================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
----------
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2002
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-584
----------
FERRO CORPORATION
(Exact name of registrant as specified in its charter)
AN OHIO CORPORATION, IRS NO. 34-0217820
1000 LAKESIDE AVENUE CLEVELAND, OH 44114
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: 216/641-8580
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
At April 25, 2002 there were 35,022,489 shares of Ferro common stock,
par value $1.00, outstanding.
================================================================================
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FERRO CORPORATION AND SUBSIDIARIES
(DOLLARS IN THOUSANDS - EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31
--------
(UNAUDITED) (UNAUDITED)
2002 2001
---- ----
Net Sales....................................................... $ 426,799 $ 370,694
Cost of Sales................................................... 319,734 273,192
Selling, Administrative and General Expenses.................... 78,454 66,453
Other Charges (Credits):
Interest Expense............................................. 13,198 7,848
Net Foreign Currency (Gain) Loss............................. 759 (183)
Other Expense - Net.......................................... 3,387 1,505
-------------- -------------
Income Before Taxes....................................... 11,267 21,879
Income Tax Expense.............................................. 4,046 7,913
-------------- -------------
Net Income...................................................... 7,221 13,966
Dividend on Preferred Stock..................................... 670 795
-------------- -------------
Net Income Available to Common Shareholders..................... $ 6,551 $ 13,171
============== =============
Per Common Share Data:
Basic Earnings............................................... $ 0.19 $ 0.39
Diluted Earnings............................................. 0.19 0.37
Shares Outstanding:
Average Outstanding.......................................... 34,641,204 34,178,782
Average Diluted.............................................. 37,634,121 37,195,911
Actual End of Period......................................... 34,840,055 34,251,943
See Accompanying Notes to Condensed Consolidated Financial Statements
1
CONDENSED CONSOLIDATED BALANCE SHEET
FERRO CORPORATION AND SUBSIDIARIES
MARCH 31, 2002 AND DECEMBER 31, 2001
(DOLLARS IN THOUSANDS)
(UNAUDITED) (AUDITED)
MARCH 31 DECEMBER 31
2002 2001
---- ----
ASSETS
Current Assets:
Cash and Cash Equivalents............................................... $ 12,073 $ 15,317
Net Receivables......................................................... 178,354 176,637
Inventories............................................................. 222,382 237,153
Other Current Assets.................................................... 170,647 171,473
------------- -------------
Total Current Assets................................................. $ 583,456 $ 600,580
Net Property, Plant & Equipment............................................ 617,025 624,463
Unamortized Intangible Assets.............................................. 407,917 405,340
Other Assets............................................................... 98,109 102,176
------------- -------------
$ 1,706,507 $ 1,732,559
============= =============
LIABILITIES
Current Liabilities:
Notes and Loans Payable................................................. $ 22,645 $ 19,506
Accounts Payable, Trade................................................. 225,298 214,408
Other Current Liabilities............................................... 177,923 171,312
------------- -------------
Total Current Liabilities............................................ $ 425,866 $ 405,226
Long - Term Debt........................................................... 777,787 829,740
Other Liabilities.......................................................... 202,291 197,207
Shareholders' Equity....................................................... 300,563 300,386
------------- -------------
$ 1,706,507 $ 1,732,559
============= =============
See Accompanying Notes to Condensed Consolidated Financial Statements
2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FERRO CORPORATION AND SUBSIDIARIES
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31
--------
(UNAUDITED) (UNAUDITED)
2002 2001
---- ----
Net Cash Provided by Operating Activities.................................. $ 36,362 $ 18,887
Cash Flow from Investing Activities:
Capital Expenditures for Plant and Equipment ........................... (7,280) (12,053)
Other Investing Activities.............................................. (2,719) 147
-------------- -------------
Net Cash Used for Investing Activities..................................... (9,999) (11,906)
Cash Flow from Financing Activities:
Net Borrowings (Payments) Under Short-Term Facilities .................. 3,139 (17,329)
Asset Securitization Proceeds .......................................... 21,527 16,615
Proceeds from Long-Term Debt ........................................... -- 4,240
Principal Payments on Long-Term Debt ................................... (51,978) --
Purchase of Treasury Stock ............................................. (424) (3,811)
Cash Dividend Paid ..................................................... (5,657) (5,750)
Other Financing Activities ............................................. 3,251 1,642
------------- -------------
Net Cash Used by Financing Activities ..................................... (30,142) (4,393)
Effect of Exchange Rate Changes on Cash ................................... 535 25
------------- -------------
Increase (decrease) in Cash and Cash Equivalents .......................... (3,244) 2,613
Cash and Cash Equivalents at Beginning of Period .......................... 15,317 777
------------- -------------
Cash and Cash Equivalents at End of Period ................................ $ 12,073 $ 3,390
============= =============
Cash Paid During the Period for:
Interest, Net of Amounts Capitalized ................................... $ 3,390 $ 4,986
Income Taxes ........................................................... $ 592 $ 492
------------- -------------
See Accompanying Notes to Condensed Consolidated Financial Statements
3
FERRO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
These condensed consolidated interim financial statements should be
read in conjunction with the consolidated financial statements and
notes thereto included in the Company's annual report on Form 10-K for
the fiscal year ended December 31, 2001. The information furnished
herein reflects all adjustments (consisting of normal recurring
adjustments) which are, in the opinion of management, necessary for
fair presentation of the results of operations for the interim period.
