major business groups, direct authority and responsibility for
achieving the Company's ambitious goals. These vice presidents are accountable
for developing a vision for their businesses and defining global strategies to
achieve growth targets. They have responsibility to direct research and new
product development and define the direction for acquisitions.
Lending crucial support, other key managers have similarly well-defined
responsibilities for business performance. Regional presidents in Europe, Latin
America and Asia-Pacific are responsible for coordinating Ferro's resources to
implement strategies locally, as well as for identifying opportunities for
synergy and growth in their respective regions of the world.
Further support was added in 1997 as each group appointed business-wide
managers for manufacturing, marketing and technology. These managers were
assigned responsibility to coordinate these key functions worldwide.
To ensure a culture dedicated to growth, Ferro is committed to providing
employees with powerful incentives and personal development. A performance-based
incentive plan rewards the achievement of profitable growth rather than asset
management. And, at all levels, talent is being nurtured by enhanced training in
marketing and productivity improvement concepts; team building in new product
development; and project assignments across businesses and geographic regions.
Within a focused framework and with the necessary support, Ferro employees
are driving the organization toward a strong future of profitable growth.
[PHOTO]
Realignment of the ceramic glaze and colors businesses enables Ferro to
more efficiently and effectively serve markets such as ceramic tile, artware,
sanitaryware and dinnerware, which use multiple Ferro products and services.
[PHOTO]
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[PHOTO]
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Ferro is helping a variety of customers find solutions to their needs through
innovative applications of various specialty plastic compounds that meet the
performance standards of higher-cost materials.
[PHOTO]
NEW OPPORTUNITIES
A MARKETING APPROACH AIMED AT CULTIVATING KEY CUSTOMERS AND MARKETS
Understanding and responding to customer needs ... Directing resources
toward key customers and markets ... Emphasizing value-added offerings. Ferro's
marketing efforts are succeeding in uncovering exciting opportunities in both
existing and new markets.
Ferro's marketing efforts in 1997 centered on assessing the value of its
products, customers and markets, and redirecting its resources to the most
profitable areas. Segmenting markets according to value, geography and product
need has led to new ways of delivering products and services to strategic
customers. Corporate account managers, for example, continue to cultivate key
customers by emphasizing the broad range of products Ferro offers. These
managers draw on the resources of all Ferro divisions and manage the accounts'
overall growth and profitability.
Now organized around end-use markets, the ceramic glaze, colors and
specialty ceramics businesses serve customers with dedicated sales professionals
who represent a full array of Ferro products. For instance, to serve the tile
market, country-specific teams from the central
ceramic design and development labs in Spain and Italy offer everything from
original designs to materials to manufacturing assistance.
This sharpened focus on providing customer solutions is leading to growth
in a variety of other value-added offerings as well. Sales for glass-filled
polypropylenes have increased 20 percent annually in the past three years, as
more and more applications for this cost-effective, high-performance compound
are introduced. To meet demand, Ferro is expanding its manufacturing capacity
for these products.
Through customer and market-centered efforts, Ferro is identifying and
pursuing new growth opportunities as well as achieving volume and margin
improvement in all of its businesses.
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[PHOTO]
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[PHOTO]
Ferro's alumina polishing compounds meet exacting requirements for providing
quality finishes on everything from camera and eyeglass lenses to computer and
calculator components.
NEW PRODUCTS
TECHNOLOGY TARGETED TO MARKETPLACE NEEDS
Creating innovative products ... Capitalizing on core technologies ...
Developing products which give customers competitive advantages. Guided by
marketing insights, Ferro is applying its world-class technological capabilities
to develop new products that provide exceptional value for customers and higher
margins for Ferro.
In 1997, aggressive R&D initiatives underscored the vital importance of new
products for Ferro's future. A new approach to funding ensures a strong
commitment to research by each business and allocates funds to the most
promising projects. Sales and marketing personnel are expected to translate
their market and customer knowledge into new product ideas.
Targeted research programs are also encouraging investment in
high-value-added products, which hold exciting potential for Ferro and its
customers. In 1997, Ferro introduced abrasion-resistant and dichromatic glazes
for ceramic tile, nontoxic/organic inks for glass decoration and
high-performance pigments tailored for the rigors of industrial coating
applications. Novel plastic colorants for certain "glow in the dark"
applications are among many possible offerings to address increasing customer
demands for cosmetic and other special effects.
New applications continue to be pursued for breakthrough products developed
in recent years. Ferro's patented low-temperature-cure powder coatings are
currently being tested in an innovative powder-on-plastic application in the
automotive market. Metallocene-based polypropylene compounds, which have also
led to production efficiencies, are being tailored to replace expensive
engineering resins in various automotive and appliance applications.
A growing list of customers is also turning to such Ferro innovations as
scratch-resistant polypropylenes, gelcoats featuring lower volatile emissions
and powder coatings for preformed steel.
In addition, Ferro is well-positioned in areas of exceptional future growth
potential. For example, the exploding worldwide market for electronics is
fueling growth in Ferro's electrolyte solutions, which are used for rechargeable
lithium ion batteries. Ferro's ceramic tape systems, which dramatically increase
circuit density for multi-chip modules, serve a rapidly growing market.
Market-driven R&D efforts will increasingly provide Ferro with new sources
of profitable growth and customer loyalty in the years to come.
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[PHOTO]
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[PHOTO]
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Efficiencies in the manufacture of Ferro's powder coatings, used in many
appliance, automotive and general industrial applications, have resulted in
improved profitability and customer satisfaction.
NEW EFFICIENCIES
AN ONGOING EFFORT TO IMPROVE PRODUCTIVITY AND PROFITABILITY
Rationalizing facilities ... Redesigning business processes ... Measuring
progress toward productivity goals. Thanks to a wide range of targeted
initiatives, Ferro is reducing operating costs and increasing efficiency at all
levels of the organization.
The corporate-wide realignment, well under way, is perhaps the most
dramatic of Ferro's initiatives to cut costs and achieve profitable growth. In
1997, Ferro consolidated and closed
several operations. Also on a corporate-wide basis, the Company set the first in
a series of goals for continuous productivity improvement per employee for all
major functions.
At the plant level, projects to redesign business processes led to
significant increases in throughput, reductions in manufacturing costs and
better service to customers. For example, by standardizing production and
sharing more efficient production techniques, many of Ferro's coatings plants
around the world achieved substantial improvements in productivity per smelter
while reducing costs. Through customer ranking, the specialty plastics plant in
Evansville, Indiana, is allocating resources more effectively to value-added
activities, which significantly enhanced its higher-margin business, improved
manufacturing productivity and increased customer satisfaction. A re-engineering
program at the powder coatings facility in Nashville, Tennessee, reduced
manufacturing cycle times, decreased finished goods inventories and improved
customer response times.
Furthermore, Ferro's Grant Chemical operation in Louisiana doubled sales
volume and maintained operating profits through major improvements and
investments in the production of various specialty chemicals. And the Plymouth,
Indiana, liquid coatings plant increased plant output while reducing overtime
hours by 80 percent.
Major business units also continue to consolidate and streamline the
delivery of products and services. For example, following the successful
integration of the Synthetic Products business, the polymer additives division
now offers a full and integrated product line. In addition, commercial and
manufacturing units are now defined along broader geographic lines, consistent
with NAFTA, MERCOSUR and other regional entities.
To facilitate these and other improvements, plants share best practices and
regularly track and report on key productivity indicators in manufacturing. The
Company is also defining measurements and initiating efforts to report on them
in all other functions of its operations.
Strengthened by productivity enhancements, Ferro is able to direct its
resources toward marketing and technology strategies designed to foster
profitable growth and to maintain the Company's leadership positions worldwide.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
[PHOTO]
Gary H. Ritondaro, Vice President and Chief Financial Officer
Ferro Corporation is a global producer of performance materials for
manufacturers. The Company's business segments consist of coatings, colors and
ceramics; chemicals; and plastics. Geographically, the Company operates in the
United States and Canada; Europe; Latin America; and Asia-Pacific. See Note 13
to the consolidated financial statements for segment operating data.
1997 RESULTS OF OPERATIONS
For the fourth consecutive year, the Company achieved record net sales,
with 1997 sales of $1.38 billion exceeding the prior-year sales by 2%. The
variety of products sold by the Company makes it difficult to determine with
certainty the increases or decreases in sales resulting from changes in the
volume of products sold and selling prices. However, management's best estimate
of volume and selling price changes, as well as changes in other factors, is
that the impact of a stronger U.S. dollar decreased sales by 4% when foreign
currency sales were translated into U.S. dollars, that changes in volume and
acquisitions increased sales by 7% and 1% respectively, while changes in
price/mix were neutral and divestitures reduced sales by 2%.
