Ferro Corp. 10-K
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
|
|
|
(Mark One)
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the fiscal year ended
December 31, 2005
|
or
|
o
|
|
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)
|
|
|
Ohio
|
|
34-0217820
|
(State of Corporation)
|
|
(IRS Employer Identification
No.)
|
|
|
|
1000 Lakeside Avenue
Cleveland, OH
(Address of principal
executive offices)
|
|
44114
(Zip Code)
|
Registrants telephone number, including area code:
216-641-8580
Securities Registered Pursuant to section 12(b) of the
Act:
|
|
|
Title of Each Class
|
|
Name of Each Exchange on Which Registered
|
|
Common Stock, par value $1.00
|
|
New York Stock Exchange
|
Common Stock Purchase Rights
|
|
New York Stock Exchange
|
Securities Registered Pursuant to Section 12(g) of the
Act:
91/8% Senior
Notes due January 1, 2009
75/8% Debentures
due May 1, 2013 (repaid August 2006)
73/8% Debentures
due November 1, 2015 (repaid July 2006)
8% Debentures due June 15, 2025 (repaid July
2006)
71/8% Debentures
due April 1, 2028 (repaid July 2006)
Series A ESOP Convertible Preferred Stock, without Par
Value
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. YES o NO þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. YES o NO þ
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 o NO þ
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained here, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). YES o NO þ
The aggregate market value of Ferro Common Stock, par value
$1.00, held by non-affiliates (based on the closing sale price)
as of June 30, 2005, was approximately $804,791,000.
On August 31, 2006, there were 42,747,117 shares of
Ferro Common Stock, par value $1.00 outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
None.
PART I
Item 1
Business
Ferro Corporation (Ferro or the
Company), incorporated under the laws of Ohio in
1919, is a leading global producer of a diverse array of
performance materials sold to a broad range of manufacturers in
approximately 30 markets throughout the world. The Company
applies certain core scientific expertise in organic chemistry,
inorganic chemistry, polymer science and material science to
develop coatings for ceramics and metal; materials for passive
electronic components; pigments; enamels, pastes and additives
for the glass market; glazes and decorating colors for the
dinnerware market; specialty plastic compounds and colors;
polymer additives; specialty chemicals for the pharmaceuticals
and electronics markets; and active ingredients and high purity
carbohydrates for pharmaceutical formulations. Ferros
products are classified as performance materials, rather than
commodities, because they are formulated to perform specific and
important functions both in the manufacturing processes and in
the finished products of its customers. The Companys
performance materials require a high degree of technical service
on an individual customer basis. The value of these performance
materials stems from the results and performance they achieve in
actual use.
Ferros products are traditionally used in markets such as
appliances, automotive, building and renovation, electronics,
household furnishings, industrial products, pharmaceuticals,
telecommunications and transportation. The Companys
leading customers include major chemical companies,
pharmaceutical companies, producers of multi-layer ceramic
capacitors, and manufacturers of tile, appliances, building
materials and automobiles. Many customers, particularly in the
appliance and automotive markets, purchase materials from more
than one of the Companys business units. Ferros
customer base is also well-diversified both geographically and
by end market.
For information about recent acquisitions and divestitures, see
the discussion in Selected Financial Data under Item 6 of
this
Form 10-K.
Raw
Materials
Raw materials widely used in Ferros operations include
polypropylene, titanium, zircon, phthalic anhydride, zinc oxide,
cobalt oxide, toluene, boron, bismuth, soybean oil, silica,
aluminum oxide, feldspar, chrome, nickel, unsaturated polyester,
polystyrene, lead oxide, tallow, and lithium. Other important
raw materials include silver, nickel, copper, gold, palladium,
platinum and other precious metals, butanol, and fiberglass. Raw
materials make up a large portion of the product cost in certain
of the Companys product lines and fluctuations in the cost
of raw materials may have a significant impact on the financial
performance of those businesses. The Company attempts to pass
through to customers raw material cost fluctuations, including
those related to precious metals.
The Company has a broad supplier base and, in many instances,
alternative sources of raw materials are available if problems
arise with a particular supplier. Ferro maintains many
comprehensive supplier agreements for its strategic and critical
raw materials. In addition, the magnitude of the Companys
purchases provides for leverage in negotiating favorable
conditions for supplier contracts. The raw materials essential
to Ferros operations both in the United States and
overseas are in most cases obtainable from multiple sources
worldwide. Ferro did not encounter raw material shortages in
2005 but is aware of potential future shortages in the world
market for certain commodities such as zircon. Ferro does not
expect to be affected by such shortages, other than by cost
increases for such products.
Patents,
Trademarks and Licenses
Ferro owns a substantial number of patents and patent
applications relating to its various products and their uses.
While these patents are of importance to Ferro, management does
not believe that the invalidity or expiration of any single
patent or group of patents would have a material adverse effect
on its business. Ferros patents and patents that may issue
from pending applications will expire at various dates through
the year 2024. Ferro also uses a number of trademarks that are
important to its business as a whole or to a particular segment.
Ferro believes that these trademarks are adequately protected.
3
Customers
None of the Companys reportable segments is dependent on
any single customer or group of customers.
Backlog
of Orders; Seasonality
In general, no significant lead-time between order and delivery
exists in any of Ferros business segments. As a result,
Ferro does not consider that the dollar amount of backlog orders
believed to be firm as of any particular date is material for an
understanding of its business. Ferro does not regard any
material part of its business to be seasonal, however the second
quarter is normally the strongest quarter of the year in terms
of sales and operating profit, because customer demands tend to
be higher in the second quarter.
Competition
In most of its markets, Ferro has a substantial number of
competitors, none of which is dominant. Due to the diverse
nature of Ferros product lines, no single company competes
across all product lines in any of the Companys segments.
Competition varies by product and by region and is based
primarily on price, product quality and performance, customer
service and technical support.
The Company is a worldwide leader in the production of glass
enamels, porcelain enamels, ceramic glaze coatings and passive
electronic materials, and believes it is currently the only
merchant manufacturer of all primary components (electrodes,
dielectrics, and termination pastes) of multi-layer capacitors.
Strong local competition for ceramic glaze and color exists in
the markets of Italy and Spain. The Company is one of the
largest producers of polymer additives in the United States and
has several large competitors. The Company is also one of the
largest plastics compounders in the United States.
Research
and Development
Ferro is involved worldwide in research and development
activities relating to new and existing products, services and
techniques required by the ever-changing markets of its
customers. The Companys research and development resources
are organized into centers of excellence that support its
regional and worldwide major business units. These centers are
augmented by local laboratories, which provide technical service
and support to meet customer and market needs of particular
geographic areas.
Expenditures for research and development activities relating to
the development or significant improvement of new
and/or
existing products, services and techniques for continuing
operations were approximately $38.4 million in 2005,
$42.4 million in 2004, and $40.2 million in 2003.
Expenditures for individual customer requests for research and
development were not material. During 2006, Ferro expects to
spend approximately $46.3 million on research and
development activities, an increase of 21% over 2005 due to
reorganization of personnel within the Company.
Environmental
Matters
Ferros manufacturing facilities, like those of the
industry generally, are subject to numerous laws and regulations
implemented to protect the environment, particularly with
respect to plant wastes and emissions. The Company anticipates
that stringent laws and regulations will continue to be placed
on Ferro and the industry in general. Ferro believes that it is
in compliance with the environmental regulations to which its
operations are subject and that, to the extent Ferro may not be
in compliance with such regulations, non-compliance has not had
a materially adverse effect on Ferros results of
operations or financial position.
The Companys policy is to operate its plants and
facilities in a manner that protects the environment and the
health and safety of its employees and the public. The Company
intends to continue to make expenditures for environmental
protection and improvements in a timely manner consistent with
available technology. Capital expenditures for environmental
control were $3.3 million in 2005, $7.1 million in
2004, and $9.6 million in 2003. These amounts pertain
primarily to costs associated with environmental protection
equipment. Although the Company cannot precisely predict future
environmental capital spending, the Company does not expect such
costs to have a material impact on the Companys results of
operations or financial position.
4
The Company expenses recurring costs associated with control and
disposal of hazardous materials in current operations. Accruals
for environmental remediation and other contingent liabilities,
including those relating to ongoing, pending or threatened
litigation, are recorded when it is probable that a liability
has been incurred and the amount of the liability can be
reasonably estimated. The amount accrued for environmental
remediation reflects the Companys assumptions about
remediation requirements at the contaminated site, the nature of
the remedy, the outcome of discussions with regulatory agencies
and other potentially responsible parties at multi-party sites,
and the number and financial viability of other potentially
responsible parties. Estimated costs are not discounted due to
the uncertainty with respect to the timing of related payments.
The Company actively monitors the status of sites, and as
assessments and cleanups proceed, accruals are reviewed
periodically and adjusted, if necessary, as additional
information becomes available. Changes in the estimates on which
the accruals are based, unanticipated government enforcement
actions, or changes in health, safety, environmental regulation,
and testing requirements could result in higher or lower costs.
As of December 31, 2005, the Company had accrued
liabilities of $6.6 million for environmental remediation
costs, of which $1.2 million related to Superfund sites. As
of December 31, 2004, the Company had accrued liabilities
of $6.4 million, of which $0.6 million related to
Superfund sites.
Employees
At December 31, 2005, Ferro, in its continuing business
operations, employed 6,839 full-time employees, including
4,386 employees in its foreign consolidated subsidiaries and
2,453 in the United States. Total employment decreased by 164
full time employees from December 31, 2004, due to
continuing restructuring and cost control programs.
Approximately 21% of the United States workforce is covered by
labor agreements, and approximately 9% is affected by labor
agreements that expire in 2006. The Company expects to complete
renewals of these agreements with no significant disruption to
the related businesses during 2006.
Domestic
and Foreign Operations
Financial information about Ferros domestic and foreign
operations by segment is included herein in Note 15 to the
consolidated financial statements under Item 8 of this
Form 10-K.
Ferros products are produced and distributed in domestic
as well as foreign markets. Ferro commenced its international
operations in 1927.
Wholly-owned subsidiaries operate manufacturing facilities in
Argentina, Australia, Belgium, Brazil, China, France, Germany,
Italy, Japan, Mexico, the Netherlands, Portugal, Spain, Thailand
and the United Kingdom. Partially-owned subsidiaries and
affiliates manufacture in China, Ecuador, Indonesia, Italy,
Spain, South Korea, Thailand and Venezuela.
Ferro receives technical service fees
and/or
royalties from many of its foreign subsidiaries. Historically,
as a matter of corporate policy, the foreign subsidiaries have
been expected to remit a portion of their annual earnings to the
parent as dividends. To the extent earnings of foreign
subsidiaries are not remitted to Ferro, those earnings are
indefinitely re-invested in those subsidiaries.
Available
Information
The Companys Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
and Current Reports on
Form 8-K,
including any amendments, will be made available free of charge
on the Companys web site, www.ferro.com, as soon as
reasonably practicable, following the filing of the reports with
the Securities and Exchange Commission.
Forward-looking
Statements
Certain statements contained here and in future filings with the
Securities and Exchange Commission reflect the Companys
expectations with respect to future performance and constitute
forward-looking statements within
5
the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act
of 1934, as amended. These statements are subject to a variety
of uncertainties, unknown risks and other factors concerning the
Companys operations and business environment, which are
difficult to predict and are beyond the control of the Company.
Item 1A
Risk Factors
Important factors that could cause actual results to differ
materially from those suggested by these forward-looking
statements, and that could adversely affect the Companys
future financial performance, include the following:
The
Company depends on reliable sources of raw materials and other
supplies at a reasonable cost, but availability to such
materials and supplies could be interrupted
and/or the
prices charged for them could escalate and adversely affect the
Companys sales and profitability.
The Company purchases many raw materials and supplies that are
used in the manufacture of its products. Changes in the
availability or price of these items could affect the
Companys ability to manufacture an adequate volume of
products to meet customers demands or to manufacture
products profitably. The Company tries to maintain multiple
sources of raw materials and supplies where practical, but this
may not prevent unanticipated changes in the availability or
cost of the supplies purchased. Significant disruptions in
availability or cost escalations could adversely affect the
Companys manufacturing volume or costs, which could have a
related negative effect on product sales or profitability of the
Companys operations.
The
markets in which the Company participates are highly competitive
and subject to intense price competition, which could adversely
affect the Companys sales and earnings
performance.
Customers choose to buy the Companys products in a
competitive environment where there are typically multiple
suppliers. If the Company is unwilling or unable to provide
products at competitive prices, and if other factors, such as
product performance and value-added services do not provide an
offsetting competitive advantage, customers may reduce,
discontinue, or fail to initiate purchases of the Companys
products. If the Company could not secure alternate customers
for lost business, the Companys sales and earnings
performance could be adversely affected.
The
Company is striving to improve operating margins through price
increases, productivity gains and improved purchasing
techniques, but it may not be successful in achieving the
desired improvements.
The Company is working to improve operating profit margins
through a number of activities such as price increases,
improvements to manufacturing processes and adoption of
purchasing techniques that lower costs or provide increased cost
predictability. However, these activities depend on a
combination of improved product design and engineering,
effective manufacturing process control initiatives and other
efforts that may or may not be successful to the extent
anticipated. The success of price increases is dependent not
only on the Companys actions but also the strength of
customer demand and competitors pricing responses, which
are not fully predictable. Failure to successfully implement
actions to improve operating margins could adversely affect the
Companys financial performance.
The
Companys products are sold into industries that are
heavily influenced by consumer spending or otherwise have proven
to be unpredictable and cyclical.
The Companys products are sold to a wide variety of
customers who supply many different market segments. Many of
these market segments, such as construction, appliances and
automotive, have been in the past, and are expected to be in the
future, cyclical or are closely tied to consumer demand, which
is difficult to predict. Incorrect forecasts of demand or
unforeseen reductions in demand can adversely affect costs and
profitability due to factors such as underused manufacturing
capacity, excess inventory, or working capital needs. These
factors can result in lower profitability or reduced financial
performance.
6
The
global scope of the Companys operations exposes the
Company to risks related to currency conversion rates and
changing economic, social and political conditions around the
world.
In order to support global customers, access regional markets
and compete effectively, the Company engages in global
operations. As a result, there is added complexity in the
Companys operations and the consequent risks associated
with managing such complexity, including currency conversion
effects and the impact of changing economic, social and
political conditions. While the Company attempts to anticipate
these changes and manage its business appropriately, these
changes are often beyond the Companys control and
difficult to forecast. The consequences of these risks may have
significant adverse effects on the Companys results of
operations or financial position.
The
Company has a growing presence in the Asia/Pacific region where
it can be difficult for an American company, such as Ferro, to
compete lawfully with local competitors.
Many of the Companys most promising growth opportunities
are in the Asia/Pacific region, especially the Peoples
Republic of China. Although the Company has been able to compete
successfully in those markets to date, local laws and customs
can make it difficult for an American-based company to compete
on a level playing field with local competitors
without engaging in conduct that would be illegal under
U.S. law. The Companys strict policy of observing the
highest standards of legal and ethical conduct may cause the
Company to lose, in some cases, otherwise attractive business
opportunities to local competition in the region.
Regulatory
authorities in the U.S., European Union and elsewhere are taking
a much more aggressive approach to regulating hazardous
materials and those regulations could affect sales of the
Companys products.
Some of the Companys products are subject to restrictions
resulting from listing of materials under laws such as
California Proposition 65 or from classification under the
European Unions hazardous substances directive. The
proposed EU REACH registration system, for example,
could affect the Companys ability to sell certain
products. Moreover, hazardous material legislation and
regulations can restrict the sale of products
and/or
increase the cost of producing them. In light of these factors,
customers will sometimes deselect a product in favor
of perceived greener or less hazardous alternatives.