The results for the three months ended March 31, 2002 are not
necessarily indicative of the results expected in subsequent quarters
or for the full year.
2. COMPREHENSIVE INCOME
Comprehensive income represents net income adjusted for foreign
currency translation adjustments and pension liability adjustments.
Comprehensive income was $1.5 million and $6.7 million for the three
months ended March 31, 2002 and 2001, respectively. Accumulated other
comprehensive loss at March 31, 2002 and December 31, 2001 was $113.4
million and $107.7 million, respectively.
3. INVENTORIES
Inventories consisted of the following:
(dollars in thousands)
MARCH 31, DECEMBER 31,
2002 2001
---- ----
Raw Materials..................................................... $ 66,892 $ 71,374
Work in Process................................................... 18,560 18,218
Finished Goods.................................................... 147,395 157,850
------------- -------------
232,847 247,442
LIFO Reserve...................................................... 10,465 10,289
------------- -------------
Net Inventories................................................... $ 222,382 $ 237,153
============= =============
4. FINANCING AND LONG-TERM DEBT
Long-term debt as of March 31, 2002 and December 31, 2001 was as
follows:
(dollars in thousands)
MARCH 31, DECEMBER 31,
2002 2001
---- ----
Senior Notes, 9.125%, due 2009.................................... $ 195,865 $ 195,712
Debentures, 7.125%, due 2028...................................... 54,453 54,448
Debentures, 7.625%, due 2013...................................... 24,835 24,833
Debentures, 8.0%, due 2025........................................ 49,463 49,457
Debentures, 7.375%, due 2015...................................... 24,951 24,950
Revolving credit agreements....................................... 426,133 372,000
Capital markets term facility..................................... -- 103,555
Other ............................................................ 4,049 6,422
------------- -------------
779,749 831,377
Less current portion (a).......................................... 1,962 1,637
------------- -------------
Total ............................................................ $ 777,787 $ 829,740
============= =============
(a) Included in notes and loans payable.
4
FERRO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. FINANCING AND LONG-TERM DEBT -- (CONTINUED)
In September 2001, the Company entered into new unsecured senior credit
facilities. The senior credit facilities included (1) a $373.0 million
five-year revolving credit facility, (2) a $187.0 million 364-day
revolving credit facility and (3) a $300.0 million capital markets
180-day term loan facility. The Company has an option to convert the
364-day revolving credit facility to a one-year term loan at the
expiration date of the facility in August, 2002. On January 14, 2002,
the Company repaid in full the remaining portion of the capital markets
term facility of $103.6 million. At March 31, 2002, the Company had
$426.1 million outstanding under the revolving credit facilities.
At the Company's option, the borrowings under the five-year and 364-day
revolving credit facilities bear interest at a rate equal to (1) LIBOR,
or (2) the greater of the prime rate established by National City Bank,
Cleveland, Ohio, and the Federal Funds effective rate plus 0.5% (Prime
Rate); plus, in each case, applicable margins based upon a combination
of the Company's index debt rating and the ratio of the Company's total
debt to EBITDA (earnings before interest, taxes, depreciation and
amortization). Interest rates in effect at March 31, 2002, for the
five-year and 364-day revolving credit facilities, were 3.40%.
The Company's credit facilities contain customary operating covenants
that limit its ability to engage in certain activities, including
acquisitions. Several of the covenants contain additional restrictions
based upon the ratio of total debt to EBITDA (as defined in the credit
facilities) or in the event the Company's senior debt ceases to be
rated investment grade by either Moody's Investor Service (Moody's) or
Standard & Poor's Rating Group (S&P). The credit facilities also
contain financial covenants relating to minimum fixed charge coverage
ratios over certain periods of time. The Company's ability to meet
these covenants in the future may be affected by events beyond its
control, including prevailing economic, financial and market conditions
and their effect on the Company's financial position and results of
operations. The Company does have several options available to
mitigate these circumstances, including selected asset sales and the
issuance of additional capital.
5
FERRO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. FINANCING AND LONG-TERM DEBT -- (CONTINUED)
Obligations under the revolving credit facilities are unsecured;
however, if the Company's senior debt ceases to be rated as investment
grade by either Moody's or S&P, the Company and its material
subsidiaries must grant security interests in its principal
manufacturing properties, pledge 100% of the stock of domestic material
subsidiaries and pledge 65% of the stock of foreign material
subsidiaries, in each case, in favor of the Company's lenders under
such facilities. In that event, liens on principal domestic
manufacturing properties and the stock of domestic subsidiaries will be
shared with the holders of the Company's senior notes and debentures
and trust notes and trust certificates issued under the leveraged lease
program.
The Company's level of debt and debt service requirements could have
important consequences to our business operations and uses of cash
flow. In addition, a reduction in overall demand for our products could
adversely affect our cash flows from operations. However, the Company
does have a $560.0 million revolving credit facility of which
approximately $133.9 million was available as of March 31, 2002. This
liquidity, along with the liquidity from the Company's asset
securitization program and the available cash flows from operations,
should allow the Company to meet its funding requirements and other
commitments.