During the second quarter the Company announced an aggressive three-year
realignment plan to significantly reduce the Company's cost base and reallocate
resources to strategies designed to foster profitable growth. Associated with
this realignment was a $152.8 million pre-tax, or $100.0 million after-tax,
charge in the second quarter. The plan calls for consolidation of manufacturing
facilities worldwide, gross margin expansion and resulting improvements in
operating profit.
Including the realignment charge, the Company had a net loss of $37.3
million, or $1.08 per diluted share. Net income, excluding the effects of the
realignment charge, increased 15% to $62.7 million. On the same basis, earnings
per share increased 18% to a new record of $1.44 (diluted).
The effects of the realignment plan, coupled with strong volume
improvements in all regions and all major businesses, drove gross margin from
24.5% to 25.6%.
The increase in foreign currency gains to $2.2 million from $0.8 million
in 1996 is largely attributable to gains on foreign currency option contracts
purchased by the parent company to hedge the earnings of selected foreign
subsidiaries, primarily in Europe. For further information, see Note 14 to the
consolidated financial statements.
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COATINGS, COLORS AND CERAMICS
Worldwide sales of $815.4 million for this segment were 4% greater than
1996 sales. This growth was primarily attributable to improved demand both
domestically and internationally for most of the product offerings. Were it not
for the negative impact of the stronger U.S. dollar, the sales increase would
have been in the low double digits.
Led by strong double-digit improvements primarily in ceramic glaze and
powder coatings due to manufacturing efficiencies and mix changes to
higher-margin products, operating profit excluding the realignment charge was up
7% to $78.7 million. In general, raw material prices were flat to down relative
to 1996. Recognition of the realignment charge reduced operating profit to $8.1
million.
CHEMICALS
Sales from ongoing operations for this segment were essentially flat
compared with 1996 as positive volume gains were more than offset largely by
negative currency influences. Total sales of $328.0 million were down nearly 3%
due to the late-1996 divestiture of a domestic dispersion business. Volume and
currency factors offset each other.
Operating profit surged 23% to establish a new record of $28.3 million
excluding the realignment charge. As was the case in 1996, the improvement was
largely due to outstanding performance in domestic polymer additives, though
each product line bettered its 1996 performance. Margins were also aided by
further productivity enhancements. Including the realignment charge, the segment
had an operating loss of $24.3 million.
PLASTICS
Sales from ongoing operations exceeded 1996 sales by 5% primarily because
significant volume increases more than offset unfavorable currency influence.
Total sales of $237.9 million, which reflected the impact of 1996 divestitures,
were comparable to 1996 sales.
Operating profit of $15.6 million excluding the realignment charge set a
new record, 14% above the previous record established in 1996. Operating margins
expanded most notably in the domestic businesses, where volume increases fueled
higher capacity utilization. Inclusion of the realignment charge resulted in a
loss of $2.8 million.
1996 RESULTS OF OPERATIONS
The Company achieved record net sales of $1.36 billion, an increase of 2%
over 1995. The variety of products sold by the Company makes it difficult to
determine with certainty the increases or decreases in sales resulting from
changes in the volume of products sold and selling prices. However, management's
best estimate of volume and selling price changes, as well as changes in other
factors, is that the impact of a stronger U.S. dollar decreased sales by 1% when
foreign currency sales were translated into U.S. dollars, that changes in volume
and acquisitions increased sales by 1% and 6% respectively, while price/mix was
neutral and divestitures reduced sales by 4%.
Net income increased 11% to $54.6 million. Earnings per common share rose
17% to a record $1.21 (diluted).
Gross margin improved from 24.1% to 24.5%, primarily due to a combination
of volume improvement in the domestic plastics business and better price/mix
performance within the international coatings, colors and ceramics business.
The decrease in interest earned was due to the lower amount of cash and
cash equivalents, as well as the interest earned in 1995 on the proceeds of the
8% debentures issued in June to redeem the 113/4% debentures in October.
Similarly, the decrease in interest expense is primarily due to the substitution
of the 8% debentures for the 11 3/4% debentures.
Coatings, colors and ceramics
Total sales for this segment were comparable to those of 1995. Increased
volumes and favorable price/mix domestically and internationally were not quite
able to offset the negative impact of a stronger U.S. dollar and a late-1995
divestiture.
Operating profit increased 3% to $73.4 million, led by double-digit
improvements in powder coatings operating profit, as a result of better mix,
stable markets and production efficiencies. Further, the coatings, colors and
ceramics business was the primary beneficiary of double-digit improvements in
Latin America, as well as favorable raw material pricing relative to 1995.
Chemicals
Record sales of $336.7 million were 25% greater than those of 1995. The
most significant contributor to the sales increase was the effect of the October
1995 acquisition of Synthetic Products Company.
19
1
22
This business also established record operating profit for the year, up
24% to $23.1 million, led by double-digit increases in the polymer additives
business, which more than offset a charge of approximately $1.5 million
associated with a cost restructuring effort at our French chemicals facility.
PLASTICS
Worldwide plastics sales of $238.0 million were 12% less than those of
1995, as improved volumes were more than offset by other factors, most notably
the effect of the sale of the European engineering thermoplastics business late
in 1995.
Record operating profit of $13.7 million, up 56%, is primarily
attributable to stabilization of resin prices, widening of gross margins due to
manufacturing cost controls and sales emphasis on higher-value-added products,
particularly in filled and reinforced polypropylene.
OTHER ITEMS
YEAR 2000 COMPLIANCE
The Company is aware of the implications and issues associated with
certain computer-based systems which are dependent upon date routines that are
likely to cause errors in processing as the year 2000 approaches. While a number
of proj-ects are well under way, studies continue with both internal systems
resources and third-party resources to identify all areas of concern and to
develop a detailed implementation plan. At this time, the Company believes that
modification or replacement of existing in-house-developed computer systems and
proper maintenance or replacement of purchased computer systems by software
providers will permit the Company to address the issue with no significant
operational problems. The Company anticipates completion of requisite system
changes by March 31, 1999 to allow sufficient time for testing. Based upon
findings to date, the Company does not now anticipate that the total cost of
being in compliance with year 2000 needs will have a material effect on the
Company's financial position or results of operations.
ENVIRONMENTAL
During 1995, the Company reached an agreement in principle to settle a
suit filed in August 1993 by the United States Environmental Protection Agency
alleging violation of the Clean Water Act and the Rivers and Harbors Act by Keil
Chemical, a production facility owned and operated by Ferro in Hammond, Indiana.
The Company had been named as one of several defendants, including three local
municipalities, one local government agency (a sewer district) and four other
area industrial concerns. In 1996, the Company signed a Consent Decree whereby
the Company agreed to pay a civil penalty of $0.4 million and to pay $1.4
million (the "Settlement Amount") into a fund to be established to help clean
sediment in the West Branch of the Grand Calumet River following entry of the
Consent Decree by the Court. The Consent Decree was entered by the Court in
February 1997. The Company paid the Settlement Amount in March 1997.
Additionally, governmental agencies have identified several disposal
sites for clean-up under Superfund and similar laws to which the Company has
been named a Potential 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.
GEOGRAPHICAL
Domestic operations established new records for sales and, excluding the
realignment charge, for operating profit. Volume improvements were the source of
increased sales and better capacity utilization, resulting in increased
operating profit.
European operations improved over 1996 as volume increases and margin
expansion resulted in 1997 operating profit, excluding the effects of the
realignment charge, 7% greater than 1996. However, the increased volumes were
more than offset primarily by currency effects, resulting in sales being
essentially flat to 1996. The relative strength of the U.S. dollar reduced sales
in the region by approximately $46.0 million.
Latin American sales increased 16% primarily because of increased volume
and sales associated with the purchase of an additional interest in a previously
unconsolidated subsidiary. Operating profit, excluding the effects of the
realignment charge, declined slightly due to margin pressures from imported
competitive materials.
Sales declined slightly in Asia-Pacific as volume increases were offset
by currency translation effect. Being a local producer permitted the Company to
acquire additional volume as currency devaluations in the region significantly
increased the price of imported products. Operating profit, excluding the effect
of the realignment charge, was up 34% over 1996.
20
23
ACCOUNTING CHANGES
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share," which establishes
standards for computing and presenting basic earnings per share and diluted
earnings per share. The Statement is effective for financial statements issued
for periods ending after December 15, 1997, including interim periods. The
Company adopted the Statement effective with the quarter ending December 31,
1997.
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which
establishes standards for reporting and displaying comprehensive income and its
components in a full set of general-purpose financial statements. The Statement
is effective for fiscal years beginning after December 15, 1997, and will have
no effect on the Company's financial position or results of operations.
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which provides that public enterprises
report certain information about business segments in complete sets of financial
statements and information concerning products and services, geographic areas in
which they operate and major customers. The Statement is effective for financial
statements for periods beginning after December 15, 1997, but need not be
applied to interim financial statements in the initial year of application.