All of these factors can adversely affect the Companys
sales and operating profits.
The
Companys operations are subject to stringent
environmental, health and safety regulations and compliance with
those regulations could require the Company to make significant
investments.
The Company strives to conduct its manufacturing operations in a
manner that is safe and in compliance with all applicable
environmental, health and safety regulations. At times,
compliance with changing regulations may require the Company to
make significant capital investments, incur training costs, make
changes in manufacturing processes or product formulations, or
otherwise incur costs that could adversely affect the
Companys profitability. These costs may not affect
competitors in an equivalent way due to differences in product
formulations, manufacturing locations or other factors, and as
such the Company may be disadvantaged, which may adversely
affect financial performance.
The
Company depends on external financial resources and any
interruption in access to capital markets or borrowings could
adversely affect the Companys financial
condition.
As of December 31, 2005, the Company had approximately
$555 million of debt with varying maturities. These
borrowings have allowed the Company to make investments in
growth opportunities and fund working capital requirements.
Continued access to capital markets is essential to meet the
Companys current obligations as well as to fund the
Companys strategic initiatives. An interruption in the
access to external financial resources could adversely affect
the Companys business prospects and financial condition.
See further information regarding the Companys liquidity
in Note 3 to the consolidated financial statements included
under Item 8 of this
Form 10-K.
7
Interest
rates on some of the Companys external borrowings are
variable and the Companys borrowing costs could be
affected adversely by interest rate increases.
Portions of the Companys debt obligations have interest
rates that are variable in nature. Generally, when interest
rates rise, as they have over the last year, the Companys
cost of borrowings increases. The Company estimates, based on
the debt obligations outstanding at December 31, 2005, that
a one percent increase in interest rates would cause interest
expense to increase by approximately $1.9 million annually.
While the Company can take actions to mitigate the effect of
rising interest rates, continued increases could adversely
affect the cost of borrowings and the Companys financial
performance. See further information regarding the
Companys liquidity in Note 3 to the consolidated
financial statements included under Item 8 of this
Form 10-K.
Many
of the Companys assets are encumbered by liens that have
been granted to lenders and those liens affect the
Companys flexibility in making timely dispositions of
property and businesses.
The Companys debt obligations are secured by substantially
all of the Companys assets. The granting of this security
interest is described in more detail in Note 3 to the
Companys consolidated financial statements under
Item 8 of this
Form 10-K.
These liens could affect the Companys flexibility in
making timely dispositions of property and businesses, as these
liens must be cleared or waived by the lenders prior to
completing any disposition.
The
Company is subject to a number of restrictive covenants in its
credit facilities and those covenants could affect the
Companys flexibility in making investments and
acquisitions.
The Companys credit facilities contain a number of
restrictive covenants as described in more detail in
Managements Discussion and Analysis under Item 7 of
this
Form 10-K.
These covenants include, among others, customary operating
restrictions that limit the Companys ability to engage in
certain activities, including limitations on additional loans
and investments; prepayments, redemptions and repurchases of
debt; and mergers, acquisitions and asset sales. The Company is
also subject to customary financial covenants including a
leverage ratio and a fixed charge coverage ratio. These
covenants restrict, among other things, the amount of the
Companys borrowings, reducing the Companys
flexibility in making investments and acquisitions. Breaches of
these covenants could become events of default under the
Companys credit facilities and cause the acceleration of
the maturity of debt beyond the Companys ability to pay.
The
Company has deferred tax assets and its ability to utilize those
assets will depend on the Companys future
performance.
To fully realize the value of its deferred tax assets, the
Company will have to generate adequate taxable profits in
various tax jurisdictions. As of December 31, 2005, the
Company had $87.3 million of net deferred tax assets. If
the Company does not generate adequate profits within the time
periods required by the applicable tax statutes, the value of
the tax assets will not be realized. In addition, if it becomes
unlikely that the deferred tax assets will be used, the value of
the assets may need to be reduced in the Companys
financial statements, adversely affecting the results of
operations. (See further information in Note 14 to the
Companys consolidated financial statements under
Item 8 of this
Form 10-K.)
The
Company is a defendant in several lawsuits that could have,
unless successfully resolved, an adverse effect on the
Companys financial condition
and/or
financial performance.
The Company is routinely involved in litigation brought by
suppliers, customers, employees, governmental agencies and
others. The most significant pending litigation is described in
Item 3 Legal Proceedings of this Form
10-K.
Litigation is an inherently unpredictable process and
unanticipated negative outcomes are possible.
The
Companys businesses depend on a continuous stream of new
products and failure to introduce new products could affect the
Companys sales and profitability.
One way that the Company remains competitive in its markets is
by developing and introducing new and improved products on an
ongoing basis. These products are continually evaluated by
customers in relation to products offered by the Companys
competitors. A failure to introduce new products in a timely
manner that are
8
price competitive and that provide the features and performance
required by customers could adversely affect the Companys
sales, or could require the Company to compensate by lowering
prices. This could result in lower sales
and/or lower
profitability.
Employee
benefit costs, especially post-retirement costs, constitute a
significant element of the Companys annual expenses, and
the funding of these costs could adversely affect the
Companys financial condition.
Employee benefit costs are a significant element of the
Companys cost structure. Certain expenses, particularly
post-retirement costs under defined benefits pension plans and
healthcare costs for employees and retirees, may increase
significantly at a rate that is difficult to forecast and may
adversely affect the Companys financial results or
financial condition.
The
Company has signed a definitive agreement to sell its Specialty
Plastics business, but there is no assurance that the sale will
be successfully completed.
On August 21, 2006, the Company announced that it had
signed a definitive agreement to sell its Specialty Plastics
business to Wind Point Partners, a private equity investment
firm. The sale was originally scheduled to close in the third
quarter of 2006, but is now scheduled to close on
October 31, 2006. The Company intends to use the proceeds
of the sale to pay down debt. If the sale is not consummated,
the Company will not be able to pay down debt as originally
planned.
The
Company is exposed to risks associated with acts of God,
terrorists and others, as well as fires, explosions, wars,
riots, accidents, embargos, natural disasters, strikes and other
work stoppages, quarantines and other governmental actions, and
other events or circumstances that are beyond the Companys
reasonable control.
The Company is exposed to risks from various events that are
beyond its control, which may have significant effects on its
results of operations. While the Company attempts to mitigate
these risks through appropriate insurance, contingency planning
and other means, it is not assured that all the risks can be
reasonably or cost-effectively managed, or that all risks can be
anticipated. As a result, the Companys results of
operations could be adversely affected by such circumstances or
events in ways that are significant
and/or long
lasting.
The risks and uncertainties identified above are not the only
risks the Company faces. Additional risks and uncertainties not
presently known to the Company or that it currently believes to
be immaterial also may adversely affect the Company. Should any
known or unknown risks and uncertainties develop into actual
events, these developments could have material adverse effects
on the Companys financial position, results of operations,
and cash flows.
Item 1B
Unresolved Staff Comments
None.
Item 2
Properties
The Companys corporate headquarters offices are located at
1000 Lakeside Avenue, Cleveland, Ohio. The Company also owns
other corporate facilities, located in Independence, Ohio.
Principal manufacturing plants owned by the Company range in
size from 17,000 sq. ft. to over
500,000 sq. ft. Plants with more than
250,000 sq. ft. are located in Germany; Spain; Niagara
Falls, New York; Penn Yan, New York; Fort Worth, Texas; and
France. The locations of these principal manufacturing plants by
business segment are as follows:
Performance Coatings U.S.: Cleveland, Ohio. Outside
the U.S.: Argentina, Australia, China, France, Indonesia, Italy,
Mexico, the Netherlands, Spain, Taiwan, Thailand and Venezuela.
Electronic Materials U.S.: Penn Yan, New York; South
Plainfield, New Jersey; and Niagara Falls, New York. Outside the
U.S.: the Netherlands.
9
Color and Glass Performance Materials U.S.:
Toccoa, Georgia; Orrville, Ohio; and Washington, Pennsylvania.
Outside the U.S.: Australia, China, France, Germany, Mexico,
Taiwan, United Kingdom and Venezuela.
Polymer Additives U.S.: Bridgeport, New Jersey;
Cleveland, Ohio; Walton Hills, Ohio; and Fort Worth, Texas.
Specialty Plastics U.S.: Evansville, Indiana;
Plymouth, Indiana; Edison, New Jersey; and Stryker, Ohio.
Outside the U.S.: the Netherlands and Spain.
Other U.S.: Waukegan, Illinois; Baton Rouge,
Louisiana. Outside the U.S.: China
In October 2005, the Dutch government placed a lien on one of
the Companys facilities in the Netherlands as collateral
for any future payment relating to an unresolved environmental
claim. In March 2006, as a result of a credit rating downgrade,
lenders of the Companys revolving credit facility, senior
notes and debentures become entitled to security interests in
the Companys and its domestic material subsidiaries
real estate. This lien grant was substantially completed in
April 2006.
In addition, Ferro leases manufacturing facilities for the
Performance Coatings segment in Brazil and Italy; for the
Electronic Materials segment in Vista, California, Germany and
Japan; for the Color and Glass Performance Materials
segment in Japan and Portugal; for the Polymer Additives segment
in Belgium and the United Kingdom; and for the Specialty
Plastics segment in Carpentersville, Illinois. In some
instances, the manufacturing facilities are used for two or more
business segments. Leased facilities range in size from
23,000 sq. ft. to over 300,000 sq. ft. at a
plant located in Portugal.
Item 3
Legal Proceedings
In February 2003, the Company was requested to produce documents
in connection with an investigation by the United States
Department of Justice into possible antitrust violations in the
heat stabilizer industry. In April 2006, the Company was
notified by the Department of Justice that the Government had
closed its investigation and that the Company was relieved of
any obligation to retain documents that were responsive to the
Governments earlier document request. Before closing its
investigation, the Department of Justice took no action against
the Company or any current or former employee of the Company.
The Company was previously named as a defendant in several
lawsuits alleging civil damages and requesting injunctive relief
relating to the conduct the Government was investigating. The
Company is vigorously defending itself in those actions, and
management does not expect these lawsuits to have a material
effect on the consolidated financial position, results of
operations, or cash flows of the Company.
In a July 23, 2004, press release, Ferro announced that its
Polymer Additives business performance in the second quarter
fell short of expectations and that its Audit Committee would
investigate possible inappropriate accounting entries in
Ferros Polymer Additives business. A consolidated putative
securities class action lawsuit arising from and related to the
July 23, 2004, announcement is currently pending in the
United States District Court for the Northern District of Ohio
against Ferro, its deceased former Chief Executive Officer, its
Chief Financial Officer, and a former operating Vice President
of Ferro. This claim is based on alleged violations of Federal
securities laws. Ferro and the named executives consider these
allegations to be unfounded, are vigorously defending this
action and have notified Ferros directors and officers
liability insurer of the claim. Because this action is in its
preliminary stage, the outcome of this litigation cannot be
determined at this time.
Also, following the July 23, 2004, announcement, two
derivative lawsuits were commenced in the United States District
Court for the Northern District of Ohio on behalf of Ferro
against Ferros Directors, its deceased former Chief
Executive Officer, and Chief Financial Officer. Two other
derivative actions were subsequently filed in the Court of
Common Pleas for Cuyahoga County, Ohio. The state court actions
were removed to the United States District Court for the
Northern District of Ohio and all of the derivative lawsuits
were then consolidated into a single action. The derivative
lawsuits alleged breach of fiduciary duties and
mismanagement-related claims. On March 21, 2006, the Court
dismissed the consolidated derivative action without prejudice.
On April 8, 2006, plaintiffs filed a motion seeking relief
from the judgment dismissing the derivative lawsuit and seeking
to further amend their complaint following discovery, which was
denied. On April 13, 2006, plaintiffs also filed a Notice
of Appeal to the Sixth Circuit Court of Appeals. The Directors
and named executives consider the allegations
10
contained in the derivative actions to be unfounded, have
vigorously defended this action and will defend against the new
filings. The Company has notified Ferros directors and
officers liability insurer of the claim. Because this appeal is
in the preliminary stage, the outcome of this litigation cannot
be determined at this time.
On June 10, 2005, a putative class action lawsuit was filed
against Ferro, and certain former and current employees alleging
breach of fiduciary duty with respect to ERISA plans. The
Company considers these allegations to be unfounded, is
vigorously defending this action, and has notified Ferros
fiduciary liability insurer of the claim. Because this action is
in the preliminary stage, the ultimate outcome of this
litigation cannot be determined at this time. However,
management does not expect the ultimate outcome of the lawsuit
to have a material effect on the financial position, results of
operations or cash flows of the Company.
On October 15, 2004, the Belgian Ministry of Economic
Affairs Commercial Policy Division (the
Ministry) served on Ferros Belgian subsidiary
a mandate requiring the production of certain documents related
to an alleged cartel among producers of butyl benzyl phthalate
(BBP) from 1983 to 2002. Subsequently, German and
Hungarian authorities initiated their own national
investigations in relation to the same allegations. Ferros
Belgian subsidiary acquired its BBP business from Solutia Europe
S.A./N.V. (SOLBR) in August 2000. Ferro promptly
notified SOLBR of the Ministrys actions and requested
SOLBR to indemnify and defend Ferro and its Belgian subsidiary
with respect to these investigations. In response to
Ferros notice, SOLBR exercised its right under the 2000
acquisition agreement to take over the defense and settlement of
these matters, subject to reservation of rights. In December
2005, the Hungarian authorities imposed a de minimus fine
on Ferros Belgian subsidiary, and the Company expects the
German and Belgian authorities also to assess fines for the
alleged conduct. Management cannot predict the amount of fines
that will ultimately be assessed and cannot predict the degree
to which SOLBR will indemnify Ferros Belgian subsidiary
for such fines.
In October 2005, the Company performed a routine environmental,
health and safety audit of its Bridgeport, New Jersey facility.
In the course of this audit, internal environmental, health and
safety auditors assessed the Companys compliance with the
New Jersey Department of Environmental Protections
(NJDEP) laws and regulations regarding water
discharge requirements pursuant to the New Jersey Water
Pollution Control Act (WPCA). On October 31,
2005, the Company disclosed to the NJDEP that it had identified
potential violations of the WPCA and the Company commenced an
investigation and committed to report any violations and to
undertake any necessary remedial actions. In September 2006, the
Company entered into an agreement with the NJDEP under which the
Company paid the State of New Jersey a civil administration
penalty of $0.2 million in full settlement of the
violations.
There are various other lawsuits and claims pending against the
Company and its consolidated subsidiaries. In the opinion of
management, the ultimate liabilities, if any, and expenses
resulting from such lawsuits and claims will not materially
affect the consolidated financial position, results of
operations, or cash flows of the Company.
Item 4
Submission of Matters to a Vote of Security
Holders
No matters were submitted to a vote of Ferros security
holders during the first, second, third, or fourth quarter of
the fiscal year covered by this report.
Executive
Officers of the Registrant
Below are set forth the name, age and positions held by each
individual serving as an executive officer of the Company as of
September 29, 2006, as well as their business experience
during the past five years. Years indicate the year the
individual was named to or held the indicated position. There is
no family relationship between any of Ferros executive
officers.