In 2000, the Company initiated a $150.0 million five-year program to
sell (securitize), on an ongoing basis, a pool of its trade accounts
receivable. Under this program, certain of the receivables of the
Company are sold to a wholly owned unconsolidated special purpose
entity, Ferro Finance Corporation (FFC). FFC can sell, under certain
conditions, an undivided fractional ownership interest in the pool of
receivables to a multi-seller receivables securitization company
(Conduit). Additionally, under this program, receivables of certain
European subsidiaries are sold directly to other Conduits. During the
first quarter of 2002, total trade receivables sold under the program
were $246.6 million, while $225.0 million was remitted to the Conduits.
The Company and certain European subsidiaries on behalf of FFC and the
Conduits provide service, administration and collection of the
receivables. FFC and the Conduits have no recourse to the Company's
other assets for failure of debtors to pay when due. The accounts
receivable securitization facility contains a provision under which the
agent can terminate the facility if the Company's senior credit rating
is downgraded below BB by S&P or Ba2 by Moody's.
The Company retains interest in the receivables transferred to FFC and
Conduits in the form of a note receivable to the extent that they
exceed advances. The note receivable balance was $49.3 million as of
March 31, 2002, and $63.4 million as of December 31, 2001 and is
included in other current assets in the balance sheet. The Company and
certain European subsidiaries on a monthly basis measure the fair value
of the retained interests at management's best estimate of the
undiscounted expected future cash collections on the transferred
receivables. Actual cash collections may differ from these estimates
and would directly affect the fair value of the retained interests. At
March 31, 2002, the Company was advanced $86.8 million compared with
$65.3 million for December 31, 2001.
6
FERRO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. EARNINGS PER SHARE COMPUTATION
THREE MONTHS ENDED
MARCH 31
--------
2002 2001
---- ----
Average Basic Shares
Outstanding....................................... 34,641,204 34,178,782
Adjustments for Assumed
Conversion of Convertible
Preferred Stock and
Common Stock Options.............................. 2,992,917 3,017,129
-------------- -------------
Average Diluted Shares............................... 37,634,121 37,195,911
============== =============
Basic earnings per share is computed as net income available to common
shareholders divided by average basic shares outstanding. Diluted
earnings per share is computed as net income adjusted for the tax
effect associated with assumed conversion of preferred stock and
common stock options to common stock divided by average diluted shares
outstanding.
6. ACQUISITIONS & DIVESTITURES
On September 7, 2001, the Company acquired from OM Group, Inc. (OMG)
certain businesses previously owned by dmc2 Degussa Metals Catalysts
Cerdec AG (dmc2) pursuant to an agreement to purchase certain assets of
dmc2, including shares of certain of its subsidiaries. The businesses
acquired included the electronic materials, performance pigments, glass
systems and Cerdec ceramics businesses of dmc2. The Company paid to OMG
in cash a purchase price for these businesses of approximately $525
million.
A summary of the preliminary allocation of the purchase price follows:
(dollars in thousands)
Current assets...................................................................... $ 270,425
Property, plant and equipment....................................................... 220,885
Estimated excess of purchase price over net assets acquired......................... 202,322
Other assets........................................................................ 34,749
-------------
Total assets..................................................................... 728,381
Current liabilities................................................................. 137,317
Long-term liabilities............................................................... 65,590
-------------
Total liabilities................................................................ 202,907
Cash purchase price................................................................. $ 525,474
=============
7
FERRO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The preliminary allocation of the purchase price has been changed
during the first quarter of 2002 to reflect revisions to the valuation
of property, plant and equipment and estimates of long-term
liabilities. The preliminary purchase price allocation is subject to
revisions, when additional information becomes available to the
Company, including the fair values of certain acquired assets and their
remaining useful lives; valuation of actuarially-determined
liabilities; measurement of certain assumed liabilities; and plans to
integrate the operations of the acquired dmc2 operations. These costs,
once determined, will be recorded as part of the purchase price
allocation and will result in adjustments to the excess of purchase
price over net assets acquired. Additionally, the purchase price is
subject to certain post-closing adjustments with respect to working
capital changes and levels of acquired cash and debt. Any such
adjustments will result in changes to the preliminary allocation shown
above.
The Company financed this transaction with proceeds from credit
facilities, which are described in Note 4 herein.
7. REALIGNMENT AND COST REDUCTION PROGRAMS
The following table summarizes the activities relating to the Company's
realignment and cost reduction programs:
(dollars in thousands)
Other
Severance Costs Total
------------------------------------------
Balance as of 12/31/01 $ 5,339 $ 202 $ 5,541
Charges 810 357 1,167
Cash payments (2,575) (392) (2,967)
------- ------- -------
Balance as of 3/31/02 $ 3,574 $ 167 $ 3,741
======= ======= =======
During the first quarter of 2002, the Company continued with its cost
reduction programs and incurred additional charges associated with
these programs. Initiated in 2001, these programs include employment
cost reductions in response to a slowdown in general economic
conditions and integration synergy plans relating to the acquisition of
certain businesses of dmc2.
Through March 31, 2002 the amount of severance costs paid under the
programs was $10.8 million and approximately 665 employees have
actually been terminated.
8. CONTINGENT LIABILITIES
On May 4, 1999, and December 16, 1999, the United States Environmental
Protection Agency (U.S. EPA) issued Notices of Violation (NOVs)
alleging that we violated various requirements of the Clean Air Act and
related state laws in modifying and operating the Pyro-Chek(R) process.