Adoption of this Statement will have no effect on the Company's financial
position or results of operations.
During 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities," which provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. The Statement is effective
after December 31, 1996 on a prospective basis, except for certain provisions
whose effective date was deferred by Statement of Financial Accounting Standards
No. 127, also issued during 1996. The Company adopted Statement No. 125,
effective January 1, 1997, and such adoption had no material impact on its 1997
financial statements.
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which provides
guidance for recognition of impairment losses to long-lived assets. The
Statement is effective for fiscal years beginning after December 15, 1995. The
Company recognized no impairment loss as a result of adoption.
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," which provides a basis for measurement and recognition of all
stock-based employee compensation plans. The disclosure requirements of this
Statement are effective for fiscal years beginning after December 15, 1995. The
Company chose to maintain its current accounting method for stock-based
compensation and disclose the pro forma effects on net income and earnings per
share of the fair market value method as permitted by the Statement.
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.
From time to time, forward-looking statements may also be contained in future
filings with the Securities and Exchange Commission, as well as in other written
and oral communications made by, or with the approval of, the Company. These
statements are subject to a variety of uncertainties, unknown risks and other
factors concerning the Company's operations and business environment, including,
but not limited to: changes in customer requirements, markets or industries
served; changing economic conditions, particularly in Europe or Latin America;
foreign exchange rates, especially in Europe or Asia-Pacific; changes in the
prices of major raw materials; and significant technological or competitive
developments.
ACQUISITIONS AND DIVESTITURES
In July 1997, the Company sold the remaining interest in Nissan-Ferro
Organic Chemical Company, Ltd., located in Japan. The results of this operation
were not material to Ferro.
21
24
In January 1996, the Company purchased the remaining interest in Ferro
Industrias Quimicas S.A., located in Portugal. In November 1996, the Company
purchased Ceramica Technica Industrial S.A. of Spain. Neither of these
transactions was material to Ferro.
In October 1996, the Company sold the dispersions portion of Synthetic
Products Company (Synpro) acquired in the prior October from Cookson Group plc
as noted below. The Company also sold two small plastics operations located in
Canada. The results of these operations were not material to Ferro.
In October 1995, the Company acquired Synthetic Products Company from
Cookson Group plc of London, England. Continuing Synpro operations are
maintained in Cleveland, Ohio, and Ft. Worth, Texas. Synpro produces a line of
polymer additives, including lubricants and heat stabilizers.
In December 1995, the Company sold the European engineering
thermoplastics business known as Eurostar to LNP Engineering Plastics Europe
B.V., a subsidiary of Kawasaki Steel Corporation.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations of $130.3 million in 1997 established a new
record and, as such, was more than sufficient to enable the Company to meet
financial obligations, including repurchasing approximately 1.3 million shares
of Ferro common stock and providing for capital expenditures. Net of cash flow
effects of the realignment charge, the increase in cash from operating
activities was largely attributable to improvements in working capital,
especially in inventory levels.
The Company purchased 1,346,627 shares of common stock during 1997,
1,455,015 shares during 1996 and 1,050,965 shares during 1995 under the stock
purchase plan.
Cash used for financing activities principally includes repayment of
borrowings under short-term credit lines, repurchases of stock and cash
dividends paid.
Capital expenditures for plant and equipment were $45.1 million in 1997,
$46.7 million in 1996 and $49.5 million in 1995. Information concerning these
expenditures by business segment can be found on page 35. Capital expenditures
for 1998 are estimated to be $65.0 million.
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 would be used for general corporate purposes.
No issuances have been made against this registration.
The Company filed a $100.0 million Shelf Registration with the Securities
and Exchange Commission in August 1992. Securities sold under that registration
include the following: On November 7, 1995, the Company issued $25.0 million of
7 3/8% debentures with a 20-year maturity; on June 20, 1995, the Company issued
$50.0 million of 8% debentures with a 30-year maturity; and on May 13, 1993, the
Company issued $25.0 million of 7 5/8% debentures with a 20-year maturity.
In October 1997, the Company declared a three-for-two stock split, and
the common stock cash dividend was increased 16.1% to a post-split annual payout
of $0.48 per common share. The common stock cash dividend was increased 14.8%
during 1996 to an annual post-split payout of $0.41 per common share. Common
stock cash dividends were paid at the rate of $0.43 per share in 1997 and $0.39
per share in 1996. See page 37 for additional dividend data.
The Company's financial condition remains strong, and the Company has the
resources necessary to meet future anticipated funding requirements. In addition
to cash flow from operations, the Company has sufficient unused debt capacity,
including a $150.0 million line of credit and the $300.0 million Shelf
Registration previously mentioned, to finance its ongoing capital requirements
and to take advantage of acquisition opportunities.
INFLATION
Management does not consider its business as a whole to be subject to
significant effects of inflationary pressures. Because of the diverse geographic
distribution of the Company's operations, the high inflation in certain of the
countries in which the Company operates is not considered to create an
unacceptable risk to conducting business worldwide.
22
25
CONSOLIDATED STATEMENTS OF INCOME
Ferro Corporation and Subsidiaries
(dollars in thousands except per share data)
Years ended December 31 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
Net sales $1,381,280 1,355,685 1,322,954
Cost of sales 1,028,069 1,023,401 1,003,638
Selling, administrative and general expense 233,674 226,518 223,101
Realignment charge 152,790 -- --
Other charges (income):
Interest expense 12,163 13,031 15,226
Interest earned (2,286) (2,528) (5,509)
Foreign currency transactions (2,246) (812) 160
Miscellaneous - net 7,586 7,868 6,179
......................................................................................................
15,217 17,559 16,056
- ------------------------------------------------------------------------------------------------------
Income (loss) before taxes (48,470) 88,207 80,159
Income tax expense (benefit) (11,193) 33,621 30,905
- ------------------------------------------------------------------------------------------------------
Net income (loss) (37,277) 54,586 49,254
Dividend on preferred stock, net of tax 3,757 3,735 3,670
- ------------------------------------------------------------------------------------------------------
Net income (loss) available to common shareholders $ (41,034) 50,851 45,584
- ------------------------------------------------------------------------------------------------------
Per common share data
Basic earnings (loss) $ (1.08) 1.29 1.10
Diluted earnings (loss) (1.08) 1.21 1.04
- ------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
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26
CONSOLIDATED BALANCE SHEETS
Ferro Corporation and Subsidiaries
(dollars in thousands)
December 31 1997 1996
- --------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 16,337 14,026
Accounts and trade notes receivable after deduction of
$8,280 in 1997 and $9,497 in 1996 for possible losses 232,927 214,131
Inventories 127,175 149,343
Other current assets 50,591 39,022
........................................................................................................
Total current assets 427,030 416,522
Other assets
Unamortized intangibles 54,355 93,302
Miscellaneous other assets 64,114 53,261
........................................................................................................
Total other assets 118,469 146,563
Property, plant and equipment
Land 13,545 16,623
Building 128,486 146,061
Machinery and equipment 419,150 520,445
........................................................................................................
561,181 683,129
Less accumulated depreciation and amortization 321,001 375,746
........................................................................................................
Net plant and equipment 240,180 307,383
Total assets $785,679 870,468
- --------------------------------------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities
Notes and loans payable $ 23,269 30,200
Accounts payable 109,958 113,156
Income taxes 6,563 10,597
Accrued payrolls 17,501 16,559
Accrued expenses/other current liabilities 120,416 81,821
........................................................................................................
Total current liabilities 277,707 252,333
Other liabilities
Long-term liabilities, less current portion 102,020 105,308
ESOP loan guarantee 13,815 22,592
Post-retirement liabilities 45,643 44,846
Other non-current liabilities 73,343 61,185
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 (13,815) (22,592)
Common stock, par value $1 per share.
Authorized 150,000,000 shares; 47,323,053 shares issued
in 1997 and 31,549,083 shares (pre-split) in 1996 47,323 31,549
Paid-in capital 1,908 14,107
Retained earnings 405,768 463,177
Foreign currency translation adjustment (51,771) (24,304)
Other (7,630) (7,230)
........................................................................................................
452,283 525,207
Less cost of treasury stock:
Common - 9,999,844 shares-1997 and 5,918,239 shares 167,974 132,595
(pre-split) in 1996
Preferred - 240,592 shares-1997 and 181,306 shares-1996 11,158 8,408
........................................................................................................