11
James F. Kirsch 49
President and Chief Executive Officer, 2005
President and Chief Operating Officer, 2004
President, Premix Inc., and President, Quantum Composites Inc.,
manufacturers of thermoset molding compounds, parts and
sub-assemblies for the automotive, aerospace, electrical and
HVAC industries, 2002
President and Director, Ballard Generation Systems Inc., a
producer of hydrogen proton exchange membrane (PEM) fuel cells
and component systems; Vice President, Ballard Power Systems
Inc., a subsidiary of Ballard Generation Systems Inc., 1999
James C. Bays 57
Vice President and General Counsel, 2001
Thomas M. Gannon 57
Vice President and Chief Financial Officer, 2003
Chief Operating Officer, Riverwood International Corporation, a
global supplier of paperboard packaging products, 2001
Ann E. Killian 52
Vice President, Human Resources, 2005
Vice President, Human Resources, W. W. Holdings, LLC, a
manufacturer and distributor of doors, frames and hardware
products for the commercial construction industry, 2003
Vice President, Compensation & Benefits, TRW Inc., a
provider of advanced technology products and services for the
global automotive, aerospace and information systems markets,
1999
Celeste Beeks Mastin 38
Vice President, Growth and Development, 2006
Vice President, Color and Glass Performance Materials, 2004
World Wide Business Director, Performance Pigments and Colors,
2003
Vice President and General Manager, Bostik Findley, Inc.,
Nonwovens Division, a global producer of adhesives, 2001
General Manager, Nitta Findley Co., Ltd., a distributor of
adhesive products in Japan, 2001
Michael J. Murry 55
Vice President, Performance Coatings and Color &
Glass Performance Materials, 2006
Vice President, Performance Coatings, 2005
President, Chief Executive Officer, and Director, Catalytica
Energy Systems, Inc., a provider of products that reduce
nitrogen oxides (NOx) emissions for the transportation and power
generation industries, 2003
Vice President and General Manager, Ballard Power Systems Inc.,
a producer of hydrogen proton exchange membrane (PEM) fuel cells
and component systems, 2001
Barry D. Russell 42
Vice President, Electronic Material Systems, 2006
Group Vice President and General Manager, Electronic Materials,
Honeywell International, a provider of aerospace products and
services; control technologies for buildings, homes, and
industry; turbo chargers; automotive products; and specialty
materials, 2004
Business Director and General Manager, Specialty Additives,
Honeywell International, 2002
Business Director and General Manager, Performance Chemicals,
Honeywell International, 2001
Peter T. Thomas 51
Vice President, Pharmaceuticals and Fine Chemicals and Polymer
Additives, 2004
Vice President, Pharmaceuticals and Fine Chemicals, 2003
Worldwide Business Director, Pharmaceuticals and Fine Chemicals,
2002
Commercial Director, Performance and Fine Chemicals, 2001
12
PART II
|
|
Item 5
|
Market
for Registrants Common Equity, Related Stockholder
Matters, and Issuer Purchases of Equity Securities
|
Quarterly
Data
The quarterly high and low intra-day sales prices and dividends
declared per share for the Companys common stock during
2005 and 2004 are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
High
|
|
|
Low
|
|
|
Dividends
|
|
|
High
|
|
|
Low
|
|
|
Dividends
|
|
|
First Quarter
|
|
$
|
23.55
|
|
|
|
18.36
|
|
|
|
0.145
|
|
|
$
|
27.62
|
|
|
|
24.21
|
|
|
|
0.145
|
|
Second Quarter
|
|
$
|
21.22
|
|
|
|
16.77
|
|
|
|
0.145
|
|
|
$
|
27.40
|
|
|
|
24.08
|
|
|
|
0.145
|
|
Third Quarter
|
|
$
|
23.22
|
|
|
|
16.91
|
|
|
|
0.145
|
|
|
$
|
26.50
|
|
|
|
18.47
|
|
|
|
0.145
|
|
Fourth Quarter
|
|
$
|
20.71
|
|
|
|
16.27
|
|
|
|
0.145
|
|
|
$
|
23.51
|
|
|
|
20.18
|
|
|
|
0.145
|
|
The common stock of the Company is listed on the New York Stock
Exchange under the ticker symbol FOE. At August 31, 2006,
the Company had 1,691 shareholders of record for its common
stock. The closing price of the common stock on August 31,
2006, was $17.08 per share.
The Company intends to continue to declare quarterly dividends
on its common stock, however, no assurances can be made as to
the amount of future dividends, since such dividends are subject
to the Companys cash flow from operations, earnings,
financial condition, capital requirements, and other matters
concerning liquidity included in Managements Discussion
and Analysis of Financial Condition and Results of Operations
under Item 7 of this
Form 10-K.
Item 6
Selected Financial Data
The following table presents selected financial data for the
last five years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(Dollars in millions, except per share data)
|
|
|
Net sales
|
|
$
|
1,882.3
|
|
|
|
1,843.7
|
|
|
|
1,615.6
|
|
|
|
1,528.5
|
|
|
|
1,246.5
|
|
Income from continuing operations
|
|
$
|
17.1
|
|
|
|
27.8
|
|
|
|
9.6
|
|
|
|
33.2
|
|
|
|
29.9
|
|
Basic earnings per share from
continuing operations
|
|
$
|
0.37
|
|
|
|
0.62
|
|
|
|
0.18
|
|
|
|
0.80
|
|
|
|
0.79
|
|
Diluted earnings per share from
continuing operations
|
|
$
|
0.37
|
|
|
|
0.62
|
|
|
|
0.18
|
|
|
|
0.80
|
|
|
|
0.79
|
|
Cash dividends declared per common
share
|
|
$
|
0.58
|
|
|
|
0.58
|
|
|
|
0.58
|
|
|
|
0.58
|
|
|
|
0.58
|
|
Total assets
|
|
$
|
1,668.5
|
|
|
|
1,733.4
|
|
|
|
1,731.3
|
|
|
|
1,603.6
|
|
|
|
1,732.2
|
|
Long-term debt, including current
portion
|
|
$
|
547.9
|
|
|
|
498.8
|
|
|
|
525.3
|
|
|
|
444.4
|
|
|
|
831.4
|
|
Total debt(a)
|
|
$
|
554.7
|
|
|
|
510.6
|
|
|
|
538.6
|
|
|
|
562.1
|
|
|
|
939.5
|
|
|
|
|
(a) |
|
Total debt is comprised of long-term debt, including current
portion, notes and loans payable, borrowings under asset
securitization and leveraged lease programs. See further
information in Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations,
Liquidity and Capital Resources, for discussion on the asset
securitization and leveraged lease programs. |
The Company adopted Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets,
(FAS No. 142) for business combinations
consummated after June 30, 2001, as of July 1, 2001,
and adopted FAS No. 142 in its entirety effective
January 1, 2002. Accordingly, all goodwill and other
intangible assets having indefinite useful lives are not
amortized but instead are subject to impairment testing on at
least an annual basis. Before the adoption of any provisions of
FAS No. 142, goodwill and intangible assets having
indefinite useful lives were amortized ratably over their
estimated useful lives.
13
In September 2001, the Company acquired from OM Group, Inc.
certain businesses previously owned by
dmc2
Degussa Metals Catalysts Cerdec AG
(dmc2).
See further information regarding the transaction in Note 8
to the Companys consolidated financial statements included
herein under Item 8.
On September 30, 2002, Ferro completed the sale of its
Powder Coatings business unit. On June 30, 2003, the
Company completed the sale of its Petroleum Additives business
and its Specialty Ceramics business. For all periods presented,
the Powder Coatings, Petroleum Additives and Specialty Ceramics
businesses have been reported as discontinued operations. The
divestiture of the Powder Coatings, Petroleum Additives and
Specialty Ceramics businesses are further discussed in
Note 10 to the Companys consolidated financial
statements included under Item 8 of this
Form 10-K.
Quarterly information is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
Per Common Share
|
|
Quarter
|
|
Net Sales
|
|
|
Cost of Sales
|
|
|
Income
|
|
|
Basic Earnings
|
|
|
Diluted Earnings
|
|
|
|
(Dollars in millions, except per share data)
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
$
|
461.6
|
|
|
$
|
359.9
|
|
|
$
|
9.0
|
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
2
|
|
|
482.6
|
|
|
|
375.5
|
|
|
|
11.8
|
|
|
|
0.27
|
|
|
|
0.27
|
|
3
|
|
|
451.6
|
|
|
|
358.9
|
|
|
|
5.9
|
|
|
|
0.13
|
|
|
|
0.13
|
|
4
|
|
|
447.9
|
|
|
|
367.2
|
|
|
|
(1.8
|
)
|
|
|
(0.05
|
)
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,843.7
|
|
|
$
|
1,461.5
|
|
|
$
|
24.9
|
|
|
$
|
0.55
|
|
|
$
|
0.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
$
|
461.7
|
|
|
$
|
368.7
|
|
|
$
|
0.5
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
2
|
|
|
496.6
|
|
|
|
392.2
|
|
|
|
7.9
|
|
|
|
0.18
|
|
|
|
0.18
|
|
3
|
|
|
466.1
|
|
|
|
371.7
|
|
|
|
6.9
|
|
|
|
0.15
|
|
|
|
0.15
|
|
4
|
|
|
457.9
|
|
|
|
368.8
|
|
|
|
1.0
|
|
|
|
0.01
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,882.3
|
|
|
$
|
1,501.4
|
|
|
$
|
16.3
|
|
|
$
|
0.35
|
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 7
Managements Discussion and Analysis of Financial
Condition and Results of Operations
Overview
Market conditions in 2005 were mixed. Sales increased in all of
the Companys segments except Electronic Materials where
there was weak demand in the first half of the year. Improved
pricing and product mix contributed to increased revenues, but
this was partially offset by weaker volume. Sales increased by
approximately 3% in North America, 9% in Asia and 14% in Latin
America. However, sales declined by approximately 3% in Europe.
Consolidated sales rose by approximately 2%. Changes in foreign
exchange rates did not materially affect the Companys
revenue growth rate in 2005.
Beyond fundamental product demand, the market factors that most
affected 2005 results included the following:
|
|
|
|
|
Increased raw material costs and the Companys ability to
raise selling prices,
|
|
|
|
A weak primary market served by the Electronic Materials segment
in the first half of 2005,
|
|
|
|
Cost control initiatives, including restructuring
programs, and
|
|
|
|
Costs incurred for the accounting investigations and restatement
process.
|
Raw material costs generally increased during the year; however,
through improvements in pricing and the mix of products sold,
the Company was largely able to recover the raw material cost
increases as well as largely offsetting the negative effects of
lower customer unit demand, particularly in Electronic Materials
and Polymer Additives. Raw materials cost increases were the
most significant in the Polymer Additives, Performance Coatings
14
and Specialty Plastics segments. The Company was the most
successful in improving pricing and product mix in the Polymer
Additives segment, although price/mix also improved in
Performance Coatings and Specialty Plastics.
Demand for electronic materials was weak in the first quarter of
2005. Following the weak beginning to the year, demand gradually
improved through the rest of 2005. Customers inventory
issues, which caused a sharp decline in sales in the first
quarter, abated in the following quarters. Sales in the second
quarter recovered somewhat, but were still below previous year
levels. Sales recovered further in the third quarter and were
slightly higher than the corresponding previous year period.
Sales growth, compared to the prior year, increased in the
fourth quarter.
Total segment income in 2005 increased to $118.0 million
from $106.5 million in 2004, driven by increases in Polymer
Additives, Specialty Plastics and Performance Coatings partially
offset by declines in Electronic Materials. As a result of
improved second quarter income in all segments except Specialty
Plastics, including a partial recovery in the results within
Electronic Materials, segment income increased by approximately
29% from the first quarter to the second quarter. Segment income
declined in the third quarter, and again in the fourth quarter,
as lower sales, particularly in the Performance Coatings and
Color and Glass Performance Materials segments, adversely
impacted income.
Income from continuing operations for the year declined to
$17.1 million in 2005 from $27.8 million in 2004.
Higher segment income, lower foreign currency losses and a gain
on forward supply contracts were more than offset by higher
expenses in connection with the accounting investigation and
restatement, increased interest expense, and higher other
expenses. Net income in 2005 was also lower than in 2004 due to
a gain on the sale of assets in 2004 that did not recur in 2005.
During the year, accounts payable declined by approximately
$23.9 million and led to an increase in working capital
requirements, despite modest reductions in accounts receivable
and inventories. In addition, during the fourth quarter,
requirements increased for cash deposits on precious metal
consignment arrangements, further consuming capital. Total debt,
as defined in Item 6, increased by $44.1 million
during the year.
Outlook
Due to the timing of the filing of this
Form 10-K,
it is not meaningful to provide an outlook for the calendar year
2006. Refer to Current Reports on
Form 8-K
filed with or furnished to the Securities and Exchange
Commission by the Company during 2006.
Results
of Operations
Comparison
of the years ended December 31, 2005 and 2004
Sales from continuing operations for the year ended
December 31, 2005, of $1,882.3 million were 2.1%
higher than for the comparable 2004 period. Improved pricing and
more favorable product mix in North America, Asia-Pacific and
Latin America were the primary drivers for the revenue gain.
Weakness in the market for multilayer capacitors depressed unit
demand and revenues, particularly in the first half of 2005. On
a consolidated basis, the impact of strengthening foreign
currencies versus the U.S. dollar had only a minimal
positive impact on revenues.
Gross margin (net sales less cost of sales) was 20.2% of sales
in 2005, compared with 20.7% of sales in 2004. The reduced gross
margin percentage was mainly due to a combination of higher raw
materials costs and lower customer unit demand, partially offset
by a more favorable price and mix of products sold. Also
contributing to the decline in gross margins was an increase in
restructuring costs as compared to the prior year. During 2005,
restructuring charges of $3.5 million were included in cost
of sales.
Selling, general and administrative (SG&A) expenses declined
by $1.6 million to $310.9 million in 2005, from
$312.4 million in 2004. As a percent of sales, SG&A
expenses were 16.5% in 2005, compared to 16.9% in the prior-year
period. The lower SG&A expense primarily was driven by
ongoing cost reduction measures which resulted in a decline in
spending for sales, technical service, research and development,
partially offset by an increase in fees related to the
accounting investigation and restatement. During 2005, the
Company recorded $1.7 million in restructuring charges, in
addition to $10.5 million in expenses relating to the
accounting investigation and
15
restatement of the 2003 and first quarter 2004 consolidated
financial statements, as part of SG&A expenses.
Restructuring expenses in SG&A were $2.5 million in
2004.
Interest expense increased to $46.9 million in 2005 from
$42.0 million in 2004. The increase was due to the combined
effect of higher interest rates on the Companys
variable-rate borrowings and increased borrowing levels.
Long-term debt increased to $547.9 million on
December 31, 2005, compared with $498.8 million on
December 31, 2004. The increase was partially due to
increased deposit requirements on precious metal consignment
agreements in the fourth quarter of 2005. In addition, increased
borrowings were made to support higher working capital
requirements, primarily driven by a decline in accounts payable.
Net foreign currency losses were $1.3 million for the year,
compared with $3.0 million for 2004. The Company uses
certain foreign currency instruments to offset the effect of
changing exchange rates on foreign subsidiary earnings and
short-term transaction exposure. The carrying values of such
contracts are adjusted to market value and resulting gains or
losses are charged to income or expense in the period.
In 2004, $5.2 million was recognized as gain on sale of
business and related to the sale of the Companys interest
in Tokan Material Technology Co. Limited, which was an
unconsolidated affiliate. There were no divestitures made in
2005.
Net miscellaneous income from continuing operations was
$1.6 million as compared to $0.4 million in 2004.