We sold assets relating to the Pyro-Chek(R) process and ceased its
production of Pyro-Chek(R) in June 2000.
We have negotiated with the U.S. EPA, the State of Indiana and local
authorities a settlement of this matter that resolves the issues raised
in the NOVs without admission of liability by us. The settlement is
subject to public notice and comment and then to approval by the United
States District Court for the Northern District of Indiana. If
approved, under the terms of the settlement, we will pay an aggregate
cash amount of $3 million to the U.S. government, the State of Indiana
and the City of Hammond. In addition, the Company will provide $844,000
to fund an environmental project in Hammond unrelated to our
operations. If approved, payment of such amounts will not have a
material adverse effect on our financial position or results of
operations.
8
FERRO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. CONTINGENT LIABILITIES--(CONTINUED)
In 2000 and 2001, tort actions were filed against us in the United
States District Court for the Northern District of Indiana by or on
behalf of four individual plaintiffs. The complaints in these actions
generally alleged that we were negligent and/or reckless in failing to
control emissions, misrepresenting emissions levels to regulatory
agencies, failing to warn nearby residents of the hazards posed by our
emissions, and in emitting carcinogenic chemicals without a permit.
Each of these actions has now been dismissed pursuant to a settlement
agreement with the individual plaintiffs. Payments under these
settlements have not had and will not have a material adverse effect on
our financial position or results of operations.
There are also pending against us and our consolidated subsidiaries
various other lawsuits and claims. In the opinion of management, the
ultimate liabilities resulting from such other lawsuits and claims will
not materially affect our consolidated financial position or results of
operations or liquidity.
9
FERRO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. REPORTING FOR SEGMENTS
The Company's reportable segments are Coatings and Performance
Chemicals. Coatings products include tile coatings systems, color and
glass performance materials, industrial coatings and electronic
materials. Performance Chemicals consists of polymer additives,
performance and fine chemicals, and specialty plastics. The Company
measures segment profit for internal reporting purposes as net
operating profit before interest and taxes. Excluded from net operating
profit are certain unallocated corporate expenses. A complete
reconciliation of segment income to consolidated income before tax is
presented below.
Sales to external customers are presented in the following chart.
Inter-segment sales are not material.
FERRO CORPORATION AND SUBSIDIARIES
SEGMENT DATA
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31
--------
(UNAUDITED) (UNAUDITED)
2002 2001
---- ----
SEGMENT SALES
Coatings................................... $ 286,347 $ 216,191
Performance Chemicals...................... 140,452 154,503
------------- -------------
Total......................................... $ 426,799 $ 370,694
============= =============
SEGMENT INCOME
Coatings................................... $ 23,961 $ 21,925
Performance Chemicals...................... 9,899 13,257
------------- -------------
Total ........................................ 33,860 35,182
Unallocated expenses (1)...................... 5,249 4,133
Interest expense.............................. 13,198 7,848
Foreign currency (gain) loss.................. 759 (183)
Other expense................................. 3,387 1,505
------------- -------------
Income before taxes........................ $ 11,267 $ 21,879
============= =============
GEOGRAPHIC SALES
United States.............................. $ 217,111 $ 214,658
International.............................. 209,688 156,036
------------- -------------
Total......................................... $ 426,799 $ 370,694
============= =============
(1) Unallocated expenses consist primarily of corporate costs, charges
associated with employment cost reduction programs and certain
integration costs related to the acquisition of certain businesses of
dmc2.
10
FERRO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued Statement No. 142, "Goodwill and Other
Intangible Assets." Statement No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized,
but instead, tested for impairment at least annually. The amortization
provisions of Statement No. 142, including nonamortization of goodwill,
apply to goodwill and intangible assets acquired after June 30, 2001.
With adoption of Statement No. 142 in its entirety on January 1, 2002,
all of the Company's goodwill and intangible assets with indefinite
lives are no longer being amortized, but are subject to periodic
impairment reviews. The Company will complete its review of
indefinite-lived intangible assets for impairment under the provisions
of Statement No. 142 by June 30, 2002.
Had the Company been accounting for its goodwill and certain other
intangible assets for all prior periods presented, the Company's net
income and earnings per common share would have been as follows:
THREE MONTHS ENDED
MARCH 31
-------------------------------
2002 2001
---- ----
(Dollars in thousands)
Net income:
As reported....................................................... $ 7,221 $ 13,966
Add back amortization expense, net of tax......................... -- 1,082
------------- -------------
Adjusted net income............................................... $ 7,221 $ 15,048
============= =============
Basic earnings per share:
As reported ...................................................... $ 0.19 $ 0.39
Add back amortization expense, net of tax ........................ -- 0.03
------------- -------------
Adjusted basic earnings per share................................. $ 0.19 $ 0.42
============= =============
Diluted earnings per share:
As reported ...................................................... $ 0.19 $ 0.37
Add back amortization expense, net of tax ........................ -- 0.03
------------- -------------
Adjusted diluted earnings per share............................... $ 0.19 $ 0.40
============= =============
In June 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations." Statement No. 143 requires entities to record
the fair value of a liability for an asset retirement obligation in the
period in which it is incurred. When the liability is initially
recorded, the entity capitalizes the cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period and the capitalized cost is
depreciated over the remaining useful life of the related asset. Upon
settlement of the liability, the entity either settles the obligation
for the amount recorded or incurs a gain or loss. Statement No. 143 is
effective for fiscal years beginning after June 15, 2002. Management is
evaluating the effect of this statement on the Company's results of
operations and financial position.