Total shareholders' equity 273,151 384,204
Total liabilities and shareholders' equity $785,679 870,468
- --------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
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27
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Ferro Corporation and Subsidiaries
Years ended December 31 (dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------------
Foreign Common Preferred Total
Guaranteed currency stock stock share-
Preferred ESOP Common Paid-in Retained translation held in held in holders'
stock obligation stock capital earnings adjustment treasury treasury Other equity
- ---------------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 1994 $70,500 (37,503) 31,549 10,233 396,969 (24,020) (74,207) (5,227) (1,550) 366,744
Net income 49,254 49,254
Cash dividends:
Common stock (14,953) (14,953)
Preferred stock (4,524) (4,524)
Federal tax benefits 865 865
Transactions involving
benefit plans 7,033 3,004 1,653 (442) (4,045) 7,223
Foreign currency
translation adjustment 3,444 3,444
Purchase of treasury stock (25,072) (831) (25,903)
...........................................................................................................................
Balances at
December 31, 1995 $70,500 (30,470) 31,549 13,237 427,611 (20,576) (97,626) (6,480) (5,595) 382,150
Net income 54,586 54,586
Cash dividends:
Common stock (15,311) (15,311)
Preferred stock (4,408) (4,408)
Federal tax benefits 699 699
Transactions involving
benefit plans 7,878 870 4,285 (658) (1,635) 10,740
Foreign currency
translation adjustment (3,728) (3,728)
Purchase of treasury stock (39,254) (1,270) (40,524)
...........................................................................................................................
Balances at
December 31, 1996 $70,500 (22,592) 31,549 14,107 463,177 (24,304) (132,595) (8,408) (7,230) 384,204
Net income (loss) (37,277) (37,277)
Cash dividends:
Common stock (16,428) (16,428)
Preferred stock (4,229) (4,229)
Federal tax benefits 525 525
Transactions involving
benefit plans 8,777 3,589 7,871 (2,750) (400) 17,087
Foreign currency
translation adjustment (27,467) (27,467)
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 (51,771) (167,974) (11,158) (7,630) 273,151
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
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28
CONSOLIDATED STATEMENTS OF CASH FLOWS
Ferro Corporation and Subsidiaries
(dollars in thousands)
Years ended December 31 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income (loss) $(37,277) 54,586 49,254
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization 44,975 49,635 46,261
Change in deferred income taxes (34,716) 498 2,173
Realignment charge 152,790 0 0
Other non-cash items (4,813) 4,143 7,677
Changes in current assets and liabilities,
net of effects of acquisitions
Trade notes and accounts receivable (1,119) 13,297 (7,242)
Inventories 23,544 2,169 1,370
Other current assets (10,939) (8,901) 3,374
Accounts payable trade (2,238) (1,218) (6,258)
Accrued expenses and other current liabilities 11,414 2,386 10,776
Other operating activities (11,338) (5,023) 368
......................................................................................................
Net cash provided by operating activities 130,283 111,572 107,753
Cash flow from investing activities
Proceeds from sale of equipment 2,709 933 2,571
Capital expenditures for plant and equipment (45,129) (46,655) (49,528)
Proceeds from divestitures 4,623 6,049 6,869
Acquisition of companies, net of cash acquired 0 (13,345) (69,919)
Transactions with affiliated companies 0 830 1,833
Other investing activities 1,250 (704) 4,338
......................................................................................................
Net cash used for investing activities (36,547) (52,892) (103,836)
Cash flow from financing activities
Net borrowings (payments) under short-term lines (25,290) (3,878) 16,491
Proceeds from long-term debt 760 2,626 75,035
Principal payments on long-term debt (1,938) (1,533) (52,228)
Proceeds from sale of stock 4,801 2,069 1,941
Purchase of treasury stock (43,250) (40,524) (25,903)
Cash dividends paid to minority shareholders of
subsidiaries (1,560) (646) (1,033)
Cash dividends paid (20,657) (19,719) (19,477)
......................................................................................................
Net cash used for financing activities (87,134) (61,605) (5,174)
Effect of exchange rate changes on cash (4,291) 256 (1,870)
......................................................................................................
Increase (decrease) in cash and cash equivalents 2,311 (2,669) (3,127)
Cash and cash equivalents at beginning of period 14,026 16,695 19,822
......................................................................................................
Cash and cash equivalents at end of period $ 16,337 14,026 16,695
- ------------------------------------------------------------------------------------------------------
Cash paid during the period for
Interest $ 8,473 11,927 15,625
Income taxes $ 36,917 35,026 29,167
See accompanying notes to consolidated financial statements.
26
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Ferro Corporation and Subsidiaries
Years ended December 31, 1997, 1996 and 1995
1. Summary of significant accounting policies
Nature of Operations
Ferro Corporation is a worldwide producer of performance materials for
manufacturers by utilizing organic and inorganic chemistry. Ferro produces a
variety of specialty coatings, colors, ceramics, chemicals and plastics. 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 mostly 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. Affiliates in which the Company has stock
ownership from 20% to 50% are accounted for on the equity basis.
Certain amounts in the 1995 and 1996 financial statements and the
accompanying notes have been reclassified to conform to the 1997 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 and transaction gains and losses
are reflected in net income.
The U.S. dollar is the functional currency of the Company's operations in
Brazil, Ecuador, Mexico and Venezuela due to the high inflation experienced in
those countries. Translation and transaction gains or losses for these
operations 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.
Marketable Securities
Marketable securities consist of highly liquid investments carried at
cost, which approximates market value.
Risk Management Derivatives
Derivatives primarily consist of forward exchange contracts, foreign
currency options and options related to primary metals. Gains and losses related
to qualifying hedges of firm commitments or anticipated transactions 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.
New Accounting Pronouncements
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share," which establishes
standards for computing and presenting basic earnings per share and diluted
earnings per share. The Statement is effective for financial statements issued
for periods ending after December 15, 1997, including interim periods. The
Company adopted the Statement effective with the quarter ending December 31,
1997.
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and displaying comprehensive income
and its components in a full set of general-purpose financial statements. The
Statement is effective for fiscal years beginning after December 15, 1997, and
will have no effect on the Company's financial position or results of
operations.
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which provides that public enterprises
report certain information about business segments in complete sets of financial
statements and information concerning products and services, geographic areas in
which they operate and major customers. The Statement is effective for financial
statements for periods beginning after December 15, 1997, but need not be
applied to interim financial statements in the initial year of application.
Adoption of this Statement will have no effect on the Company's financial
position or results of operations.
During 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities," which provides
consistent standards for distinguishing transfers of financial assets that are
sales
27
30
from transfers that are secured borrowings. The Statement is effective after
December 31, 1996, on a prospective basis, except for certain provisions
whose effective date was deferred by Statement of Financial Accounting
Standards No. 127, also issued during 1996. Adoption of Statement No. 125 had
no material impact on the Company's 1997 financial statements.
During 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," which provides a basis for measurement and recognition of all
stock-based employee compensation plans. The disclosure requirements of this
Statement are effective for fiscal years beginning after December 15, 1995. The
Company chose to maintain its current accounting method for stock-based
compensation and disclose the pro forma effects on net income and earnings per
share of the fair market value method as permitted by the Statement.
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
and international inventories which utilize the last-in, first-out (LIFO)
method.
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, with the most extended period being 40 years. Accumulated
amortization was $21.5 million and $27.1 million at December 31, 1997 and 1996,
respectively.
The realizability of goodwill and other intangibles is evaluated
periodically as events or circumstances warrant. As such, the Company recognized
as part of the realignment charge in 1997 an impairment loss in the pre-tax
amount of $33.2 million for goodwill and other intangibles under the provisions
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
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 has been based on the following estimated
useful lives:
Buildings 20 to 40 years
Machinery and equipment 5 to 15 years
In 1997, under the provisions of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets
to Be Disposed Of," the Company recognized an impairment loss in the pre-tax
amount of $55.7 million as part of the realignment charge for plant and
equipment at certain domestic and international facilities which will be closed
or sold.
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 have been provided using the liability method under
Statement of Financial Accounting Standards No. 109.
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. Realignment charge
In the second quarter of 1997, the Company recorded a
$152.8 million pre-tax charge associated with a plan to significantly reduce the
Company's cost base and allocate resources to strategies designed to foster
profitable growth. The three-year plan calls for consolidation of worldwide
manufacturing facilities and reduction in work force levels by approximately
1,200 individuals. Items included in the charge consist of the write-off of
certain long-lived assets totaling $88.9 million, including goodwill of $33.2
million, termination benefits of $45.3 million for work force reductions, and
$18.6 million for facility closure and other costs. In accordance with the plan,
work force reductions in 1997 were not significant, but will be greater in
1998. During 1997, cash payments of $4.2 million were made, $3.9 million of
which was for
28
31
termination benefits. The remaining balance in the accrual is $56.3 million, of
which $20.0 million is to be utilized during 1998, with the remainder being
utilized during 1999.
3. Inventories
The portion of inventories valued on a LIFO basis at December 31, 1997
and 1996 is as follows:
1997 1996
- ---------------------------------------------------------
United States 51% 41
Outside the United States 9 8
Consolidated 26 22
- ----------------------------------------------------------
If the FIFO method of inventory valuation had been used exclusively by
the Company, inventories would have been $14.4 million and $16.9 million higher
than reported at December 31, 1997 and 1996, respectively.