During 2005, the Company recorded gains of $3.1 million
associated with
marked-to-market
forward supply contracts, primarily for natural gas. During
2004, the Company recorded a loss of $1.7 million from
marked-to-market
supply contracts. Partially offsetting this 2005 increase were
higher minority interest expenses, lower realized gains on
investments designated to fund payments for a nonqualified
benefit plan, and lower gains on sales of fixed assets in 2005.
Income tax as a percentage of pre-tax income from continuing
operations for the year ended December 31, 2005, was 28.8%
compared to 10.7% for the year ended December 31, 2004. The
primary reason for the increase in 2005 was the Companys
2004 reversal of valuation allowances due to utilization of net
operating losses and managements determination that, more
likely than not, certain deferred tax assets would be realized.
Also contributing to the higher effective tax rate in 2005 was a
higher proportion of earnings in jurisdictions having higher
effective tax rates.
Income from continuing operations for the year ended
December 31, 2005, was $17.1 million compared with
$27.8 million for the year ended December 31, 2004.
Diluted earnings per share from continuing operations totaled
$0.37 for the year ended December 31, 2005, compared with
$0.62 in 2004.
There were no new businesses included as discontinued operations
in the year ended December 31, 2005. The Company, however,
recorded a loss of $0.9 million, net of taxes, in 2005
related to certain post-closing matters associated with
businesses sold in prior periods. The loss from discontinued
operations in 2004 was $2.9 million.
Net income for 2005 totaled $16.3 million, or
$0.35 per diluted share versus $24.9 million, or
$0.55 per diluted share for 2004.
Performance Coatings Segment Results. For
2005, sales in the Performance Coatings segment increased 4.7%
to $488.5 million compared to $466.5 million for 2004.
The higher revenue was due to a favorable price and mix of
products, as well as improved volumes. Growth was mainly within
the Companys tile coatings business, and was distributed
across the Asia-Pacific, European and North American markets.
Operating income for the segment was $31.6 million for the
year ended December 31, 2005, compared with
$23.9 million for 2004. The increase in segment income was
driven primarily by increased volume and higher average selling
prices, combined with lower segment SG&A expenses. These
improvements more than offset higher raw materials costs.
Electronic Materials Segment Results. For
2005, sales in the Electronic Materials segment declined 8.4% to
$355.7 million compared to $388.3 million for 2004.
The decline in revenue was largely due to weakness in the market
for multilayer capacitors and resulting inventory corrections by
the Companys customers. These inventory corrections
resulted in sharply lower volumes. Sales increased in
Asia-Pacific, but not enough to offset declines in North America
and Europe. Operating income for the segment was
$13.5 million for the year ended December 31, 2005,
compared with operating income of $33.2 million in the
prior year. The decline in segment income reflects the
16
lower volume of products sold, and the resulting negative impact
of fixed manufacturing costs coupled with lower prices for the
Companys products.
Color and Glass Performance Materials Segment
Results. Sales in the Color and
Glass Performance Materials segment were
$359.6 million for 2005, an increase of 1.0% versus
$355.9 million in the prior year. The increase in volume
for the year was slightly larger than the decline in the
combination of price and a less favorable product mix. Segment
operating income increased by 4.8%, to $38.9 million, from
$37.1 million in 2004. The higher segment income was due
primarily to a combination of lower segment SG&A expenses
and improvements in the average selling price of products sold.
This improvement was partially offset by higher raw materials
costs.
Polymer Additives Segment Results. Sales in
the Polymer Additives segment increased to $300.6 million
for 2005, or 7.3%, from $280.2 million in 2004. The
year-over-year
increase in sales was primarily due to improved performance in
North American end markets, including vinyl processing and
construction. Increased pricing, particularly in the markets for
polymer modifiers, more than offset a reduction in volumes
across the Polymer Additives product lines. Segment operating
income for 2005 was $18.5 million versus a loss of
$0.9 million in 2004. The increased segment income was due
to pricing increases coupled with lower SG&A spending.
Specialty Plastics Segment Results. Sales in
the Specialty Plastics segment were $279.1 million for
2005, an increase of 5.3% versus $265.0 million in the
prior year. The
year-over-year
increase in sales was primarily due to improved demand for North
American durable goods, including automobiles and appliances.
These sales gains were partially offset by weakness in Europe,
where sales declined by approximately 8%. Segment operating
income increased to $13.4 million from $9.6 million in
2004. The higher segment income was due primarily to the margin
benefits from improved average selling prices, partially offset
by higher raw material costs and lower volumes.
Other Segment Results. Sales in the Other
segment increased to $98.8 million for 2005, from
$87.8 million in the prior year. Segment operating income
declined to $2.1 million from $3.6 million in 2004.
Geographic Sales. Sales in the United States
were $925.9 million for the year ended December 31,
2005, compared with sales of $900.0 million for the year
ended December 31, 2004. The increase was primarily due to
increased sales in the Polymer Additives, Performance Coatings
and Specialty Plastics segments, partially offset by lower sales
in Electronic Materials. International sales were
$956.4 million in 2005 compared with $943.7 million in
2004. The majority of the international sales increase occurred
in the Asia-Pacific region, largely within the Color and
Glass Performance Materials and Electronic Materials
segments. This growth was partially offset by a volume decline
in Europe that was not fully offset by pricing and product mix
improvements.
Cash Flows. Net cash provided by operating
activities of continuing operations for the year ended
December 31, 2005, was $23.2 million, compared with
$63.5 million for 2004. The difference between the two
periods was driven primarily by changes in net income, working
capital balances, and use of the asset securitization facility.
Cash used for investing activities was $35.8 million in
2005 compared with $19.4 million in 2004. Capital
expenditures for continuing operations were $42.8 million
in 2005 compared to $39.1 million in 2004.
Net cash provided by financing activities was $18.1 million
in 2005 compared with $51.8 million used by financing
activities in 2004. Cash provided in 2005 primarily reflects an
increase in debt, partially offset by dividends paid to the
Companys shareholders.
Net cash used for operating activities of discontinued
operations was $1.8 million in 2005 versus
$1.6 million in 2004.
Related Party Transactions. Transactions with
unconsolidated affiliates included sales of $5.1 million
and $19.4 million in 2005 and 2004, respectively, and
purchases of $5.6 million and $6.4 million in 2005 and
2004, respectively. At December 31, 2005, the Company had
outstanding a 2.4 million guarantee, which was
terminated in May 2006, to support the borrowing of an
unconsolidated affiliate, and also had $2.8 million due to
an unconsolidated wholly-owned qualifying special purpose
entity. A Ferro Director, Mr. Weisser, is the Chairman and
Chief Executive Officer of Bunge Limited (Bunge) and
another Ferro Director, Mr. Bulkin, also serves on the
board of Bunge. Bunge has a controlling interest in Central Soya
Company from which Ferro purchased raw
17
materials totaling $11.2 million in 2005 and
$14.3 million in 2004. In addition, Mr. Weisser is a
member of the board of directors of International Paper Company
from which Ferro purchased other items totaling
$0.8 million in 2005. Payables related to these purchases
were less than $0.1 million at December 31, 2005.
Comparison
of the years ended December 31, 2004 and 2003
Sales from continuing operations for the year ended
December 31, 2004, of $1,843.7 million were 14.1%
higher than the $1,615.6 million of sales for the
comparable 2003 period. Increased volumes in North America,
Asia-Pacific and Latin America were the primary drivers for the
revenue gain. Increased volumes were driven by improved economic
conditions in North America, particularly in construction,
automotive, appliance and vinyl processing end markets coupled
with increased demand for electronic materials and continued
volume gains in Asia for tile coatings products. Europe also
recorded increased sales due to the
year-over-year
change in foreign currency exchange rates. On a consolidated
basis, the impact of strengthening currencies, in particular the
Euro, improved revenue by approximately $61 million.
Gross margin (net sales less cost of sales) was 20.7% of sales
compared with 23.1% for the comparable 2003 period. The reduced
gross margin compared with 2003 stemmed primarily from increased
raw material and energy costs that were only partially recovered
through price adjustments. Increased costs of many basic
materials, including crude oil and related petrochemical
feedstocks, base and precious metals, and agricultural based
commodities, drove much of the raw material cost increases. In
addition, tight supply positions and strong global demand for
basic plastics, including polypropylene, polystyrene, and
polyethylene, further pressured raw material costs.
Selling, general and administrative expenses from continuing
operations were $312.4 million, or 16.9% of sales for 2004
compared to $315.9 million, or 19.6% of sales for 2003. The
strength of foreign currencies, primarily the Euro, increased
2004 reported costs by approximately $11 million. Excluding
the impact of foreign currencies, SG&A declined by
approximately $14 million. Differences in restructuring
charges were a primary driver for the decline. In 2004, the
Company recorded in SG&A $2.5 million of restructuring
charges compared to $10.1 million in 2003. Restructuring
savings from the actions taken in 2003 and other expense
reductions initiated during 2004 further contributed to the
decline, offsetting $2.7 million in expenses incurred as a
result of the accounting investigation coupled with other cost
increases, including pensions and research and development.
Earnings for the year ended December 31, 2004, included
total pre-tax charges of $9.3 million related primarily to
restructuring activities and the investigation and restatement
process. Earnings for the year ended December 31, 2003,
included pre-tax charges of $14.2 million related primarily
to restructuring costs, consisting principally of employee
termination expenses related to facility rationalization,
overhead reduction and lease buy-out costs. Of the
$9.3 million of charges incurred in 2004, $2.6 million
were recorded in cost of sales, $5.2 million in SG&A
expenses, and $1.5 million in miscellaneous expense.
Interest expense from continuing operations declined from
$43.1 million for 2003 to $42.0 million for 2004. This
change was driven by a decline in interest expense relating to
capitalized lease obligations. This decline was partially offset
by increased interest on the Companys credit facility
driven by higher average interest rates and increases in credit
facility fees offset partially by reduced average debt levels
during 2004.
Net foreign currency loss for the year ended December 31,
2004, was $3.0 million as compared to $1.2 million for
2003. Fiscal 2004 includes a $1.0 million loss from the
write-off of accumulated translation adjustments associated with
the liquidation of a joint venture company. The Company uses
certain foreign currency instruments to offset the effect of
changing exchange rates on foreign subsidiary earnings and
short-term transaction exposure. The carrying values of such
contracts are adjusted to market value and resulting gains or
losses are charged to income or expense in the period.
A pre-tax gain of $5.2 million was recognized in 2004 for
the sale of the Companys interest in Tokan Material
Technology Co. Limited, an unconsolidated affiliate. There were
no similar gains or losses in 2003.
Net miscellaneous income for the year was $0.4 million as
compared to expense of $1.8 million in 2003. The majority
of the increase in net miscellaneous income resulted from gains
associated with an asset sale. The Company recorded a
$1.7 million pre-tax gain on the sale of a manufacturing
facility. This asset related gain was
18
partially offset by costs incurred to recognize unrealized
losses on natural gas contracts. In 2004 the Company recorded a
loss of $0.9 million for the
marked-to-market
valuation of gas contracts versus a $0.6 million gain in
2003.
Income tax as a percentage of pre-tax income from continuing
operations for the year ended December 31, 2004, was 10.7%
compared to 19.8% for the year ended December 31, 2003.
Contributing to the decline in the effective tax rate were
several positive adjustments to the Companys tax
provision, primarily in the fourth quarter, the largest of which
was due to a reduction in a valuation allowance for a deferred
tax asset associated with a net operating loss carryforward that
is expected to be realized. The positive effect of the tax
adjustments recorded in the fourth quarter of 2004 was
approximately $3.1 million.
Income from continuing operations for the year ended
December 31, 2004, was $27.8 million compared with
$9.6 million for the year ended December 31, 2003.
Diluted earnings per share from continuing operations totaled
$0.62 for the year ended December 31, 2004, compared with
$0.18 in 2003.
There were no businesses reported as discontinued operations in
the year ended December 31, 2004. The Company, however,
recorded a loss of $2.9 million, net of taxes, in 2004
related to certain post-closing matters associated with
businesses sold in prior periods, including Powder Coatings and
Specialty Ceramics. The loss from discontinued operations in
2003 was $0.9 million. The 2003 results include the
Petroleum Additives and Specialty Ceramics business units, which
were divested in June 2003. The disposal of the Petroleum
Additives and Specialty Ceramics business units resulted in a
gain, net of income taxes, of $3.1 million in the year
ended December 31, 2003. In addition, certain post-closing
matters increased the previously recorded gain on the 2002 sale
of Powder Coatings business by $2.2 million. Diluted
earnings per share from discontinued operations totaled a loss
of $0.07 for December 31, 2004, compared to a $0.11 gain
for the year ended December 31, 2003.
Net income for the year ended December 31, 2004, totaled
$24.9 million, or $0.55 per diluted share versus
$14.1 million, or $0.29 per diluted share for the year
ended December 31, 2003.
Performance Coatings Segment Results. For
2004, sales in the Performance Coatings segment increased 9.7%
to $466.5 million compared to $425.1 million for 2003.
The higher revenue was primarily due to improved economic
conditions in North America, resulting in increased sales to the
appliance market, increased demand for tile coatings products,
principally driven by increased market demand in Asia, and the
favorable impact of foreign currency exchange rates. These gains
were partially offset by volume declines related to key European
end markets for tile coatings and a slightly lower average
selling price. Operating income for the segment was
$23.9 million for the year ended December 31, 2004,
compared with operating income of $26.2 million in 2003.
The decline in segment income was driven primarily by higher raw
material costs partially offset by slightly lower SG&A costs.
Electronic Materials Segment Results. For
2004, sales in the Electronic Materials segment increased 14.8%
to $388.3 million compared to $338.3 million for 2003.
The higher revenue was primarily due to volume growth to support
global electronic industry demand. Segment revenues also
benefited from the favorable impact of foreign currency exchange
rates. Operating income for the segment was $33.2 million
for the year ended December 31, 2004, compared with
operating income of $21.0 million in 2003. The increase in
segment income reflects the increased demand from the
electronics industry and higher operating rates, partially
offset by increased SG&A costs, primarily due to increased
research and development spending. While the Electronic
Materials segment results were favorable for 2004, operating
results declined substantially late in the year. Following a
very strong first eight months of 2004, demand in the
electronics market slowed as a result of customers
inventory corrections which caused a substantial sales decline
in the fourth quarter, compared to the previous three quarters
of 2004.
Color and Glass Performance Materials Segment
Results. Sales in the Color and
Glass Performance Materials segment were
$355.9 million for 2004, an increase of 16.5% versus
$305.4 million in 2003. Both increased volumes and a higher
average selling price drove the
year-over-year
sales increase. Demand for products serving construction and
container glass markets were major contributors to the increased
volume, partially offset by a decline in sales to the dinnerware
market. Appreciating foreign currency exchange rates relative to
the U.S. dollar also added to the increase. Segment
operating income decreased to $37.1 million from
$41.7 million in 2003. The lower segment income was due
primarily to higher raw material costs that the Company was
unable to recover through pricing initiatives and increased
SG&A expenditures.
19
Polymer Additives Segment Results. Sales in
the Polymer Additives segment were $280.2 million for 2004,
an increase of 16.6% versus $240.4 million in 2003. The
year-over-year
increase in sales was primarily due to improved demand from the
North American end markets, including vinyl processing and
construction. Increased pricing and appreciating foreign
currency exchange rates relative to the U.S. dollar also
added to the increase. These sales gains were partially offset
by weakness in Europe, excluding the effect of foreign currency.
Segment operating income for 2004 was a loss of
$0.9 million versus income of $2.5 million in 2003.