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," effective prospectively
for fiscal years beginning after December 15, 2001 and accordingly, the
Company has adopted Statement No. 144 as of January 1, 2002. Statement
No. 144 supersedes Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the
accounting and reporting provisions of APB Opinion 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment
of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" for the disposal of a segment of business
(Opinion 30). The FASB issued Statement No. 144 to establish a single
accounting model for long-lived assets to be disposed of by sales.
Statement No. 144 broadens the presentation of discontinued
11
FERRO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. ACCOUNTING PRONOUNCEMENTS--(CONTINUED)
operations in the income statement to include a component of an entity
(rather than a segment of a business). A component of an entity
comprises operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest of an
entity. Statement No. 144 also requires that discontinued operations be
measured at the lower of the carrying amount or fair value less cost to
sell. The adoption of Statement No. 144 did not have a material impact
on the Company's financial position or results of operations.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
First quarter 2002 net sales of $426.8 million were 15.1% higher than
the $370.7 million of sales for the comparable 2001 period. Sales
increased 32.5% in the Coatings segment and declined 9.1% in the
Performance Chemicals segment.
Overall volume increased 22.1% for the quarter, including the effect of
acquisitions. The increased volume was primarily due to the acquisition
of certain businesses of dmc2, which was completed in September, 2001.
The additional volume from this acquisition more than offset lower
demand levels as a result of the economic conditions in the United
States and Europe. A shift toward more economically sensitive products
had an adverse price/mix impact of about 5% on a year-over-year basis.
Currency also reduced sales by about 2% this period versus the first
quarter of last year.
Gross margins were 25.1% of sales compared with 26.3% for the
comparable 2001 period. The lower gross margins compared to the prior
year primarily stemmed from lower demand and capacity utilization, the
Company's inventory reduction program, which yielded a reduction in
inventory of approximately $14.8 million in the first quarter of 2002,
and the unfavorable mix/price shift described above.
Selling, administrative and general expenses were $78.5 million in the
first quarter of 2002 compared with $66.5 million in the first quarter
of 2001. The increase was due primarily to the addition of dmc2
operating expenses offset partially by cost reductions achieved related
to the integration of the dmc2 businesses.
Interest expense was $13.2 million for the first quarter of 2002,
compared to $7.8 million for the first quarter of 2001. The higher
interest expenses were due to additional debt related to the
acquisition of the dmc2 businesses.
Net income for the quarter ended March 31, 2002, was $7.2 million
versus $14.0 million for the quarter ended March 31, 2001. The lower
net income was primarily due to lower gross margins and higher SG&A,
offset partially by the added earnings from the acquired dmc2
businesses and cost reductions related to the integration of those
businesses. Earnings per diluted common share were $0.19 for the first
quarter of 2002 including a reduction for integration costs of $1.2
million or $0.02 per share, compared with $0.37 per share for the prior
year period ($0.40 per share if FASB Statement No. 142 had been
effective for that period).
QUARTERLY SEGMENT RESULTS
Sales in the Coatings segment were $286.3 million in the first quarter,
compared with first quarter 2001 sales of $216.2 million. Operating
income was $24.0 million in the quarter, compared with $21.9 million in
the year-ago quarter. The increase in sales reflects higher volume
related to the dmc2 acquisition, which was partially offset by the
effect of reduced demand in the United States and Europe. The operating
income increase is due to the higher volume and the realization of cost
synergies from the dmc2 integration, including significant efforts to
reduce selling, general and administrative costs. Overall, the segment
experienced stronger demand in the United States during the 2002 first
quarter, driven by the automotive, building and renovation and durable
goods markets, as compared to the 2001 fourth quarter. Demand in the
electronics market improved in the 2002 first quarter as compared to
the 2001 fourth quarter, especially in the Far East, but remained well
below prior-year levels. European market conditions improved slightly
during the first quarter versus the fourth quarter of 2001, but
remained at a relatively weak level.
13
Sales in the Performance Chemicals segment for the first quarter of
2002 were $140.5 million, compared with $154.5 million in the first
quarter of last year. Operating income was $9.9 million in the quarter,
down from $13.3 million a year ago. The decline in sales and earnings
reflected reduced demand and changes in product mix and prices in
certain businesses as compared to the first quarter of 2001. The
segment started to experience a rebound in market demand and volume in
the United States during the first quarter of 2002, led by the
automotive, building and renovation, durable goods and consumer
packaging markets. Demand remained soft across most European markets.
GEOGRAPHIC SALES
Sales in the United States were $217.1 million for the three months
ended March 31, 2002 compared with $214.7 million for the three months
ended March 31, 2001. International sales were $209.7 million for the
three months ended March 31, 2002, compared with $156.0 million for the
three months ended March 31, 2001. The sales growth in both of these
geographical areas was driven primarily by the dmc2 acquisition.
OUTLOOK
Market conditions improved compared with the fourth quarter of 2001,
but the level and rate of the economic recovery are still uncertain.
The Company's businesses have implemented, and are continuing to
implement, aggressive cost containment measures and are managing
working capital to mitigate, in part, the impact of economic conditions
on the results of operations. In the near term, the primary focus of
the Company will be to continue to realize the synergies from
integrating the acquired dmc2 businesses with their Ferro counterparts.