Inasmuch as 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 impracticable to separate LIFO
inventory values among raw materials, work in process and finished goods.
4. Financing and long-term liabilities
Long-term liabilities at December 31, 1997 and 1996 are as follows:
(dollars in thousands) 1997 1996
- ----------------------------------------------------------------------------
Parent Company:
Unsecured:
Debentures, 75/8%, due 2013 $24,801 24,794
Debentures, 8%, due 2025 49,364 49,341
Debentures, 73/8%, due 2015 24,936 24,932
Secured:
Mortgages, 7.207%
payable to 2017 74 76
Subsidiary Companies:
Unsecured:
Notes payable, 5.1% to 13.0%
payable to 2002 1,482 5,722
Secured:
Mortgages, 0.0% to 12.5 %
payable to 2002 2,263 2,801
..............................................................................
102,920 107,666
Less current portion(a) 900 2,358
.............................................................................
Total $102,020 105,308
- ------------------------------------------------------------------------------
(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)
1998 1999 2000 2001 2002
- ------------------------------------------------------------------------------
$900 1,148 642 447 252
At December 31, 1997, $2.3 million of long-term indebtedness was secured
by property, equipment and certain other assets with a net book value
approximating $3.8 million.
In 1993, the Company issued $25.0 million in 7 5/8% debentures under the
1992 Shelf Registration. These debentures mature in the year 2013, and the fair
market value was approximately $27.1 million at December 31, 1997.
In 1995, the Company issued $50.0 million in 8% debentures under the 1992
Shelf Registration. These debentures mature in the year 2025, and the fair
market value was approximately $53.3 million at December 31, 1997.
In 1995, the Company issued $25.0 million in 7 3/8% debentures under the
1992 Shelf Registration. These debentures mature in the year 2015, and the fair
market value was approximately $26.5 million at December 31, 1997. This issuance
exhausted the $100.0 million Shelf Registration filed in 1992.
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 would be used for general corporate purposes.
The Company has a five-year revolving credit agreement in the amount of
$150.0 million which matures on August 1, 2001. 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, 1997, the Company had no outstanding borrowing 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. Interest
paid by the ESOP totaled $1.7 million, $2.4 million and $3.0 million in
borrowings as a loan guarantee on its balance sheet with a like amount of
29
32
"Guaranteed ESOP Obligation" recorded as a reduction of shareholders' equity. As
the Company and its employees make contributions to the ESOP, these
contributions, plus the dividends paid on the Company's preferred stock held by
the ESOP, are used to service the borrowings. As the principal amounts of the
loans are repaid, the "Guaranteed ESOP Obligation" is reduced accordingly.
Capitalized interest was $0.5 million, $0.6 million and $0.7 million in
1997, 1996 and 1995, 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.
5. Stock plans
The Company maintains the following stock plans for the benefit of its
employees: a stock option plan, a performance share plan and a savings and stock
ownership plan which includes an investment savings plan and an ESOP.
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:
1997 1996 1995
- ---------------------------------------------------------
Shares granted 682,942 584,273 301,403
Average option
price $19.56 15.91 16.00
Shares exercised 379,149 79,536 53,514
Average option
price $11.18 8.63 6.22
Shares which became
exercisable 363,454 241,341 206,030
Average option
price $17.85 19.02 19.41
Shares unexercised
at year-end 2,478,641 2,200,199 1,718,795
Option price range
per share $8.89 6.52 4.63
to 22.67 to 22.67 to 22.67
Shares cancelled 25,304 23,224 33,956
Shares available
for granting
future options 1,996,535 2,654,174 965,112
- ----------------------------------------------------------
Significant option groups outstanding at December 31, 1997, and the
related weighted average price for the exercisable options and remaining life
information are as follows:
Options outstanding Options exercisable
- ---------------------------------------------------------------------------------------------------------------------------
Range of Average Remain- Average
exercise exercise ing life exercise
prices Shares price (years) Shares price
- ---------------------------------------------------------------------------------------------------------------------------
$20-23 327,875 $21.95 7 205,023 $22.30
17-19 947,187 19.29 8 307,110 18.95
14-16 899,147 15.66 7 368,380 15.44
8-12 304,432 10.08 2 304,432 10.08
- ---------------------------------------------------------------------------------------------------------------------------
$ 8-23 2,478,641 $19.19 7 1,184,945 $16.16
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 1997, 1996 and
1995 were $6.89, $6.18 and $6.25 per option, respectively. The fair value of
options at date of grant was estimated using the Black-Scholes model with the
following weighted average assumptions:
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Expected life (years) 8.5 10 10
Interest rate 5.84% 6.25 6.00
Volatility 25.25 26.40 26.90
Dividend yield 1.88 1.92 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 consistent
with the provisions of Statement of Financial Accounting Standards No. 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts shown below:
1997 1996 1995
- ------------------------------------------------------------
Net income (loss)
as reported $(37,277) 54,586 49,254
Net income (loss)
pro forma (39,138) 53,770 48,973
Income (loss) per share
(diluted) as reported $ (1.08) 1.21 1.04
Income (loss) per share
(diluted) pro forma (1.13) 1.19 1.03
- -------------------------------------------------------------
The pro forma effects on net income for 1997 and 1996 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.
30
33
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 601,802 shares, 243,479 shares
and 249,700 shares were outstanding at the end of 1997, 1996 and 1995,
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 $2,712,000, $582,000 and $500,000 in 1997, 1996
and 1995, respectively.
The ESOP provides for the Company to match eligible employee pre-tax
savings. Amounts expensed under the ESOP were $3.3 million, $2.9 million and
$2.6 million in 1997, 1996 and 1995, respectively.
6. 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.
On January 26, 1996, the Board of Directors authorized the repurchase of
up to 3,000,000 shares of Ferro common stock in addition to any previously
authorized shares. These shares are to be purchased on the open market from time
to time.
The Company purchased 1,346,627 shares of common stock in 1997 at an
aggregate cost of $43.3 million; purchased 1,455,015 shares of common stock in
1996 at an aggregate cost of $39.3 million; and purchased 1,050,965 shares of
common stock in 1995 at an aggregate cost of $25.1 million. At December 31,
1997, the Company had remaining authorization to acquire 563,394 shares under
the then current treasury stock purchase program.
On January 23, 1998, the Board of Directors authorized the repurchase of
up to 5,000,000 shares of Ferro common stock in addition to any previously
authorized shares. These shares are to be purchased on the open market from time
to time.
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 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.
31
34
7. Earnings per share computation
In December 1997, the Company adopted Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 128, "Earnings per Share,"
which establishes standards for computing and presenting basic and diluted
earnings per share. Information concerning the calculation of basic and diluted
earnings per share (EPS) is shown below:
(in thousands, except EPS) 1997 1996 1995
- -----------------------------------------------------------
Basic EPS Computation
Numerator:
Net income (loss)
available $(41,034) 50,851 45,584
Denominator:
Common shares
outstanding 38,132 39,507 41,420
............................................................
Basic EPS $(1.08) 1.29 1.10
- -----------------------------------------------------------
Diluted EPS Computation
Numerator:
Net income (loss)
available $(41,034) 50,851 45,584
Convertible
preferred stock(a) -- 1,862 1,654
Net income (loss)
assuming
conversion $(41,034) 52,713 47,238
Denominator:
Common shares
outstanding 38,132 39,507 41,420
Convertible
preferred stock(a) -- 3,528 3,621
Options(a) -- 382 274
...........................................................
Total shares 38,132 43,417 45,315
Diluted EPS(a) $(1.08) 1.21 1.04
- -----------------------------------------------------------
(a)Not applicable in 1997 since conversion of preferred shares and options would
be anti-dilutive.
8. Acquisitions and divestitures
In July 1997, the Company sold the remaining interest in Nissan-Ferro
Organic Chemical Company, Ltd., located in Japan. The results of this operation
were not material to Ferro.
In January 1996, the Company purchased the remaining interest in Ferro
Industrias Quimicas S.A., located in Portugal. In November 1996, the Company
purchased Ceramica Technica Industrial S.A. of Spain. Neither of these
transactions was material to Ferro.
In October 1995, the Company acquired Synthetic Products Company (Synpro)
from Cookson Group plc of London, England. The cost of this acquisition was
approximately $69.0 million and was accounted for using the purchase method of
accounting. The purchase price was allocated based on fair value of assets at
the date of acquisition with approximately $48.7 million being assigned to
goodwill and other intangibles. See Note 15 for further information.
In December 1995, the Company sold the European engineering
thermoplastics business known as Eurostar to LNP Engineering Plastics Europe
B.V., a subsidiary of Kawasaki Steel Corporation. The results of this operation
were not material to Ferro.