The lower segment income was due primarily to higher raw
material cost that the Company was unable to recover through
pricing initiatives, coupled with increased SG&A spending.
Specialty Plastics Segment Results. Sales in
the Specialty Plastics segment were $265.0 million for
2004, an increase of 12.3% versus $236.0 million in 2003.
The
year-over-year
increase in sales was primarily due to improved demand for North
American durable goods, including automobiles and appliances.
Increased pricing coupled with appreciating foreign currency
exchange rates relative to the U.S. dollar also added to
the increase. These sales gains were partially offset by
weakness in Europe, where volumes declined by approximately 7%.
Segment operating income decreased to $9.6 million from
$12.8 million in 2003. The lower segment income was due
primarily to higher raw material cost that the Company was
unable to recover through pricing initiatives, partially offset
by lower SG&A spending.
Other Segment Results. Sales in the Other
segment were $87.8 million for 2004, an increase of 24.7%
versus $70.4 million in 2003. Operating income improved to
$3.6 million from $3.1 million in 2003.
Geographic Sales. Sales in the United States
were $900.0 million for the year ended December 31,
2004, compared with sales of $776.4 for the year ended
December 31, 2003. The increase was primarily due to
increased volumes sold to the electronics industry coupled with
improved demand in construction, automotive, appliance, and
vinyl processing end markets. International sales were
$943.7 million in 2004 compared with $839.2 million in
2003. The majority of the international sales increase occurred
in Europe due to the strengthening of the Euro against the
dollar and in the Asia-Pacific region due to volume growth.
Cash Flows. Net cash provided by operating
activities of continuing operations for the year ended
December 31, 2004, was $63.5 million, compared with
$4.6 million for 2003. The difference between the two
periods was driven primarily by changes in net income, working
capital balances, and use of the asset securitization facility.
Cash used for investing activities was $19.4 million in
2004 compared with $49.7 million in 2003. Capital
expenditures for continuing operations were $39.1 million
in 2004 compared to $36.1 million in 2003. Cash used for
investing activities in 2003 included a $25.0 million buy
out of an operating lease agreement, accounting for the majority
of the change in cash used for investing activities between 2004
and 2003.
Net cash used for financing activities was $51.8 million in
2004 compared with a source of $53.6 million in 2003. Cash
used in 2004 reflects primarily debt reduction and dividends
paid to the Companys shareholders. The Company increased
debt in 2003 primarily to buy-out an operating lease arrangement.
Net cash used for operating activities of discontinued
operations was $1.6 million in 2004 versus
$1.1 million in 2003. Net cash provided by investing
activities of discontinued operations was $19.3 million in
2003, including the proceeds from the sale of the Companys
Specialty Ceramics and Petroleum Additives businesses.
Related Party Transactions. Transactions with
unconsolidated affiliates included sales of $19.4 million
and $5.5 million in 2004 and 2003, respectively, and
purchases of $6.4 million and $2.2 million in 2004 and
2003, respectively. At December 31, 2004, the Company had
outstanding a 2.4 million guarantee, which was
terminated in May 2006, to support the borrowing of an
unconsolidated affiliate, and also had $2.8 million due to
an unconsolidated wholly-owned qualifying special purpose
entity. In addition, Ferro purchased raw materials from a
company whose controlling interest is held by a company whose
Chief Executive Officer currently serves on the Companys
Board of Directors. These purchases amounted to
$14.3 million in 2004 and $7.0 million in 2003. There
were no payables outstanding relating to these purchases at
December 31, 2004.
20
Liquidity
and Capital Resources
The Companys liquidity requirements include primarily debt
service, working capital requirements, capital investments,
post-retirement obligations and dividend payments. Capital
expenditures were $42.8 million and $39.1 million for
the years ended December 31, 2005 and 2004, respectively.
The Company expects to be able to meet its liquidity
requirements from a variety of sources, including cash flow from
operations and use of its credit facilities. At
December 31, 2005, the Company had a $300 million
revolving credit facility that was scheduled to expire in
September 2006, as well as $200 million of senior notes and
$155 million of debentures outstanding with varying
maturities, the majority of which extended beyond 2010. The
Company also had an accounts receivable securitization facility
under which the Company could receive advances of up to
$100 million, subject to the level of qualifying accounts
receivable. The accounts receivable securitization facility was
due to mature in June 2006.
Subsequent to December 31, 2005, the Company replaced
and/or
modified its existing facilities to secure future financial
liquidity. The $300 million revolving credit facility was
replaced by a $700 million credit facility, consisting of a
$250 million multi-currency senior revolving credit
facility expiring in 2011 and a $450 million senior
delayed-draw term loan facility expiring in 2012. See further
discussion under Revolving Credit and Term Loan
Facility below. In addition, the Company extended its
$100 million accounts receivable securitization facility
for up to three additional years. See further discussion under
Off Balance Sheet Arrangements below. For further
information regarding the Companys credit facilities refer
to Note 3 to the Companys consolidated financial
statements under Item 8 herein.
At December 31, 2005, the Companys senior credit
rating was Ba1 by Moodys Investor Service, Inc.
(Moodys) and BB by Standard &
Poors Rating Group (S&P). In March 2006,
Moodys downgraded its rating to B1 and then withdrew its
ratings, and S&P downgraded its rating to B+. The rating
agencies may, at any time, based on various factors including
changing market, political or economic conditions, reconsider
the current rating of the Companys outstanding debt. Based
on rating agency disclosures, Ferro understands 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. Moodys and S&P have
disclosed that the Companys ability to improve earnings,
reduce the Companys level of indebtedness and strengthen
cash flow protection measures, whether through asset sales,
increased free cash flows from operations or otherwise, will be
factors in their ratings determinations going forward.
Revolving
Credit and Term Loan Facility
In March 2006, the Company accepted a commitment from a
syndicate of lenders to underwrite a $700 million credit
facility (the New Credit Facility) and, in June
2006, finalized the agreement. The New Credit Facility is
comprised of a five year, $250 million multi-currency
senior revolving credit facility and a six year,
$450 million senior delayed-draw term loan facility. Under
the terms of the New Credit Facility, the Company can request
that the revolving credit facility be increased by
$50 million at no additional fee.
The New Credit Facility was entered into to replace the prior
revolving credit facility that was scheduled to expire in
September 2006. In addition, the financing, through the term
loan facility, provided capital resources sufficient to
refinance the $200 million of senior notes and
$155 million of debentures that could have become
immediately due and payable due to defaults associated with the
Companys delayed SEC financial filings for 2005. Because
one of the purposes of the term loan facility is to fund the
potential acceleration of the senior notes and debentures, the
term facility contains certain restrictions including, but not
limited to, the following:
|
|
|
|
|
$355 million of the facility is reserved to repay the
senior notes and debentures;
|
|
|
|
$95 million of the facility is immediately available for
refunding indebtedness other than the senior notes and
debentures;
|
|
|
|
The Company may access up to $55 million of the
$355 million reserved to repay the senior notes and
debentures if these obligations have not already been paid in
full and no event of default for these obligations exists and is
continuing; and
|
21
|
|
|
|
|
The Company may draw on the delayed-draw facility for up to one
year with any unused commitment under the term facility
terminating on June 6, 2007.
|
At the close of the New Credit Facility in June 2006, the
Company drew $95 million of the term loan facility to
partially repay the old revolving credit facility. In addition,
during the third quarter of 2006, the Company drew down another
$155 million of the term loan facility to repay
$155 million of outstanding debentures, as bondholders
accelerated payment on these obligations due to the previously
mentioned 2005 SEC financial reporting delays. See further
discussion under Senior Notes and Debentures below.
The New Credit Facility is secured by substantially all of the
Companys assets, including the assets and 100% of the
shares of the Companys material domestic subsidiaries and
65% of the shares of the Companys first tier
foreign subsidiaries, but excluding trade receivables sold
pursuant to the Companys accounts receivable sales
programs (see below). These liens are shared with the holders of
the Companys senior notes, as required under the
respective indenture. The New Credit Facility contains customary
operating covenants that limit the Companys ability to
engage in certain activities, including limitations on
additional loans and investments; creation of additional liens;
prepayments, redemptions and repurchases of debt; and mergers,
acquisitions and asset sales. The Company is also subject to
customary financial covenants including a leverage ratio and a
fixed charge coverage ratio. Additional covenants of the New
Credit Facility require the Company to file its 2005
Form 10-K
by November 15, 2006, and its 2006
Forms 10-Q
by the earlier of three months after the 2005
Form 10-K
is filed or January 15, 2007. Failure to satisfy certain of
these covenants, either immediately or after a brief period
allowing the company to satisfy the covenant, would result in an
event of default. If any event of default should occur and be
continuing and a waiver not have been obtained, the obligations
under the New Credit Facility may become immediately due and
payable at the option of providers of more than 50% of the
credit facility commitment.
Senior
Notes and Debentures
The indentures under which the senior notes and the debentures
were issued contain operating covenants that limit the
Companys ability to engage in certain activities including
limitations on consolidations, mergers, and transfers of assets;
and sale and leaseback transactions. The indentures contain
cross-default provisions with other debt obligations that exceed
$10 million of principal outstanding. In addition, the
terms of the indentures require, among other things, the Company
to file with the Trustee copies of its annual reports on
Form 10-K,
quarterly reports on
Form 10-Q
and an Officers Certificate relating to the Companys
compliance with the terms of the indenture within 120 days
after the end of its fiscal year. The Company has been in
default on these reporting requirements since it delayed filing
its
Form 10-Q
for the second quarter of 2004 due to the restatement of its
2003 and first quarter 2004 results. As the Company anticipated
and planned for, in March and April 2006, the Company received
notices of default from a holder and the Trustee of the senior
notes and debentures of which $355 million was outstanding.
The notices of default related only to reporting requirements
and the related Officers Certificate. Under the terms of
the indentures, the Company had 90 days from the notices of
default to cure the deficiencies identified in the notices of
default or obtain waivers, or events of default would have
occurred and the holders or the Trustee of the senior notes or
debentures could declare the principal immediately due and
payable. At the end of these periods, the deficiencies had not
been cured and waivers had not been obtained. During July and
August 2006, the bondholders accelerated the payment of the
principal amount of the debentures, of which $155 million
was outstanding, and the Company financed the accelerated
repayments by use of the aforementioned $450 million term
loan facility.
As of the date of this filing, the $200 million senior
notes currently remain outstanding, although they could be
declared immediately due and payable at any time. In the event
the bondholders of the senior notes provide a notice of
acceleration prior to the Company curing the existing reporting
default, the Company believes it has sufficient liquidity
resources, primarily through the term loan facility, to fully
satisfy any potential acceleration. In addition, the senior
notes are redeemable at the option of the Company at any time
for the principal amount of the senior notes then outstanding
plus the sum of any accrued but unpaid interest and the present
value of any remaining scheduled interest payments. The senior
notes are redeemable at the option of the holders only upon a
change in control of the Company combined with a rating by
either Moodys or S&P below investment grade as defined
in the indenture. Currently, the rating by S&P of the senior
notes is below investment grade.
22
Off
Balance Sheet Arrangements
Asset Securitization Program. The Company has
a $100 million program to sell (securitize), on an ongoing
basis, a pool of its trade accounts receivable. This program
serves to accelerate cash collections of the Companys
trade accounts receivable at favorable financing costs and helps
manage the Companys liquidity requirements. In 2005, the
Company amended the program to resolve issues related to a
credit rating downgrade and delayed SEC filings and to extend
the program through June 2006. In June 2006, the Company amended
the program to extend it up to June 2, 2009, to cure a
default resulting from a credit rating downgrade, and to modify
the reporting requirements to more closely match those in the
New Credit Facility. While the Company expects to maintain a
satisfactory U.S. asset securitization program to help meet
the Companys liquidity requirements, factors beyond the
Companys control such as prevailing economic, financial
and market conditions may prevent the Company from doing so.
Under this program, certain of the Companys receivables
are sold to Ferro Finance Corporation (FFC), a
wholly-owned unconsolidated qualified special purpose entity
(QSPE), as defined by Statement of Financial
Accounting Standards No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, (FAS No. 140). FFC finances its
acquisition of trade accounts receivables assets by issuing
financial interests to multi-seller receivables securitization
companies (commercial paper conduits). At
December 31, 2004, $3.6 million had been advanced to
the Company, net of repayments, under this program. During the
twelve months ended December 31, 2005, $946.2 million
of accounts receivable were sold under this program and
$948.8 million of receivables were collected and remitted
to FFC and the commercial paper conduits, resulting in a net
decrease in advances of $2.6 million and total advances
outstanding at December 31, 2005, of $1.0 million.
The Company on behalf of FFC and the commercial paper conduits
provides normal collection and administration services with
respect to the receivables. In accordance with the criteria in
FAS No. 140, no servicing asset or liability is
reflected on the Companys consolidated balance sheet. FFC
and the commercial paper conduits have no recourse to the
Companys other assets for failure of debtors to pay when
due as the assets transferred are legally isolated in accordance
with the bankruptcy laws of the United States. Under
FAS No. 140 and Financial Accounting Standards Board
(FASB) Interpretation No. 46R,
Consolidation of Variable Interest Entities, neither
the amounts advanced nor the corresponding receivables sold are
reflected in the Companys consolidated balance sheets as
the trade receivables have been de-recognized with an
appropriate accounting loss recognized and included in interest
expense in the Consolidated Statements of Income included under
Item 8 of this
Form 10-K.
The Company retains a beneficial interest in the receivables
transferred to FFC or the conduits in the form of a note
receivable to the extent that cash flows collected from
receivables transferred exceed cash flows used by FFC to pay the
commercial paper conduits. The note receivable balance was
$111.9 million as of December 31, 2005, and
$108.5 million as of December 31, 2004. The Company,
on a monthly basis, measures the fair value of the retained
interests using managements 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.
Consignment Arrangements. The Company
consigns, from various financial institutions, precious metals
(primarily silver, gold, platinum and palladium, collectively
metals) used in the production of certain products
for customers. Under these consignment arrangements, the
financial institutions provide the Company with metals for a
specified period of one year or less in duration, for which the
Company pays a fee. Under these arrangements, the financial
institutions own the metals, and accordingly, the Company does
not report these consigned materials as part of its inventory on
its consolidated balance sheet. These agreements are cancelable
by either party at the end of each consignment period, however,
because the Company has access to a number of consignment
arrangements with available capacity, consignment needs can be
shifted among the other participating institutions. In certain
cases, these other participating institutions may require cash
deposits to provide additional collateral beyond the underlying
precious metals. In the fourth quarter of 2005, due to the
Companys delays in filing consolidated financial
statements, certain financial institutions began to require the
Company to make deposits. The Company had outstanding deposits
of $19.0 million and $88.5 million at
December 31, 2005, and August 31, 2006,
23
respectively, which are included in other current assets in the
Companys Consolidated Balance Sheets. The Company
anticipates that the majority of these cash deposits will be
returned by December 31, 2006.
Cost of sales related to the consignment arrangements fees
were $1.6 million for 2005 and $2.4 million for 2004.
At December 31, 2005 and 2004, the Company had
5.9 million and 9.4 million troy ounces of metals
(primarily silver) on consignment for periods of less than one
year with market values of $99.3 million and
$106.4 million, respectively.
Other
Financing Arrangements
In addition, the Company maintains other lines of credit and
receivable sales programs to provide global flexibility for the
Companys liquidity requirements. Most of these facilities,
including receivable sales programs, are uncommitted lines for
the Companys international operations. At
December 31, 2005, the unused portions of these lines
provided approximately $15.0 million of additional
liquidity. The receivable sales are generally without recourse.