The Company believes that additional significant cost savings can be
achieved through eliminating duplicate facilities, reducing overhead
and capitalizing on raw material sourcing synergies. The Company
expects that ongoing efforts to integrate the acquired dmc2 businesses
will likely result in integration charges, including severance costs,
in future periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements include primarily capital
investments, working capital requirements and debt service. The Company
expects to be able to meet its liquidity requirements from a variety of
sources. The Company has a $560.0 million revolving credit facility, of
which $133.9 million was available as of March 31, 2002. The Company
also has an accounts receivable securitization facility under which the
Company may receive advances of up to $150.0 million, subject to the
level of qualifying accounts receivable. At March 31, 2002 and at
December 31, 2001, $86.8 million and $65.3 million, respectively, was
advanced under this facility and under Generally Accepted Accounting
Principles, neither the amounts advanced nor the corresponding
receivables sold are reflected in the Company's consolidated balance
sheet. We also maintain a leveraged lease program pursuant to which we
lease certain land, buildings, machinery and equipment for a five-year
period through 2005.
14
Obligations under the revolving credit facilities are unsecured;
however, if the Company's senior debt ceases to be rated as investment
grade by either Moody's Investors Service, Inc. (Moody's) or Standard &
Poor's Rating Group (S&P), the Company and its material subsidiaries
must grant security interests in our respective principal manufacturing
properties, pledge 100% of the stock of material domestic subsidiaries
and pledge 65% of the stock of material foreign subsidiaries, in each
case, in favor of the Company's lenders under such facilities. In that
event, liens on our principal domestic manufacturing properties and the
stock of domestic subsidiaries would be shared with the holders of the
Company's senior notes and debentures and trust notes and trust
certificates issued under a leveraged lease program. Such liens could
reasonably be expected to impair our ability to obtain financing on
commercially reasonable terms. Although, as of March 31, 2002, we had
approximately $133.9 million available under our revolving credit
facilities, any such future liens may have a material adverse effect on
our ability to satisfy our ongoing capital resource and liquidity
requirements. The accounts receivable securitization facility contains
a provision under which the agent can terminate the facility if the
Company's senior credit rating is downgraded below BB by S&P or Ba2 by
Moody's. We do not believe that a termination of this facility would be
reasonably expected to have a material adverse effect on our liquidity
or our capital resource requirements.
The rating agencies may, at any time, based on changing market,
political or socio-economic conditions reconsider the current rating of
our outstanding debt. Based on rating agency disclosures, we understand
that ratings changes within the general industrial sector are evaluated
based on quantitative, qualitative and legal analyses. Factors
considered by the rating agencies include: industry characteristics,
competitive position, management, financial policy, profitability,
capital structure, cash flow production and financial flexibility. S&P
and Moody's have disclosed that our ability to reduce our level of
indebtedness and to strengthen cash flow protection measures, through
asset sales, increased free cash flows from acquisitions or otherwise,
will be a factor in their ratings determinations going forward. The
rating agencies also have indicated that if our debt levels remain near
current levels at year end 2002 and there is no significant improvement
in earnings, we may not be able to maintain our investment grade
rating. On April 29, the Company announced its intent to sell 4 million
common shares through a public offering. The proceeds from the offering
are intended to be used to reduce borrowings under the revolving credit
facility. Based upon the terms of the facility, the amount available
for borrowing will be reduced by the corresponding amount of the
repayment.
The Company's credit facilities contain customary operating covenants
that limit its ability to engage in certain activities, including
acquisitions. Several of the covenants contain additional restrictions
based upon the ratio of total debt to EBITDA (earnings before interest,
taxes, depreciation and amortization, as defined in the credit
facilities) or in the event the Company's senior debt ceases to be
rated investment grade by either Moody's or S&P. The credit facilities
also contain financial convenants relating to minimum fixed charge
coverage ratios over certain periods of time. The Company's ability to
meet these covenants in the future may be affected by events beyond its
control, including prevailing economic, financial and market conditions
and their effect on the Company's financial position and results of
operations. The Company does have several options available to mitigate
these circumstances, including selected asset sales and the issuance of
additional capital.
The Company's level of debt and debt service requirements could have
important consequences to our business operations and uses of cash
flow. In addition, a reduction in overall demand for our products could
adversely affect our cash flows from operations. However, the Company
does have a $560.0 million revolving credit facility of which
approximately $133.9 million was available as of March 31, 2002. This
liquidity, along with the liquidity from the Company's asset
securitization program and available cash flows from operations, should
allow the Company to meet its funding requirements and other
commitments. The Company also has potential liquidity requirements
related to payments under our leveraged lease program and contingent
liabilities as described further in Note 8 to the consolidated
financial statements included elsewhere herein.
ENVIRONMENTAL
Refer to Note 8 of the Condensed Consolidated Financial Statements
included herein for a description of the status of environmental
matters.
15
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB issued Statement No. 142, "Goodwill and Other
Intangible Assets." Statement No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized,
but instead, tested for impairment at least annually. The amortization
provisions of Statement No. 142, including nonamortization of goodwill,
apply to goodwill and intangible assets acquired after June 30, 2001.