The Company sold or closed operations representing annual sales of
approximately $11.0 million, $25.0 million and $20.0 million in 1997, 1996 and
1995, respectively. The results of these operations were not material to Ferro.
9. Contingent liabilities
There are pending against the Company and its consolidated subsidiaries
various lawsuits and claims.
In the opinion of management, the ultimate liabilities resulting from
such lawsuits and claims will not materially affect the consolidated financial
position or results of operations or liquidity of the Company.
10. Research and development expense
Amounts expended for development or significant improvement of new and/or
existing products, services and techniques approximated $26.6 million, $23.8
million and $23.2 million in 1997, 1996 and 1995, respectively.
11. Retirement benefits
The following information sets forth data for those selected pension
plans of the Company and its consolidated subsidiaries. Due to the diverse
nature of the regulatory environment of various countries, the pension plans
have varied benefit determinations. The largest plan is for United States
salaried employees whose benefits are primarily based on employees' highest
consecutive five years' earnings. Annual pension costs for the defined benefit
and defined contribution plans of the Company and its subsidiaries were $9.2
million, $8.9 million and $7.2 million in 1997, 1996 and 1995, respectively.
The Company's funding policy is to contribute annually amounts required
by the various agencies governing the retirement plans of the Company.
32
35
The net periodic pension cost for the significant defined benefit plans
included the following components:
(dollars in thousands) 1997 1996 1995
- ----------------------------------------------------------
Service cost-benefits
earned during
the period $ 6,658 6,477 5,310
Interest cost on the
projected benefit
obligation 16,118 15,526 14,468
Actual return on
plan assets (30,585) (24,240) (30,528)
Net amortization
and deferral 15,012 9,331 16,949
...........................................................
Net periodic
pension cost $ 7,203 7,094 6,199
- ----------------------------------------------------------
Net amortization and deferral consists of amortization of net assets and
obligations at transition and deferral and amortization of subsequent net gains
and losses.
Assumptions used in developing the projected benefit obligation as of
December 31 were:
1997 1996 1995
- -----------------------------------------------------------
Discount or
settlement rate 5.5-10.0% 6.0-10.0 6.5-10.0
Rate of increase in
compensation levels 3.0-9.0 3.0-9.0 2.5-9.0
Expected long-term rate
of return on assets 6.0-10.0 7.25-10.0 7.0-10.5
- -----------------------------------------------------------
- -----------------------------------------------------------
The following table sets forth the funded status of the plans and the
amounts recognized in the Company's consolidated balance sheets:
Plans in which Plans in which
assets exceed accumulated benefits
(dollars in thousands) accumulated benefits exceed assets
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefit obligation $168,653 152,302 21,962 18,228
- ---------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation 175,918 158,587 33,103 32,363
Projected benefit obligation 208,435 187,591 34,298 33,302
Plan assets at fair value 208,312 190,502 12,263 10,453
...........................................................................................................................
Projected benefit obligation (in excess of) or less than plan assets (123) 2,911 (22,035) (22,849)
Unrecognized net (gain) or loss (14,333) (13,883) 4,551 5,646
Prior service cost 4,234 5,150 4,357 4,813
Unrecognized net transition (asset) obligation (1,205) (2,655) 1,194 1,605
Minimum liability adjustment -- -- (9,019) (11,254)
...........................................................................................................................
Pension liability $(11,427) (8,477) (20,952) (22,039)
- ---------------------------------------------------------------------------------------------------------------------------
In the aggregate, at year-end 1997 and 1996 the various plans' assets at
fair value were less than the various plans' projected benefit obligations by
$22.2 million and $19.9 million, respectively. The Company recognized an
increase in equity of $0.9 million in 1997 and a decrease in equity of $0.2
million in 1996 for minimum liability adjustments.
The plans' assets consist primarily of equities and government and
corporate obligations. The United States plans' assets did not include any
shares of the Company's stock at year-end 1997, but did include shares of the
Company's stock with a market value of $3.3 million at year-end 1996.
The Company provides eligible domestic retired employees with health care
and life insurance benefits. These benefits are subject to the provisions of
Statement of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions." The Company funds these benefits
as claims are presented.
The net periodic postretirement benefit cost included the following
components:
(dollars in thousands) 1997 1996 1995
- --------------------------------------------------------
Service cost $ 671 715 498
Interest cost 2,479 2,820 2,935
Net amortization
and deferral (684) (192) (442)
.........................................................
Net periodic
postretirement
benefit cost $2,466 3,343 2,991
- --------------------------------------------------------
33
36
Assumptions used in developing the accumulated postretirement benefit
obligation as of December 31 were:
1997 1996 1995
- --------------------------------------------------------
Discount or settlement rate 7.3% 7.9 7.7
Rate of increase in covered
health care benefits:
First year 8.0 8.3 9.0
Decreasing gradually
over 20 years to 4.0 4.0 4.0
- ----------------------------------------------------------
The following table sets forth the accrued postretirement benefit
obligation recognized in the Company's consolidated balance sheets.
(dollars in thousands) 1997 1996
- ----------------------------------------------------------
Accumulated postretirement
benefit obligation:
Retirees $22,012 25,515
Fully eligible active
plan participants 4,608 4,063
Other active plan participants 8,633 8,705
............................................................
35,253 38,283
Unrecognized net (gain) or loss (10,390) (6,563)
............................................................
Accrued postretirement
benefit obligation $45,643 44,846
- ----------------------------------------------------------
Increasing the assumed health care cost trend rates by one percentage
point for each future year would increase the accumulated postretirement benefit
obligation as of December 31, 1997, by $2.7 million and the net periodic
postretirement benefit cost by $0.2 million.
12. Income tax expense
Income tax expense (benefit) is comprised of the following components:
(dollars in thousands) 1997 1996 1995
- ----------------------------------------------------------
Current:
U.S. federal $21,958 18,641 15,173
Foreign 14,354 12,968 12,063
State and local 3,758 3,345 2,845
...........................................................
40,070 34,954 30,081
Deferred:
U.S. federal (25,173) (588) (278)
Foreign (21,908) (663) 1,613
State and local (4,182) (82) (511)
...........................................................
(51,263) (1,333) 824
- ----------------------------------------------------------
Total income tax $(11,193) 33,621 30,905
- ----------------------------------------------------------
In addition to the 1997 income tax benefit of $11.2 million, certain tax
benefits of $1.8 million were allocated directly to shareholders' equity.
The above tax benefits are based upon earnings before income taxes and
after a $152.8 million pre-tax charge. These earnings (losses) aggregated
$(14.5) million, $53.7 million and $44.4 million for domestic operations and
$(34.0) million, $34.5 million and $35.7 million for foreign operations in 1997,
1996 and 1995, respectively.
A reconciliation of the statutory federal income tax rate and the
effective tax rate follows:
1997 1996 1995
- ---------------------------------------------------------
Statutory federal income
tax rate (35.0)% 35.0 35.0
Realignment charge 7.2 -- --
Foreign tax rate difference 1.6 0.4 1.9
U.S. taxes on dividends
from subsidiaries 1.4 0.9 0.8
State and local taxes net
of federal income tax 3.9 2.4 1.9
Miscellaneous (2.2) (0.6) (1.0)
........................................................
Effective tax rate (23.1)% 38.1 38.6
- --------------------------------------------------------
The components of deferred tax assets and liabilities at December 31
were:
(dollars in thousands) 1997 1996
- ---------------------------------------------------------------
Deferred tax assets:
Realignment reserves $31,865 --
Pension and other
benefit programs 25,466 22,915
Restructuring reserves 643 2,238
Accrued liabilities 6,577 6,488
Net operating loss carryforwards 8,628 9,858
Inventories 4,342 3,412
Other 9,474 8,930
...............................................................
Total deferred tax assets: $86,995 53,841
...............................................................
Deferred tax liabilities:
Property and equipment -
depreciation and amortization 11,143 29,107
Other 111 1,486
...............................................................
Total deferred tax liabilities 11,254 30,593
...............................................................
Net deferred tax asset before
valuation allowance 75,741 23,248
Valuation allowance (8,678) (5,008)
...............................................................
Net deferred tax asset $67,063 18,240
...............................................................
At December 31, 1997, the Company's foreign subsidiaries had deferred tax
assets relating to net operating loss carryforwards for income tax purposes of
$8.6 million that expire in years 1998 through 2002, and in three instances have
no expiration period. For financial reporting purposes, a valuation allowance of
$2.5 million has been recognized to offset the deferred tax assets relating to
the net operating loss carryforwards.
In connection with the second quarter realignment charge, a valuation
allowance in the amount of $5.5 million has been recognized to offset the
deferred tax assets relating to the realignment charge.
34
37
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $99.2 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.