At December 31, 2005, the amount of outstanding receivables
sold under these international receivable sales programs was
less than $20 million. The Company had a
2.4 million guarantee, which was outstanding at
December 31, 2005, and was terminated in May 2006, to
support the borrowing facilities of an unconsolidated affiliate.
In June 2003, the Company bought out its $25.0 million
leveraged lease program under which the Company leased certain
land, buildings, machinery and equipment. The assets had a net
carrying value of $24.0 million and an appraised value of
$22.6 million. A loss of $1.4 million was recognized
in cost of sales in 2003 as a result of the buyout. The program
was accounted for as an operating lease.
Liquidity
Ferros level of debt and debt service requirements could
have important consequences to its business operations and uses
of cash flows. In addition, a reduction in overall demand for
the Companys products, as well as the potential
requirement to repay the senior notes due to the Companys
delayed SEC filings, could adversely affect cash flows. Despite
these potential constraints on cash flows, the Company maintains
considerable resources. At December 31, 2005, the Company
had a $300.0 million revolving credit facility of which
$113.9 million was available. This liquidity, along with
the liquidity from the Companys asset securitization
program of which $99.0 million was available as of
December 31, 2005, other financing arrangements, available
cash flows from operations, asset sales, and the New Credit
Facility, should allow the Company to meet its funding
requirements and other commitments. However, factors beyond the
Companys control such as prevailing economic, financial
and market conditions may prevent the Company from doing so. As
of August 31, 2006, the Company had borrowed
$165.5 million against its $250 million revolving
credit facility and drawn $49.2 million on the
$100 million asset securitization program. In addition, the
Company had drawn $250 million on the $450 million
term loan facility, although the $200 million remaining
availability is reserved for the repayment of the
91/8% senior
notes should they be accelerated by the bondholders.
The Companys aggregate amount of obligations for the next
five years and thereafter is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Thereafter
|
|
|
Totals
|
|
|
|
(Dollars in thousands)
|
|
|
Maturities of notes and debentures
|
|
$
|
655
|
|
|
$
|
347
|
|
|
$
|
169
|
|
|
$
|
200,112
|
|
|
$
|
118
|
|
|
$
|
155,159
|
|
|
$
|
356,560
|
|
Revolving credit facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
186,100
|
|
|
|
186,100
|
|
Accounts receivable securitization
facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
Obligations under capital leases
|
|
|
1,628
|
|
|
|
1,424
|
|
|
|
1,222
|
|
|
|
1,115
|
|
|
|
1,109
|
|
|
|
5,385
|
|
|
|
11,883
|
|
Obligations under operating leases
|
|
|
11,516
|
|
|
|
8,004
|
|
|
|
5,070
|
|
|
|
3,133
|
|
|
|
2,195
|
|
|
|
9,656
|
|
|
|
39,574
|
|
Purchase commitments
|
|
|
15,099
|
|
|
|
665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,764
|
|
Nonqualified retirement plan
obligations
|
|
|
2,747
|
|
|
|
413
|
|
|
|
406
|
|
|
|
416
|
|
|
|
401
|
|
|
|
2,566
|
|
|
|
6,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31,645
|
|
|
$
|
10,853
|
|
|
$
|
6,867
|
|
|
$
|
205,776
|
|
|
$
|
3,823
|
|
|
$
|
358,866
|
|
|
$
|
617,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
Interest payments are not included in the above table due to
changes in the debt structure which increased the level of
floating-rate debt, as discussed above and in Quantitative and
Qualitative Disclosures about Market Risk under Item 7A of
this
Form 10-K.
Further, the nonqualified retirement plan obligations are net of
$9.2 million of investments designated to fund the plan
benefits. The Company expects to contribute approximately
$43.9 million to its pension and other post-retirement
benefit plans in 2006.
Derivative
Financial Instruments
Commodity Price Risk Management. The Company
purchases portions of its natural gas requirements under fixed
price contracts, which in certain circumstances, although
unlikely because committed quantities are below expected usage,
could result in the Company settling its obligations under these
contracts in cash at prevailing market prices. In compliance
with FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities,
(FAS No. 133), as amended by Statement No. 149,
Amendment of Statement 133 on Derivative Instruments
and Hedging Activities, (FAS No. 149), the
Company marked these contracts to fair value and recognized the
resulting gains or losses as miscellaneous income or expense,
respectively. The fair value of the contracts for natural gas
was $2.1 million and $(0.9) million at
December 31, 2005 and 2004, respectively.
The Company also hedges a portion of its exposure to changes in
the pricing of certain nickel and zinc commodities using
derivative financial instruments. Nickel and zinc are raw
materials used in the Companys tile, porcelain enamel, and
color and glass product lines. The hedges are accomplished
principally through swap arrangements that allow the Company to
fix the pricing of the commodities for future purchases. While
hedged quantities are below expected usage, these swap
arrangements, unlike the natural gas contracts, do not provide
for physical delivery of the commodity but require the Company
to settle its obligations in cash at the maturity of the
contracts. In compliance with FAS No. 133 and
FAS No. 149, the Company marks these contracts to fair
value and recognizes the resulting gains or losses as other
comprehensive income. After the contracts mature and the
materials are sold, the gains and losses are recognized as a
part of cost of goods sold. The fair value of the nickel and
zinc contracts was $0.1 million at December 31, 2005.
There were no such contracts at December 31, 2004.
Consignment Arrangements. The Company
consigns, from various financial institutions, precious metals
(primarily silver, gold, platinum and palladium, collectively
metals) used in the production of certain products
for customers. Under these consignment arrangements, the
financial institutions provide the Company with metals for a
specified period of one year or less in duration, for which the
Company pays a fee. Under these arrangements, the financial
institutions own the metals, and accordingly, the Company does
not report these consigned materials as part of its inventory on
its consolidated balance sheet. These agreements are cancelable
by either party at the end of each consignment period, however,
because the Company has access to a number of consignment
arrangements with available capacity, consignment needs can be
shifted among the other participating institutions. In certain
cases, these other participating institutions may require cash
deposits to provide additional collateral beyond the underlying
precious metals. In the fourth quarter of 2005, due to the
Companys delays in filing consolidated financial
statements, certain financial institutions began to require the
Company to make deposits. At August 31, 2006, and
December 31, 2005, the Company had outstanding deposits of
$88.5 million and $19.0 million, respectively, which
are included in other current assets in the Companys
consolidated balance sheets. The Company anticipates that the
majority of these cash deposits will be returned by
December 31, 2006. The fair value of the Companys
rights and obligations under these arrangements at
December 31, 2005 and 2004 was not material.
Costs of sales related to the consignment arrangements
fees were $1.6 million for 2005, $2.4 million for
2004, and $1.6 million for 2003. At December 31, 2005
and 2004, the Company had 5.9 million and 9.4 million
troy ounces of metals (primarily silver) on consignment for
periods of less than one year with market values of
$99.3 million and $106.4 million, respectively.
The consignment arrangements allow for the Company to replace
the metals used in the manufacturing process by obtaining
replacement quantities on the spot market and to charge the
customer for the cost of the replacement quantities (i.e., the
price charged to the customer is largely a pass-through). In
certain circumstances, customers request at the time an order is
placed, a fixed price for the metals cost pass-through. In these
instances, the Company will enter into a fixed price sales
contract to establish the cost for the customer at the estimated
future delivery date. At the same time, the Company enters into
a forward purchase arrangement with a metal supplier to
completely
25
cover the value of the fixed price sales contract. At
December 31, 2005 and 2004, the Company had 3,000 and
599,000 troy ounces of metals (primarily silver) with market
values of $0.1 million and $1.7 million, respectively,
under fixed price contracts for future metal consignment
replenishments. In accordance with FAS No. 133, the
market value of these fixed price contracts is analyzed
quarterly. Due to the short duration of the contracts (generally
three months or less), the difference between the contract
values and market values at any financial reporting date is not
material.
Impact
of Newly Issued Accounting Pronouncements
The FASBs Emerging Issues Task Force (the
EITF) ratified Issue No.
03-1,
The Meaning of
Other-Than-Temporary
Impairment and Its Application to Certain Investments, in
March 2004. The issue provided guidance for evaluating whether
an investment is
other-than-temporarily
impaired and was effective for other- than-temporary impairment
evaluations made in reporting periods beginning after
June 15, 2004. However, the guidance contained in
paragraphs 10-20
was delayed by FASB Staff Position (FSP) EITF Issue
No. 03-1-1,
Effective Date of Paragraphs 10 20 of
EITF Issue
No. 03-1,
The Meaning of
Other-Than-Temporary
Impairment and Its Application to Certain Investments, in
September 2004; the delay of that effective date will be
superseded concurrent with the final issuance of FSP EITF Issue
No. 03-1-a.
The adoption of EITF Issue
No. 03-1
is not expected to have a material impact on the Companys
results of operations or financial position.
The FASB issued Statement No. 151, Inventory
Costs, (FAS No. 151) in November 2004.
FAS No. 151 is effective for fiscal years beginning
after June 15, 2005, and amends the guidance of ARB
No. 43 to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs and wasted
material (spoilage). FAS No. 151 requires that those
items be recognized as current-period charges regardless of
whether they meet the criterion of so abnormal. The
adoption of FAS No. 151 as of January 1, 2006, is
not expected to have a material impact on the results of
operations or financial position of the Company.
In December 2004, the FASB issued Statement No. 123R,
Share-Based Payment, (FAS No. 123R) that
requires public entities to measure the cost of employee
services received in exchange for an award of equity instruments
based on the grant-date fair value of the award. That cost will
be recognized over the period during which the employee is
required to provide services in exchange for the award.
FAS No. 123R is effective for interim and annual
periods beginning after June 15, 2005, and applies to all
outstanding and unvested share-based payment awards as of the
adoption date. In April 2005, the Securities and Exchange
Commission published a rule allowing public companies with
calendar year ends to delay the quarter in which they begin to
expense stock options to first quarter 2006 from third quarter
2005. The Company plans to adopt FAS No. 123R
beginning January 1, 2006, using the modified prospective
method and expects to incur pre-tax charges of approximately
$3 million to $4 million for 2006.
In May 2005, the FASB issued Statement No. 154,
Accounting Changes and Error Corrections a
replacement of APB Opinion No. 20 and FASB Statement
No. 3, (FAS No. 154). This Statement
requires retrospective application to prior periods
financial statements of changes in accounting principle, unless
it is impracticable to determine either the period-specific
effects or the cumulative effect of the change or unless
specific transition provisions are proscribed in the accounting
pronouncements. FAS No. 154 does not change the
accounting guidance for reporting a correction of an error in
previously issued financial statements or a change in accounting
estimate. FAS No. 154 is effective for accounting
changes and error corrections made after December 31, 2005.
The Company will apply this standard prospectively.
In September 2005, the EITF reached a consensus on Issue
No. 04-13,
Accounting for Purchase and Sales of Inventory with the
Same Counterparty, that requires companies to recognize an
exchange of finished goods for raw materials or
work-in-progress
within the same line of business at fair value. All other
exchanges of inventory should be reflected at the recorded
amount. This consensus is effective for transactions completed
after March 31, 2006, and is not expected to have a
material impact on the results of operations or financial
position of the Company.
In March 2006, the FASB issued Statement No. 156
Accounting for Servicing of Financial Assets
an amendment of FASB Statement No. 140,
(FAS No. 156). This statement requires an entity to
recognize at fair value, if practicable, a servicing asset or
liability each time it undertakes an obligation to service a
financial asset by entering into a servicing contract in certain
situations primarily relating to off-balance sheet arrangements.
Entities
26
may chose between two subsequent measurement methods for each
class of separately recognized servicing assets and servicing
liabilities. FAS No. 156 is effective for fiscal years
beginning after September 15, 2006. The provisions of
FAS No. 156 are to be applied prospectively to
transactions entered into after its adoption. The Company will
adopt FAS No. 156 as of January 1, 2007, as
permitted, and is currently evaluating the implementation
options; at this time, the Company is uncertain as to the impact
on the Companys results of operations and financial
position.
The FASB published Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, (Interpretation
No. 48) in June 2006. This interpretation requires
companies to determine whether it is more likely than not that a
tax position will be sustained upon examination by the
appropriate taxing authorities before any part of the benefit
can be recorded in the financial statements. Interpretation
No. 48 also provides guidance on derecognition,
classification, accounting in interim periods, and disclosure
requirements for tax contingencies. This interpretation is
effective for fiscal years beginning after December 15,
2006. The Company is currently assessing the impact that
Interpretation No. 48 will have on the Companys 2007
results of operations and financial position.
In September 2006, the FASB published Staff Position
No. AUG AIR-1, Accounting for Planned Maintenance
Activities. This staff position prohibits the use of the
accrue-in-advance
method of accounting for planned major maintenance activities.
It is effective for fiscal years beginning after
December 15, 2006, and is to be applied retrospectively.
When adopted in fiscal 2007, the staff position will increase
retained earnings as of the beginning of 2005 by approximately
$1.6 million, increase 2005 income from continuing
operations by approximately $0.4 million and increase
2005 net income by approximately by $0.3 million.
In September 2006, the FASB issued Statement No. 157,
Fair Value Measurements, (FAS No. 157).
FAS No. 157 defines fair value, establishes a
framework and gives guidance regarding the methods used for
measuring fair value, and expands disclosures about fair value
measurements. Accordingly, FAS No. 157 does not
require any new fair value measurements, but will change current
practice for some entities. FAS No. 157 is effective
for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. The Company will apply this standard prospectively.
In September 2006, the U.S. Securities and Exchange
Commission (SEC) released Staff Accounting
Bulletin No. 108, Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements,
(SAB No. 108) which provides interpretive
guidance on the SECs views regarding the process of
quantifying materiality of financial statement misstatements.
SAB No. 108 is effective for years ending after
November 15, 2006, with early application for the first
interim period ending after November 15, 2006. The Company
does not believe that the application of SAB No. 108
will have a material effect on the Companys results of
operations or financial position.
Critical
Accounting Policies
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. The policies discussed below are considered
by management to be more critical than other policies because
their application requires managements most subjective or
complex judgments, often a result of the need to make estimates
about the effect of matters that are inherently uncertain.
Management has discussed the development, selection and
disclosure of these policies with the Audit Committee of the
Board of Directors.
Environmental
and Other Contingent Liabilities
The Company expenses recurring costs associated with control and
disposal of hazardous materials in current operations. Accruals
for environmental remediation and other contingent liabilities,
including those relating to ongoing, pending or threatened
litigation, are recorded when it is probable that a liability
has been incurred and the amount of the liability can be
reasonably estimated. The amount accrued for environmental
remediation reflects the Companys assumptions about
remediation requirements at the contaminated site, the nature of
the remedy, the outcome of discussions with regulatory agencies
and other potentially responsible parties at multi-party sites,
and the number and financial viability of other potentially
responsible parties. Estimated costs are not discounted due to
27
the uncertainty with respect to the timing of related payments.
The Company actively monitors the status of sites, and as
assessments and cleanups proceed, accruals are reviewed
periodically and adjusted, if necessary, as additional
information becomes available. Changes in the estimates on which
the accruals are based, unanticipated government enforcement
actions, or changes in health, safety, environmental regulation,
and testing requirements could result in higher or lower costs.
As of December 31, 2005, the Company had accrued
liabilities of $6.6 million for environmental remediation
costs, of which $1.2 million related to Superfund sites. As
of December 31, 2004, the Company had accrued liabilities
of $6.4 million of which $0.6 million related to
Superfund sites.