With adoption of Statement No. 142 in its entirety on January 1, 2002,
all of the Company's goodwill and intangible assets with indefinite
lives are no longer being amortized, but are subject to periodic
impairment reviews. Amortization expense related to indefinite-lived
intangibles was approximately $0.3 million for the quarter ended March
31, 2002 and was $2.1 million for all intangible assets for the quarter
ended March 31, 2001. Amortization expense for the first quarter of
2001 would have been $0.4 million had the provisions of Statement No.
142 been in effect. The Company will complete its review of
indefinite-lived intangible assets for impairment under the provisions
of Statement No. 142 by June 30, 2002.
In June 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations." Statement No. 143 requires entities to record
the fair value of a liability for an asset retirement obligation in the
period in which it is incurred. When the liability is initially
recorded, the entity capitalizes the cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period and the capitalized cost is
depreciated over the remaining useful life of the related asset. Upon
settlement of the liability, the entity either settles the obligation
for the amount recorded or incurs a gain or loss. Statement No. 143 is
effective for fiscal years beginning after June 15, 2002. Management is
evaluating the effect of this statement on the Company's results of
operations and financial position.
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," effective prospectively
for fiscal years beginning after December 15, 2001 and accordingly, the
Company has adopted Statement No. 144 as of January 1, 2002. Statement
No. 144 supersedes Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the
accounting and reporting provisions of APB Opinion 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment
of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" for the disposal of a segment of business
(Opinion 30). The FASB issued Statement No. 144 to establish a single
accounting model for long-lived assets to be disposed of by sales.
Statement No. 144 broadens the presentation of discontinued operations
in the income statement to include a component of an entity (rather
than a segment of a business). A component of an entity comprises
operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest of an
entity. Statement No. 144 also requires that discontinued operations be
measured at the lower of the carrying amount or fair value less cost to
sell. The adoption of Statement No. 144 did not have a material impact
on the Company's financial position or results of operations.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Management's Discussion and
Analysis and elsewhere in this report reflect the Company's current
expectations with respect to the future performance of the Company and
may constitute "forward-looking statements" within the meaning of the
federal securities laws. These statements are subject to a variety of
uncertainties, unknown risks and other factors concerning the Company's
operations and business environment, and actual events or results may
differ materially from the events or results discussed in the
forward-looking statements. Factors that could cause or contribute to
such differences include, but are not limited to: the success of the
Company's integration of certain businesses of dmc2; changes in
customer requirements, markets or industries served; changes in
interest rates; changing economic or political conditions; changes in
foreign exchange rates; changes in the prices of major raw materials or
sources of energy; significant technological or competitive
developments; the completion or failure to complete the announced
common stock offering; and the impact of environmental proceedings and
regulation.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FACTORS
The Company's exposure to market risks is primarily limited to interest
rate and foreign currency fluctuation risks. The Company's exposure to
interest rate risk is related primarily to its debt portfolio including
off balance sheet obligations under its accounts receivable
securitization program. The Company's interest rate risk management
objectives are to limit the effect of interest rate changes on
earnings, cash flows and overall borrowing costs. To limit interest
rate risk on borrowings, the Company maintains a percentage of fixed
and variable rate debt within defined parameters. In managing the
percentage of fixed versus variable rate debt, consideration is given
to the interest rate environment and forecasted cash flows. This policy
limits exposure from rising interest rates and allows the Company to
benefit during periods of falling rates. The Company's interest rate
exposure is generally limited to the amounts outstanding under the
revolving credit facilities and amounts outstanding under its
receivables securitization program. Based on the total amount of
variable rate indebtedness outstanding at December 31, 2001, a 1%
change in short-term interest rates would have resulted in a $6.0
million change in expense for the year 2001. A 1% change in short-term
interest rates would have resulted in a $1.4 million change in expense
for the first quarter of 2002.
At March 31, 2002, the Company had $349.6 million of fixed rate debt
outstanding with an average interest rate of 8.4%, all maturing after
2006. The fair market value of these debt securities was approximately
$328.8 million at March 31, 2002.
The Company manages exposures to changing foreign currency exchange
rates principally through the purchase of put options on currencies and
forward foreign exchange contracts. Put options are purchased to offset
the exposure of foreign currency-denominated earnings to a depreciation
in the value of the local currency to the U.S. dollar. The Company's
primary foreign currency put option market exposure is the euro.
Foreign subsidiaries also mitigate the risk of currency fluctuations on
the cost of raw materials denominated in U.S. dollars through the
purchase of U.S. dollars to cover the future payable. A 10%
appreciation of the U.S. dollar versus the corresponding currencies
would have resulted in a $1.9 million and a $2.2 million increase in
the fair value of these contracts in the aggregate at March 31, 2002
and December 31, 2001, respectively. A 10% depreciation of the U.S.
dollar would have resulted in a $1.5 million and $1.7 million decrease
in the fair value of the contracts in the aggregate at March 31, 2002
and December 31, 2001, respectively.
In September 2001, the Company completed the acquisition of the dmc2
businesses. This acquisition increases the Company's exposure to
fluctuations in foreign currencies versus the U.S. dollar, particularly
in Europe and Asia. At March 31, 2002, the Company had forward
contracts to sell euros for U.S. dollars in a notional amount of $4.0
million at an average rate of $.8778/euro and outstanding put options
to sell euros for U. S. dollars having a notional amount of $8.4
million and an average strike price of $.8804/euro. These forward and
future contracts have a net fair value of approximately $1.0 million.