13. Reporting for segments
Major product lines of the Company are coatings, colors and ceramics;
chemicals; and plastics. Within coatings, colors and ceramics, coatings revenues
represented approximately 38% of consolidated net sales during 1997 and 1996 and
approximately 41% during 1995; colors represented approximately 11% of
consolidated net sales in each of the three years. Within chemicals, polymer
additives represented approximately 14% of consolidated sales in 1997 and 1996.
The Company's sales are primarily made through its own full-time sales force,
though some sales are made through manufacturers' representatives and
distributors.
Identifiable assets are those used in the operation of each segment.
Information about the Company's segment operating data follows:
Coatings,
Colors and
(dollars in millions) Ceramics Chemicals Plastics Total
- ----------------------------------------------------------------
Net sales
1997 $815.4 328.0 237.9 1,381.3
1996 781.0 336.7 238.0 1,355.7
1995 782.6 269.7 270.7 1,323.0
Operating
profit (loss)
1997(a) $ 8.1 (24.3) (2.8) (19.0)
1996 73.4 23.1 13.7 110.2
1995 71.3 18.6 8.8 98.7
Identifiable assets
1997 $420.1 167.7 78.0 665.8
1996 464.8 225.7 86.3 776.8
1995 454.0 250.2 95.6 799.8
Capital expenditures
1997 $ 29.5 11.6 4.0 45.1
1996 29.6 13.6 3.5 46.7
1995 33.4 11.7 4.4 49.5
Depreciation and
amortization
1997 $ 26.6 12.5 5.9 45.0
1996 27.5 15.1 7.0 49.6
1995 25.6 13.3 7.4 46.3
- -------------------------------------------------------------
(a) Excluding the realignment charge, on a pre-tax basis, operating profit
would have been $78.7 million for Coatings, Colors and Ceramics, $28.3
million for Chemicals and $15.6 million for Plastics.
A reconciliation of operating profit to income before income taxes
included in the consolidated statements of income follows:
(dollars in millions) 1997 1996 1995
- -------------------------------------------------------------
Operating profit (loss) $(19.0) 110.2 98.7
Interest earned 2.3 2.5 5.5
General corporate
expense-net (9.6) (7.9) (6.6)
Realignment charge -
corporate (11.1) -- --
Interest expense (12.2) (13.0) (15.2)
Miscellaneous 1.1 (3.6) (2.2)
...............................................................
Income (loss) before taxes $ (48.5) 88.2 80.2
- ---------------------------------------------------------------
A reconciliation of identifiable assets shown above to the total assets
included in the consolidated balance sheets follows:
(dollars in millions) 1997 1996 1995
- -----------------------------------------------------------
Total identifiable assets $665.8 776.8 799.8
Investments in affiliated
companies 0 7.1 7.6
Corporate assets 119.9 86.6 68.5
...........................................................
Total assets $785.7 870.5 875.9
- ------------------------------------------------------------
Geographic operating data follows:
(dollars in millions)
- ---------------------------------------------------------------------------------------------------------------------------
United
States and Latin Asia-
Canada Europe America Pacific Total
- ---------------------------------------------------------------------------------------------------------------------------
Net sales
1997 $748.6 436.6 112.3 83.8 1,381.3
1996 733.9 439.7 97.1 85.0 1,355.7
1995 658.1 483.5 88.3 93.1 1,323.0
Operating
profit (loss)
1997(a) $ 8.8 0.1 (12.4) (15.5) (19.0)
1996 59.9 37.0 7.9 5.4 110.2
1995 46.5 39.2 5.3 7.7 98.7
Identifiable
assets
1997 $351.5 225.0 57.2 32.1 665.8
1996 404.4 258.7 52.4 61.3 776.8
1995 423.5 271.9 40.5 63.9 799.8
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
- --------------
(a) Excluding the realignment charge, on a pre-tax basis, 0perating profit
would have been $68.1 million for the United States and Canada, $39.7
million for Europe, $7.5 million for Latin America and $7.3 million for
Asia-Pacific.
35
38
Transfers between geographic areas are immaterial. Identifiable assets
are those used in the operation of each geographic area.
The Company's international operations may be affected by exchange con
trols, currency fluctuations, and laws or policies of particular countries, as
well as by laws and policies of the United States affecting foreign trade and
investment. Because of the diversity of Ferro's international operations, the
Company does not consider that its international business, as a whole, is
exposed to significant political or economic risks which are disproportionate
to ordinary risks of doing business, whether domestic or international.
14. 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.
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 Dutch
guilders and Spanish pesetas. The maturity of the hedges is consistent with the
underlying exposure, generally not beyond one year. At December 31, 1997, the
market value of such forward contracts was $12.3 million, compared with a
contract value of $12.5 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 Dutch guilder, Spanish peseta and
French franc against the U.S. dollar. The maturity of the options is generally
under one year. At December 31, 1997, the face value or notional amount of all
outstanding currency options was $20.8 million. If liquidated at year-end 1997,
these options would have produced a cash amount of $1.2 million versus an
unamortized cost of $453,000.
In addition to hedging foreign exchange risk, the Company also purchases
call options to hedge certain base metals raw materials against future increases
in price. At December 31, 1997, there were no base metal call options
outstanding.
All forward contract, option and hedging activity is executed with major
reputable multinational financial institutions. Accordingly, the Company does
not anticipate counterparty default and believes that such risk is immaterial.
15. Lease commitment
In 1995, in conjunction with the Synthetic Products Company 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, 1997, are estimated to be
$1.8 million.
36
39
INDEPENDENT AUDITORS' REPORT
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, 1997 and 1996 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, 1997. 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, 1997
and 1996, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1997 in conformity with
generally accepted accounting principles.
/s/KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Cleveland, Ohio
January 26, 1998
QUARTERLY DATA (UNAUDITED)
Ferro Corporation and Subsidiaries
(dollars in thousands except per share data)
Per common share
--------------------------------
Net Basic Diluted
Gross income earnings earnings Cash Common stock
Quarter Net sales profit (loss) (loss) (loss) dividends price range
- ---------------------------------------------------------------------------------------------------------------------------
1997 1 $ 342,197 86,427 15,194 0.37 0.35 0.103 $21.583-18.667
2(a) 363,045 92,881 (83,946) (2.21) (2.21) 0.103 25.917-18.833
3 338,957 86,778 15,364 0.38 0.35 0.103 26.042-23.583
4 337,081 87,125 16,111 0.40 0.38 0.120 26.667-22.438
...........................................................................................................................
Total(a) $1,381,280 353,211 (37,277) (1.08) (1.08) 0.430
- ---------------------------------------------------------------------------------------------------------------------------
1996 1 $ 348,184 85,259 13,151 0.30 0.29 0.090 $18.917-15.250
2 344,715 84,507 14,315 0.34 0.32 0.090 18.917-17.167
3 329,212 78,715 13,227 0.31 0.30 0.103 18.250-17.000
4 333,574 83,803 13,893 0.33 0.32 0.103 20.083-17.500
...........................................................................................................................
Total $1,355,685 332,284 54,586 1.29 1.21 0.390
- ---------------------------------------------------------------------------------------------------------------------------
Per share data has been adjusted to reflect a 3-for-2 split in November 1997.
The common stock of the Company is listed on the New York Stock Exchange. Ticker
Symbol: FOE
At January 31, 1998, the Company had 2,924 holders of its common stock.
The Company's total earnings per share for 1996 and 1997 differ from the sum of
the quarterly amounts because of the effect of antidilutive securities in the
second quarter 1997 calculation and due to rounding differences and changes
in the basis of shares used to calculate earnings per share.
(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 share. Excluding
the realignment charge, net income for 1997 would have been $62.7
million, or $1.44 per common share.
37
40
SELECTED FINANCIAL DATA
Ferro Corporation and Subsidiaries
Years ended December 31, 1987 through 1997 (dollars in thousands except per
share data and sales per employee data) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
Operating results (A)
Net sales $ 1,381,280 1,355,685 1,322,954 1,194,247 1,065,748
Income (loss) before taxes and
cumulative effect of changes
in accounting principles $ (48,470) 88,207 80,159 74,306 89,289
Income tax expense (benefit) $ (11,193) 33,621 30,905 26,912 31,784
Net income (loss) $ (37,277) 54,586 49,254 47,394 36,955
Income as a percent of sales before
cumulative effect of changes in
accounting principles -- 4.0% 3.7% 4.0% 5.4%
Return on average shareholders' equity -- 14.2% 13.2% 13.1% 16.3%
Per common share data (A,B)
Average shares outstanding 38,131,631 39,506,572 41,419,578 42,745,959 43,601,090
Basic earnings (loss) $ (1.08) 1.29 1.10 1.02 0.77
Diluted earnings (loss) (1.08) 1.21 1.04 0.97 0.73
Cash dividends 0.43 0.39 0.36 0.36 0.34
Book value 7.32 9.99 9.49 8.79 8.21
Financial condition at year-end
Current assets $ 427,030 416,522 433,530 415,415 411,253
Current liabilities 277,707 252,333 258,472 228,336 198,958
...........................................................................................................................