Income
Taxes
Deferred income taxes are provided to recognize the effect of
temporary differences between financial and tax reporting.
Deferred income taxes are not provided for undistributed
earnings of foreign consolidated subsidiaries, to the extent
such earnings are reinvested for an indefinite period of time.
The Company has significant operations outside the United
States, where substantial pre-tax earnings are derived, and in
jurisdictions in which the statutory tax rate is lower than in
the United States. The Company also has significant cash
requirements in the United States to pay interest and principal
on borrowings. As a result, significant tax and treasury
planning and analysis of future operations are necessary to
determine the proper amount of tax assets, liabilities and tax
expense. The Companys tax assets, liabilities and tax
expense are supported by its best estimates and assumptions of
its global cash requirements, planned dividend repatriations and
expectations of future earnings. Expectations of future
earnings, the scheduled reversal of deferred tax liabilities,
the ability to carryback losses and credits to offset taxable
income in a prior year, and tax planning strategies are the
primary drivers underlying managements evaluation of the
valuation allowance on net deferred tax assets. However, the
amounts recorded may materially differ from the amounts that are
ultimately payable if managements estimates of future
earnings, cash flows and outcomes of tax planning strategies are
ultimately inaccurate. Valuation allowances are recorded against
deferred tax assets for which management believes realization is
not more likely than not.
Pension
and Other Postretirement Benefits
The Company sponsors defined benefit plans in the U.S. and many
countries outside the U.S., and also sponsors retiree medical
benefits for a segment of its salaried and hourly work force
within the U.S. The assumptions used in actuarial
calculations for these plans have a significant impact on
benefit obligations and annual net periodic benefit costs. Ferro
management meets with its actuaries annually to discuss key
economic assumptions used to develop these benefit obligations
and net periodic costs. The discount rate for the
U.S. pension plans is determined based on a bond model.
Using the Companys projected pension cash flows, the bond
model considers all possible bond portfolios (based on bonds
with a quality rating of AA or better under either Moodys
or S&P) that produce matching cash flows and selects the
optimal one with the highest possible yield. The discount rates
for the
non-U.S. plans
are selected based on a yield curve method. Using AA-rated bonds
applicable in respective capital markets, the duration of each
plans liabilities is used to select the rate from the
yield curve corresponding to the same duration. The resulting
yield is rounded to the nearest 25 basis points. The
expected return on assets at the beginning of the year for
defined benefit plans is calculated as the weighted-average of
the expected return for the target allocation of the principal
asset classes held by each of the plans. In determining the
expected returns, the Company considers both historical
performance and an estimate of future long-term rates of return.
The resulting expected returns are then rounded to the nearest
25 basis points. All other assumptions are reviewed periodically
by the Companys management and its actuaries and may be
adjusted based on current trends and expectations as well as
past experience in the plans.
28
The following table provides the sensitivity of net annual
periodic benefit costs for the Companys pension plans,
including a U.S. nonqualified retirement plan, and the
retiree medical plan to a 25 basis point decrease in both
the discount rate and asset return assumption:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25 Basis Point Decrease
|
|
|
|
25 Basis Point Decrease
|
|
|
in Asset Return
|
|
|
|
in Discount Rate
|
|
|
Assumption
|
|
|
|
(Dollars in millions)
|
|
|
U.S. Pension Plans
|
|
$
|
1.3
|
|
|
$
|
0.6
|
|
U.S. Retiree Medical Plan
|
|
|
0.0
|
|
|
|
0.0
|
|
Non-U.S. Pension
Plans
|
|
|
0.8
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2.1
|
|
|
$
|
0.9
|
|
|
|
|
|
|
|
|
|
|
The discount rate used to determine the net periodic pension
cost associated with U.S. pension and retiree medical
purposes decreased from 6.25% for 2004 to 6.10% for 2005. The
discount rate used to determine actuarial liabilities associated
with U.S. pension and retiree medical plans decreased from
6.10% at December 31, 2004 to 5.90% at December 31,
2005. The Company also reduced the expected asset return
assumption for the U.S. pension plans from 8.75% in 2004 to
8.50% in 2005. These decreases were due to generally falling
bond and equity yields during 2004 and 2005. The weighted
average discount rate and expected asset return assumption for
the Companys
non-U.S. pension
plans decreased from 5.26% and 5.41% in 2004 to 4.77% and 5.26%
in 2005, respectively. The measurement dates used to determine
pension and other postretirement benefit measurements are
September 30 for the United States plans and
December 31 for the international plans.
Amortization of unrecognized gains or losses is a component of
net periodic cost. These gains or losses result from the
difference between actual and assumed results and from changes
in actuarial assumptions. At December 31, 2005,
Ferros U.S. and
non-U.S. pension
plans, including the nonqualified retirement plan, had
unrecognized losses of $148.1 million, while Ferros
U.S. retiree medical plan currently had unrecognized gains
of $4.9 million. These unrecognized gains and losses will
be recognized in future net periodic costs.
During 2006, the Company entered into an agreement under which
additional contributions (above those required by local
statutory law) would be made into one international defined
benefit plan in the event of the Companys termination of
participants in the plan without a transfer of the
participants respective accrued benefits. The additional
contributions would be required as follows should such events
occur before December 31, 2012: 2006 $4.6 million,
2007 $4.2 million, 2008 $3.7 million, 2009
$3.2 million, 2010 $2.5 million, 2011
$1.8 million, and 2012 $1.0 million.
On April 1, 2006, the Company froze retirement benefit
accumulations for its largest defined benefit pension plan,
which covers certain salaried and hourly employees in the United
States. The affected employees now receive benefits in the
Companys defined contribution plan that previously covered
only U.S. salaried employees hired after June 30,
2003. The new plan supports a diverse and mobile workforce with
a competitive, flexible and portable retirement benefit, while
lowering and providing greater predictability to the
Companys cost structure. These changes do not affect
current retirees or former employees.
Additionally, the Company limited eligibility for the retiree
medical and life insurance coverage for all eligible nonunion
employees. Only employees age 55 or older with 10 or more
years of service as of December 31, 2006, will be eligible
for post-retirement medical and life insurance benefits.
Moreover, these benefits will be available only to those
employees who retire by December 31, 2007, after having
advised the Company of their retirement plans by March 31,
2007. These changes do not affect current retirees.
Ferro expects its overall net periodic cost (U.S. pension,
U.S. retiree medical, and
non-U.S. pension)
to decrease approximately $5.2 million from 2005 to 2006,
primarily due to $10.0 million in expense reductions
relating to the aforementioned changes in the pension and
retiree medical programs, offset by $4.2 million in charges
primarily relating to a lump sum payment to the beneficiary of
its deceased former Chief Executive Officer from the
nonqualified defined benefit retirement plan.
29
The Company expects to contribute approximately
$28.1 million to its U.S. defined benefit pension
plans in 2006. Over the four-year period from 2007 through 2010,
an additional $58 million of contributions could be
required. These cash contribution requirements were determined
based on current ERISA and IRS guidelines and reflect the
aforementioned recent pension plan changes. For significant
non-U.S. plans,
the Company expects to contribute $4.2 million in 2006 and
an additional $15.5 million over the four-year period from
2007 through 2010. These funding amounts were determined based
on the minimum contributions required under various applicable
regulations in each respective country.
Inventories
The Company values inventory at the lower of cost or market,
with cost being determined utilizing the
first-in,
first-out (FIFO) method, except for selected inventories where
the last-in,
first-out (LIFO) method is used. Inventory valuation is
periodically evaluated primarily based upon the age of the
inventory, but also considers assumptions of future demand and
market conditions. As a result of the evaluation, the inventory
may be written down to the lower of cost or realizable value. If
actual circumstances are less favorable than those projected by
management, additional write-downs may be required.
Restructuring
and Cost Reduction Programs
Costs associated with exit and disposal activities are
recognized when liabilities are incurred. Reserves are
established for such activities by estimating employee
termination costs utilizing detailed restructuring plans
approved by management. Reserve calculations are based upon
various factors including an employees length of service,
contract provisions, salary level and health care benefit
choices. The Company believes the estimates and assumptions used
to calculate these restructuring provisions are appropriate, and
although significant changes are not anticipated, actual costs
could differ from the estimates should changes be made in the
nature or timing of the restructuring plans.
The Company continued actions during 2005 associated with its
cost reduction and integration programs. The programs affect all
businesses across the Company, and generally will take no longer
than twelve months to complete from the date of commencement
unless certain legal or contractual restrictions on the
Companys ability to complete the program exist. The
Company recorded $3.7 million of pre-tax charges during
2005, all of which related to severance benefits for employees
affected by plant closings or capacity reduction, as well as
various personnel in administrative or shared service functions.
Termination benefits were based on various factors including
length of service, contract provisions, local legal requirements
and salary levels. Management estimated the charges based on
these factors as well as projected final service dates.
Revenue
Recognition
The Company recognizes revenue when persuasive evidence of an
arrangement exists, the selling price is fixed and determinable,
collection is reasonably assured, and title has passed to it
customers. Provision is made for uncollectible accounts based on
historical experience and specific circumstances, as
appropriate. Accounts deemed to be uncollectible or to require
excessive collection costs are written off against the allowance
for doubtful accounts. Customer rebates are accrued over the
rebate periods based upon estimated attainments of the
provisions set forth in the rebate agreements and recorded as
reductions of sales.
Valuation
of Goodwill and Other Intangibles
The Company adopted FASB Statement No. 142, Goodwill
and Other Intangible Assets,
(FAS No. 142) for goodwill and intangible assets
acquired after June 30, 2001 as of July 1, 2001.
FAS No. 142 was adopted in its entirety as of
January 1, 2002 and accordingly, the Companys
goodwill and intangible assets with indefinite useful lives are
no longer being amortized.
Fair value is estimated using the discounted cash flow method.
The Company uses projections of market growth, internal sales
efforts, input cost movements, and cost reduction opportunities
to project future cash flows.
30
Certain corporate expenses and assets and liabilities are
allocated to the business units in this process. Using a risk
adjusted, weighted average
cost-of-capital,
the Company discounts the cash flow projections to the annual
measurement date, October 31st. If the fair value of any of
the units were determined to be less than its carrying value,
the Company would proceed to the second step and obtain
independent appraisals of its assets. In 2005 and 2004, the fair
value exceeded the carrying value, and therefore, it was not
necessary to obtain independent appraisals.
Assessment
of Long-Lived Assets
The Companys long-lived assets include property, plant,
equipment, goodwill and other intangible assets. Property, plant
and equipment are depreciated on a straight-line basis over
their estimated useful lives.
Property, plant and equipment are reviewed for impairment
whenever events or circumstances indicate that the undiscounted
net cash flows to be generated by their use and eventual
disposition is less than their recorded value. In the event of
impairment, a loss is recognized for the excess of the recorded
value over fair value. The long-term nature of these assets
requires the estimation of cash inflows and outflows several
years into the future and only takes into consideration
technological advances known at the time of impairment.
Due to depressed conditions in the electronics industry in late
2004 and 2005, the Company specifically evaluated its
electronics assets in Holland. The Company also evaluated its
Italian tile and Belgian polymer additives manufacturing assets
because of sluggish market conditions in these regions. In each
situation, management concluded that the assets were not
impaired.
Asset
Retirement Obligations
FASB Statement No. 143, Accounting for Asset
Retirement Obligations,
(FAS No. 143) requires that the fair value of a
liability for an asset retirement obligation (ARO)
be recognized in the period in which it is incurred. FASB
Interpretation No. 47, Accounting for Conditional
Asset Retirement Obligations, (Interpretation
No. 47) clarifies the evaluation of conditional AROs.
The Company adopted FAS No. 143 as of January 1,
2003, and recorded AROs of $0.1 million. The Company
adopted Interpretation No. 47 as of January 1, 2005,
and recorded additional conditional AROs of $0.9 million.
At December 31, 2005 and 2004, estimated liabilities for
AROs were $1.0 million and $0.1 million, respectively.
In determining the amounts recorded relating to conditional
AROs, the Company utilizes an expected value technique whereby
potential settlement dates and related probabilities are based
upon managements judgment, taking into consideration the
Companys historical practices, current business
intentions, and other relevant information. Legal obligations
exist in connection with the retirement of assets at many of the
Companys operating facilities that would be triggered upon
closure of the facilities or abandonment of existing operations.
If certain operating facilities were to be closed, for which
there is no current intention to do so, changes to or
settlements of the related conditional AROs could significantly
affect the Companys results of operations and cash flows
at that time.
Derivative
Financial Instruments
The Company employs derivative financial instruments, primarily
foreign currency forward exchange contracts and foreign currency
options, to hedge certain anticipated transactions, firm
commitments, or assets and liabilities denominated in foreign
currencies. Gains and losses on foreign currency forward
exchange contracts and foreign currency options are recognized
as foreign currency transaction gains and losses.
The Company purchases portions of its natural gas requirements
under fixed price contracts, which in certain circumstances,
although unlikely because committed quantities are below
expected usage, could result in the Company settling its
obligations under these contracts in cash at prevailing market
prices. In compliance with FASB Statement No. 133,
Accounting for Derivative Instruments and Hedging
Activities, (FAS No. 133), as amended by
Statement No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities,
31
(FAS No. 149), the Company marked these contracts to
fair value and recognized the resulting gains or losses as
miscellaneous income or expense, respectively.
The Company also hedges a portion of its exposure to changes in
the pricing of certain nickel and zinc commodities using
derivative financial instruments. Nickel and zinc are raw
materials used in the Companys tile, porcelain enamel, and
color and glass product lines. The hedges are accomplished
principally through swap arrangements that allow the Company to
fix the pricing of the commodities for future purchases. While
hedged quantities are below expected usage, these swap
arrangements, unlike the natural gas contracts, do not provide
for physical delivery of the commodity but require the Company
to settle its obligations in cash at the maturity of the
contracts. In compliance with FAS No. 133 and
FAS No. 149, the Company marks these contracts to fair
value and recognizes the resulting gains or losses as other
comprehensive income. After the contracts mature and the
materials are sold, the gains and losses are recognized as a
part of cost of goods sold.
The Company consigns, from various financial institutions,
precious metals (primarily silver, gold, platinum and palladium,
collectively metals) used in the production of
certain products for customers. Under these consignment
arrangements, the financial institutions provide the Company
with metals for a specified period of one year or less in
duration, for which the Company pays a fee. Under these
arrangements, the financial institutions own the metals, and
accordingly, the Company does not report these consigned
materials as inventory on its consolidated balance sheet. These
agreements are cancelable by either party at the end of each
consignment period, however, because the Company has access to a
number of consignment arrangements with available capacity,
consignment needs can be shifted among the other participating
institutions. Beginning in the fourth quarter of 2005, certain
participating institutions required cash deposits to provide
additional collateral beyond the underlying precious metals. At
August 31, 2006, and December 31, 2005, the Company
had outstanding deposits of $88.5 million and
$19.0 million, respectively, which are included in other
current assets in the Companys consolidated balance
sheets. Fees relating to these contracts are recorded as cost of
sales.
Item 7A
Quantitative and Qualitative Disclosures about Market
Risk
The Companys exposure to market risks is primarily limited
to fluctuations in interest rates, foreign currency exchange
rates, and costs of raw materials and natural gas.