The Company also had forward contracts to sell other currencies with an
aggregate notional amount of $7.6 million and a net fair value of $0.3
million.
17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Legal proceedings were reported in the Company's Form 10-K for the year
ended December 31, 2001 and are also covered in Footnote 8 to the
Condensed Consolidated Financial Statements contained herein.
ITEM 2. CHANGE IN SECURITIES.
No change.
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The exhibits listed in the attached Exhibit Index are filed
pursuant to Item 6(a) of the Form 10-Q.
(b) The Company did not file any reports on Form 8-K during the
three-month period ended March 31, 2002.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FERRO CORPORATION
(Registrant)
Date: May 07, 2002
/s/ HECTOR R. ORTINO
---------------------------------------------------
Hector R. Ortino
Chairman and Chief Executive Officer
Date: May 07, 2002
/s/ BRET W. WISE
---------------------------------------------------
Bret W. Wise
Senior Vice President and Chief Financial Officer
19
EXHIBIT INDEX
The following exhibits are filed with this report or are incorporated here by
reference to a prior filing in accordance with Rule 12b-32 under the Securities
Exchange Act of 1934. (Asterisk denotes exhibits filed with this report.)
Exhibit:
(3) Articles of Incorporation and by-laws
(a) Eleventh Amended Articles of Incorporation. (Reference is made to
Exhibit (3)(a) to Ferro Corporation's Quarterly Report on Form 10-Q for
the three months ended June 30, 1998, which Exhibit is incorporated
here by reference.)
(b) Certificate of Amendment to the Eleventh Amended Articles of
Incorporation of Ferro Corporation filed December 28, 1994. (Reference
is made to Exhibit (3)(b) to Ferro Corporation's Quarterly Report on
Form 10-Q for the three months ended June 30, 1998, which Exhibit is
incorporated here by reference.)
(c) Certificate of Amendment to the Eleventh Amended Articles of
Incorporation of Ferro Corporation filed January 19, 1998. (Reference
is made to Exhibit (3)(c) to Ferro Corporation's Quarterly Report on
Form 10-Q for the three months ended June 30, 1998, which Exhibit is
incorporated here by reference.)
(d) Amended Code of Regulations. (Reference is made to Exhibit (3)(d) to
Ferro Corporation's Quarterly Report on Form 10-Q for the three months
ended June 30, 1998, which Exhibit is incorporated here by reference.)
(4) Instruments defining rights of security holders, including indentures
(a) Amended and Restated Shareholder Rights Agreement between Ferro
Corporation and National City Bank, Cleveland, Ohio, as Rights Agent,
dated as of December 10, 1999. (Reference is made to Exhibit 4(k) to
Ferro Corporation's Form 10-K for the year ended December 31, 1999,
which Exhibit is incorporated here by reference.)
(b) The rights of the holders of Ferro's Debt Securities issued and to be
issued pursuant to a Senior Indenture between Ferro and J. P. Morgan
Trust Company, National Association (successor-in-interest to Chase
Manhattan Trust Company, National Association) as Trustee, are
described in the Senior Indenture, dated March 25, 1998. (Reference is
made to Exhibit 4(c) to Ferro Corporation Quarterly Report on Form 10-Q
for the three months ended March 31, 1998, which Exhibit is
incorporated here by reference.)
(c) Form of Security (7-1/8% Debentures due 2028). (Reference is made to
Exhibit 4(a-1) to Ferro Corporation's Form 8-K filed March 31, 1998,
which Exhibit is incorporated here by reference.)
(d) Officer's Certificate dated December 20, 2001, pursuant to Section 301
of the Indenture dated as of March 25, 1998, between the Company and J.
P. Morgan Trust Company, National Association (the
successor-in-interest to Chase Manhattan Trust Company, National
Association), as Trustee (excluding exhibits thereto). (Reference is
made to Exhibit 4.1 to Ferro Corporation's Form 8-K filed December 21,
2001, which Exhibit is incorporated here by reference.)
(e) Form of Global Note (9-1/8% Senior Notes due 2009). (Reference is made
to Exhibit 4.2 to Ferro Corporation's Form 8-K filed December 21, 2001,
which Exhibit is incorporated here by reference.)
The Company agrees, upon request, to furnish to the Securities and
Exchange Commission a copy of any instrument authorizing long-term debt
that does not authorize debt in excess of 10%of the total assets of the
Company and its subsidiaries on a consolidated basis.
20
(10) Material Contracts
* (m)(1) Amendment to Receivables Purchase Agreement, dated as of
February 28, 2002, among Ferro Finance Corporation as Seller, Corporate
Asset Funding Company, Inc. as Investor and assignee of CIESCO L.P.,
Ferro Electronic Materials, Inc. as an Originator, Ferro Corporation as
Originator and Collection Agent, and Citicorp North America, Inc. as
Agent.
* (n)(1) Amendment to Purchase and Contribution Agreement, dated as of
February 28, 2002, between Ferro Corporation and Ferro Electronic
Materials, Inc. as Sellers and Ferro Finance Corporation as Purchaser.
*(11) Computation of Earnings Per Share.
*(12) Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined
Fixed Charges and Preferred Stock Dividends.
21