Working capital 149,323 164,189 175,058 187,079 212,295
...........................................................................................................................
Plant and equipment 561,181 683,129 653,352 601,594 538,188
Accumulated depreciation
and amortization 321,001 375,746 364,064 313,005 280,367
...........................................................................................................................
Net plant and equipment 240,180 307,383 307,288 288,589 257,821
...........................................................................................................................
Other assets 118,469 146,563 136,294 97,372 98,820
Total assets 785,679 870,468 872,112 801,376 767,894
Long-term liabilities 102,020 105,308 104,910 77,611 79,349
ESOP loan guarantee 13,815 22,592 30,470 37,503 44,076
Deferred income taxes 7,168 23,391 21,380 17,309 14,884
Postretirement liabilities 45,643 44,846 43,570 42,076 40,096
Other non-current liabilities 66,175 37,794 36,160 31,797 31,734
Shareholders' equity 273,151 384,204 382,150 366,744 358,797
Plant and equipment
Capital expenditures and
acquisitions 45,129 50,592 60,733 63,404 75,037
Depreciation 39,421 42,283 40,233 37,076 33,812
Employees
Number (year-end) 6,851 6,912 6,914 6,817 6,627
Sales per employee $ 201,617 196,135 191,344 175,187 160,820
- ---------------------------------------------------------------------------------------------------------------------------
38
41
1992 1991 1990 1989 1988 1987
- -------------------------------------------------------------------------------------------------
1,097,793 1,056,940 1,124,833 1,083,573 1,008,990 871,008
97,689 20,349 43,509 83,764 88,436 61,023
38,861 15,532 24,090 34,016 41,816 29,336
58,828 4,817 19,419 49,748 46,620 31,687
5.4% 0.5% 1.7% 4.6% 4.6% 3.6%
18.1% 1.6% 6.4% 16.8% 16.8% 13.1%
43,301,822 42,689,787 43,074,468 45,695,063 46,327,196 46,565,745
1.29 0.04 0.38 1.04 1.01 0.68
1.18 0.04 0.35 0.97 -- --
0.30 0.29 0.29 0.27 0.21 0.20
7.95 7.11 7.18 6.80 6.35 5.64
414,927 405,740 386,704 408,692 356,972 325,835
205,043 212,575 221,155 210,059 194,171 174,577
- -------------------------------------------------------------------------------------------------
209,884 193,165 165,549 198,633 162,801 151,258
- -------------------------------------------------------------------------------------------------
497,561 511,605 519,044 446,290 399,785 359,223
269,998 276,885 263,114 226,268 202,563 187,334
- -------------------------------------------------------------------------------------------------
227,563 234,720 255,930 220,022 197,222 171,889
- -------------------------------------------------------------------------------------------------
54,055 31,465 43,029 40,417 33,946 34,302
696,545 671,925 685,663 669,131 588,140 532,026
53,210 55,658 58,047 60,764 63,163 64,147
50,897 57,229 62,649 68,020 -- --
10,918 9,444 21,088 19,860 20,622 22,035
-- -- -- -- -- --
31,504 31,732 17,122 13,359 14,850 11,516
344,973 305,287 305,602 297,069 295,334 259,751
48,761 39,005 61,408 53,471 53,753 37,339
33,451 32,686 30,389 27,574 24,696 21,883
6,535 7,266 8,205 8,045 8,374 8,100
167,990 145,460 137,090 134,690 120,490 107,530
- -------------------------------------------------------------------------------------------------
(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 is $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 (loss) per share are based on a weighted average of common
shares outstanding. Diluted earnings (loss) 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 2-for-1 stock split in
August 1987, 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.
39
42
DIRECTORS
Sandra Harden Austin
(1994)
President and Chief Executive
Officer, Sedona Healthcare
Group, Inc., Age 50 [2,3,4]
Albert C. Bersticker (1978)
Chairman and Chief Executive
Officer, Age 63 [3]
Paul S. Brentlinger (1984)
Partner, Morgenthaler Ventures, a
venture capital partnership,
Age 70 [1,4]
Dr. Glenn R. Brown (1988)
Retired Senior Vice President and
Director, Standard Oil Company
(now BP America), Age 67 [1,2]
Michael H. Bulkin (1998)
Private investor; Retired Director, McKinsey & Company,
a management consulting firm, Age 59 [2]
William E. Butler (1992)
Retired Chairman and Chief
Executive Officer, Eaton Corporation, manufacturer of engineered products for
automotive, industrial, commercial and military markets, Age 66 [2,3] A. James
Freeman (1986) Retired Vice Chairman and Chief Executive Officer, Lord
Corporation, manufacturer of bonded rubber specialty products for the automotive
industry, adhesives and chemical coatings, Age 69 [1,2]
John C. Morley (1987)
Retired President and Chief Executive Officer, Reliance Electric Company,
manufacturer of industrial motors and controls, mechanical power transmission
products and specialty telecommunication systems and products, Age 66 [1,3]
Hector R. Ortino (1993)
President and Chief Operating Officer,
Age 55
Rex A. Sebastian (1986)
Private investor,
Age 68 [3,4]
William J. Sharp (1998)
President, Global Support
Operations, The Goodyear
Tire & Rubber Company,
worldwide manufacturer of
tires, chemicals and engineered products,
Age 56 [1]
Dennis W. Sullivan (1992)
Executive Vice President, Industrial,
Parker Hannifin Corporation,
manufacturer of fluid power
products, Age 59 [3,4]
Milton F. Rosenthal
Director Emeritus, Age 83
Note: Figures in parentheses
indicate the year the Director
was elected to the Board.
Figures in brackets indicate
the Committee(s) which a
Director serves.
[1] Audit, [2] Compensation
& Organization, [3] Executive,
[4] Finance
CORPORATE OFFICERS
Albert C. Bersticker (1958)
Chairman and Chief Executive Officer, Age 63
David G. Campopiano (1989)
Vice President, Corporate Development, Age 48
Mark A. Cusick (1995)
Secretary
Principal Occupation: Partner,
Squire, Sanders & Dempsey,
Attorneys at Law, Age 49
R. Jay Finch (1991)
Vice President, Specialty Plastics, Age 56
James F. Fisher (1959)
Senior Vice President, Ceramics
and Colorants, Age 60
James B. Friederichsen (1994)
Vice President, Specialty Chemicals, Age 55
D. Thomas George (1988)
Treasurer, Age 50
J. Larry Jameson (1996)
Vice President, Powder Coatings, Age 60
Charles M. Less (1995)
Vice President, Marketing,
Age 48
Hector R. Ortino (1971)
President and Chief Operating Officer, Age 55
Thomas O. Purcell (1990)
Vice President, Chief Technical Officer, Age 53
Paul V. Richard (1983)
Vice President, Human Resources, Age 38
Gary H. Ritondaro (1986)
Vice President and Chief Financial Officer, Age 51
Note: Figures in parenthesis indicate the year the Officer joined the
Corporation.
40
43
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%
and 8% Debentures
Chase National Corporate
Services, Inc.
Skylight Office Tower
1600 West Second Street
Cleveland, Ohio 44113
Independent Auditors
KPMG Peat Marwick 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, 1997 is available to shareholders
upon written request to:
Corporate Communications
Ferro Corporation
1000 Lakeside Avenue
P.O. Box 147000
Cleveland, Ohio 44114-7000
Annual Meeting
April 24, 1998, 10:00 a.m.
Erie Room
One Cleveland Center
1375 East Ninth Street
Cleveland, Ohio 44114
Executive Offices
Ferro Corporation
1000 Lakeside Avenue
P.O. Box 147000
Cleveland, Ohio 44114-7000
216/641-8580
WORLDWIDE OPERATING UNITS
United States and Canada
Coatings, Colors and Ceramics
California, Georgia, New York,
Ohio, Pennsylvania, Tennessee
Plastics
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 Industrias Quimicas
(Portugal), 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.
Brazil
Ferro Enamel do Brasil I.C.L.
Ecuador
Ferro Ecuatoriana S.A. (51%)
Mexico
Ferro Mexicana S.A. de C.V.
Venezuela
Ferro de Venezuela, C.A. (51%)
Asia-Pacific
Australia
Ferro Corporation (Australia) Pty. Ltd.
Hong Kong
Ferro Far East, Ltd.
Indonesia
P.T. Ferro Mas Dinamika (55%)
Japan
Ferro Enamels (Japan) Ltd. (10%),
Ferro (Japan) K.K.
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] is a trademark of
Ferro Corporation.
41
44
Ferro Corporation
1000 Lakeside Avenue
Cleveland, Ohio
44114