Ferros exposure to interest rate risk relates primarily to
its debt portfolio including obligations under the accounts
receivable securitization program. The Companys interest
rate risk management objective is to limit the negative effect
of interest rate changes on earnings, cash flows and overall
borrowing costs. 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 Companys
interest rate exposure is generally limited to the amounts
outstanding under the revolving credit facility and amounts
outstanding under its asset securitization program. Based on the
amount of variable-rate indebtedness outstanding at
December 31, 2005 and 2004, a 1% increase or decrease in
interest rates would have resulted in a $1.9 million and a
$1.5 million corresponding change in interest expense,
respectively. For 2006, the sensitivity to interest rate
fluctuations is likely to be higher due to increased levels of
variable rate debt. At December 31, 2005, the Company had
$354.4 million carrying value of fixed rate debt
outstanding with an average effective interest rate of 8.6%,
substantially all maturing after 2008. The fair market value of
these debt securities was approximately $354.8 million at
December 31, 2005. During July and August 2006, the
bondholders accelerated the payment of the principal amount of
the Companys fixed-rate debentures, of which
$155 million was outstanding. The debentures were repaid
through use of the term loan facility (see further information
included under Liquidity and Capital Resources under Item 7
of this
Form 10-K),
which increased the level of floating-rate debt.
Ferro manages its currency risks principally by entering into
forward contracts to mitigate the impact of currency
fluctuations on transaction and other exposures. At
December 31, 2005, the Company held forward contracts with
a notional amount of $119.3 million and an aggregate fair
value of $0.1 million. A 10% appreciation of the
U.S. dollar would have resulted in a $0.4 million and
a $0.8 million decrease in the fair value of these
positions in the aggregate at December 31, 2005 and 2004,
respectively. A 10% depreciation of the U.S. dollar
32
would have resulted in a $0.5 million and a
$1.0 million increase in the fair value of these positions
in the aggregate at December 31, 2005 and 2004,
respectively.
The Company is also subject to cost changes with respect to its
raw materials and natural gas purchases. The Company attempts to
mitigate raw materials cost increases with price increases to
the Companys customers. In addition, the Company purchases
portions of its natural gas requirements under fixed price
contracts, over short time periods, to reduce the volatility of
this cost. Natural gas contracts at December 31, 2005, and
2004, respectively, for 1.2 million and 1.5 million
MMBTUs of natural gas had fair values of $2.1 million
and $(0.9) million. A 10% increase or decrease in the
forward prices of natural gas would have resulted in a
$1.3 million and a $0.9 million corresponding change
in the fair value of these contracts as of December 31,
2005 and 2004, respectively. The Company also hedges a portion
of its exposure to changes in the pricing of certain nickel and
zinc commodities using derivative financial instruments. The
hedges are accomplished principally through swap arrangements
that allow the Company to fix the pricing of the commodities for
future purchases. Nickel and zinc contracts at December 31,
2005, for 3,092 metric tons had a fair value of
$0.1 million. A 10% increase or decrease in the forward
prices of these commodities would have resulted in a
$0.7 million corresponding change in the fair market of
these contracts as of December 31, 2005. There were no such
contracts at December 31, 2004.
33
Item 8
Financial Statements and Supplementary Data
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Ferro Corporation
Cleveland, Ohio
We have audited the accompanying consolidated balance sheets of
Ferro Corporation and subsidiaries (the Company) as
of December 31, 2005, and the related consolidated
statements of income, shareholders equity and
comprehensive income, and cash flows for the year ended
December 31, 2005. Our audit also included the financial
statement schedule listed in the index at Item 15.1(c) for
the year ended December 31, 2005. These financial
statements and financial statement schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on the financial
statements and financial statement schedule based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). 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 audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Ferro Corporation and subsidiaries as of December 31, 2005,
and the results of their operations and their cash flows for the
year ended December 31, 2005, in conformity with accounting
principles generally accepted in the United Sates of America.
Also, in our opinion, such financial statement schedule for the
year ended December 31, 2005, when considered in relation
to the basic 2005 consolidated statements taken as a whole,
presents fairly, in all material respects, the information set
forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2005, based on the
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission, and our report dated September 29,
2006, expressed an unqualified opinion on managements
assessment of the effectiveness of the Companys internal
control over financial reporting and an adverse opinion on the
effectiveness of the Companys internal control over
financial reporting because of material weaknesses.
/s/ Deloitte &
Touche LLP
Cleveland, Ohio
September 29, 2006
34
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Ferro Corporation:
We have audited the accompanying consolidated balance sheet of
Ferro Corporation and subsidiaries as of December 31, 2004,
and the related consolidated statements of income,
shareholders equity and comprehensive income, and cash
flows for each of the years in the two-year period ended
December 31, 2004. In connection with our audits of the
consolidated financial statements, we have also audited the
financial statement schedule listed in the index at
Item 15(a) for the two-year period ended December 31,
2004. These consolidated financial statements and schedule are
the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). 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 as of
December 31, 2004, and the results of their operations and
their cash flows for each of the years in the two-year period
ended December 31, 2004, in conformity with
U.S. generally accepted accounting principles. Also in our
opinion, the related financial statement schedule, when
considered in relation to the basic consolidated statements
taken as a whole, presents fairly, in all material respects, the
information set forth therein.
The accompanying financial statements have been prepared
assuming the Company will continue as a going concern. As
discussed in note 3 to the financial statements, the
Company faces certain liquidity uncertainties that raise
substantial doubt about its ability to continue as a going
concern. Managements plan in regard to these matters are
also described in note 3. The financial statements do not
include any adjustments that might result from the outcome of
this uncertainty.
As discussed in note 1 to the consolidated financial
statements, effective January 1, 2003, the Company adopted
the provisions of Statement of Financial Accounting Standards
No. 143, Accounting for Asset Retirement Obligations;
and effective January 1, 2002, the Company voluntarily
early adopted the provisions of the Financial Accounting
Standards Boards Emerging Issues Tax Force Issue
No. 04-06, Accounting for Stripping Costs Incurred
During Production in the Mining Industry.
Cleveland, Ohio
March 31, 2006, except as to note 20,
which is as of September 28, 2006.
35
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
Net sales
|
|
$
|
1,882,305
|
|
|
$
|
1,843,721
|
|
|
$
|
1,615,598
|
|
Cost of sales
|
|
|
1,501,355
|
|
|
|
1,461,514
|
|
|
|
1,242,414
|
|
Selling, general and
administrative expenses
|
|
|
310,882
|
|
|
|
312,441
|
|
|
|
315,910
|
|
Other expense (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
46,919
|
|
|
|
41,993
|
|
|
|
43,106
|
|
Interest earned
|
|
|
(538
|
)
|
|
|
(887
|
)
|
|
|
(883
|
)
|
Foreign currency transactions, net
|
|
|
1,284
|
|
|
|
3,035
|
|
|
|
1,199
|
|
Gain on sale of businesses
|
|
|
(69
|
)
|
|
|
(5,195
|
)
|
|
|
|
|
Miscellaneous (income) expense, net
|
|
|
(1,600
|
)
|
|
|
(372
|
)
|
|
|
1,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
24,072
|
|
|
|
31,192
|
|
|
|
12,016
|
|
Income tax expense
|
|
|
6,928
|
|
|
|
3,352
|
|
|
|
2,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations
|
|
|
17,144
|
|
|
|
27,840
|
|
|
|
9,638
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations,
net of tax
|
|
|
|
|
|
|
|
|
|
|
(903
|
)
|
(Loss) gain on disposal of
discontinued operations, net of tax
|
|
|
(868
|
)
|
|
|
(2,915
|
)
|
|
|
5,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
16,276
|
|
|
|
24,925
|
|
|
|
14,050
|
|
Dividends on preferred stock
|
|
|
(1,490
|
)
|
|
|
(1,705
|
)
|
|
|
(2,088
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common
shareholders
|
|
$
|
14,786
|
|
|
$
|
23,220
|
|
|
$
|
11,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share
data
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
0.37
|
|
|
$
|
0.62
|
|
|
$
|
0.18
|
|
From discontinued operations
|
|
|
(0.02
|
)
|
|
|
(0.07
|
)
|
|
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.35
|
|
|
$
|
0.55
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
0.37
|
|
|
$
|
0.62
|
|
|
$
|
0.18
|
|
From discontinued operations
|
|
|
(0.02
|
)
|
|
|
(0.07
|
)
|
|
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.35
|
|
|
$
|
0.55
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
36
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
17,413
|
|
|
$
|
13,939
|
|
Accounts and trade notes
receivable, net
|
|
|
182,390
|
|
|
|
184,470
|
|
Notes receivable
|
|
|
112,744
|
|
|
|
114,030
|
|
Inventories
|
|
|
215,257
|
|
|
|
220,126
|
|
Deferred income taxes
|
|
|
40,732
|
|
|
|
45,647
|
|
Other current assets
|
|
|
42,183
|
|
|
|
34,137
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
610,719
|
|
|
|
612,349
|
|
Other assets
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
531,139
|
|
|
|
598,719
|
|
Intangibles, net
|
|
|
410,666
|
|
|
|
412,507
|
|
Deferred income taxes
|
|
|
61,130
|
|
|
|
46,696
|
|
Other non-current assets
|
|
|
54,890
|
|
|
|
63,166
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,668,544
|
|
|
$
|
1,733,437
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Loans payable and current portion
of long-term debt
|
|
$
|
7,555
|
|
|
$
|
9,674
|
|
Accounts payable
|
|
|
236,282
|
|
|
|
260,215
|
|
Income taxes
|
|
|
5,474
|
|
|
|
3,609
|
|
Accrued payrolls
|
|
|
25,112
|
|
|
|
31,468
|
|
Accrued expenses and other current
liabilities
|
|
|
92,461
|
|
|
|
96,017
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
366,884
|
|
|
|
400,983
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
Long-term debt, less current
portion
|
|
|
546,168
|
|
|
|
497,314
|
|
Post-retirement and pension
liabilities
|
|
|
230,320
|
|
|
|
247,132
|
|
Deferred income taxes
|
|
|
14,002
|
|
|
|
15,304
|
|
Other non-current liabilities
|
|
|
22,611
|
|
|
|
27,610
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,179,985
|
|
|
|
1,188,343
|
|
Series A convertible
preferred stock
|
|
|
20,468
|
|
|
|
22,829
|
|
Shareholders
equity
|
|
|
|
|
|
|
|
|
Common stock, par value
$1 per share; 300,000,000 shares authorized;
52,323,053 shares issued
|
|
|
52,323
|
|
|
|
52,323
|
|
Paid-in capital
|
|
|
163,074
|
|
|
|
162,912
|
|
Retained earnings
|
|
|
595,902
|
|
|
|
605,521
|
|
Accumulated other comprehensive
loss
|
|
|
(115,990
|
)
|
|
|
(67,683
|
)
|
Other
|
|
|
(6,123
|
)
|
|
|
(7,292
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
689,186
|
|
|
|
745,781
|
|
Common shares in treasury, at cost
|
|
|
(221,095
|
)
|
|
|
(223,516
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
468,091
|
|
|
|
522,265
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
1,668,544
|
|
|
$
|
1,733,437
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
37
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND
COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Total
|
|
|
|
Common Shares
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Share-
|
|
|
|
In Treasury
|
|
|
Common
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
holders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)(a)
|
|
|
Other
|
|
|
Equity(b)
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
Balances at December 31,
2002
|
|
|
11,807
|
|
|
$
|
(247,530
|
)
|
|
|
52,323
|
|
|
|
153,115
|
|
|
|
618,119
|
|
|
|
(131,183
|
)
|
|
|
(6,118
|
)
|
|
$
|
438,726
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,050
|
|
|
|
|
|
|
|
|
|
|
|
14,050
|
|
Other comprehensive income (loss),
net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,043
|
|
|
|
|
|
|
|
57,043
|
|
Minimum pension liability
adjustment(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,426
|
)
|
|
|
|
|
|
|
(9,426
|
)
|
Other adjustments(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
270
|
|
|
|
|
|
|
|
270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,937
|
|
Cash dividends(c):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,552
|
)
|
|
|
|
|
|
|
|
|
|
|
(23,552
|
)
|
Preferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,088
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,088
|
)
|
Federal tax benefits(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
59
|
|
Transactions involving benefit
plans(b)
|
|
|
(941
|
)
|
|
|
13,879
|
|
|
|
|
|
|
|
6,047
|
|
|
|
|
|
|
|
|
|
|
|
(797
|
)
|
|
|
19,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31,
2003
|
|
|
10,866
|
|
|
$
|
(233,651
|
)
|
|
|
52,323
|
|
|
|
159,162
|
|
|
|
606,588
|
|
|
|
(83,296
|
)
|
|
|
(6,915
|
)
|
|
$
|
494,211
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,925
|
|
|
|
|
|
|
|
|
|
|
|
24,925
|
|
Other comprehensive income (loss),
net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,166
|
|
|
|
|
|
|
|
25,166
|
|
Minimum pension liability
adjustment(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,778
|
)
|
|
|
|
|
|
|
(9,778
|
)
|
Other adjustments(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
225
|
|
|
|
|
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,538
|
|
Cash dividends(c):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,344
|
)
|
|
|
|
|
|
|
|
|
|
|
(24,344
|
)
|
Preferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,705
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,705
|
)
|
Federal tax benefits(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
57
|
|
Transactions involving benefit
plans(b)
|
|
|
(681
|
)
|
|
|
10,135
|
|
|
|
|
|
|
|
3,750
|
|
|
|
|
|
|
|
|
|
|
|
(377
|
)
|
|
|
13,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31,
2004
|
|
|
10,185
|
|
|
$
|
(223,516
|
)
|
|
|
52,323
|
|
|
|
162,912
|
|
|
|
605,521
|
|
|
|
(67,683
|
)
|
|
|
(7,292
|
)
|
|
$
|
522,265
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,276
|
|
|
|
|
|
|
|
|
|
|
|
16,276
|
|
Other comprehensive income (loss),
net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38,769
|
)
|
|
|
|
|
|
|
(38,769
|
)
|
Minimum pension liability
adjustment(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,518
|
)
|
|
|
|
|
|
|
(9,518
|
)
|
Other adjustments(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,031
|
)
|
Cash dividends(c):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,447
|
)
|
|
|
|
|
|
|
|
|
|
|
(24,447
|
)
|
Preferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,490
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,490
|
)
|
Federal tax benefits(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
Transactions involving benefit
plans(b)
|
|
|
(215
|
)
|
|
|
2,421
|
|
|
|
|
|
|
|
162
|
|
|
|
|
|
|
|
|
|
|
|
1,169
|
|
|
|
3,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31,
2005
|
|
|
9,970
|
|
|
$
|
(221,095
|
)
|
|
|
52,323
|
|
|
|
163,074
|
|
|
|
595,902
|
|
|
|
(115,990
|
)
|
|
|
(6,123
|
)
|
|
$
|
468,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
|
|
|
(a)
|
|
Accumulated translation adjustments
were $(37,125), $1,644, and $(23,522), and accumulated minimum
pension liability adjustments were $(79,340), $(69,822), and
$(60,044) at December 31, 2005, 2004, and 2003,
respectively.
|
|
(b)
|
|
Income tax benefits (expenses) in
2005, 2004, and 2003, respectively, related to minimum pension
liability adjustments were $5,125, $6,371, and $5,123, related
to other adjustments to other comprehensive income were $11,
$(121), and $(145), related to dividends on performance shares
were $42, $57, and $59, and related to exercised stock options
were $181, $785, and $185.
|
|
(c)
|
|
Dividends per share of common stock
were $0.58 for 2005, 2004 and 2003. Dividends per share of
convertible preferred stock were $3.25 for 2005, 2004 and 2003.
|
38
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands)
|
|
|
Cash flows from operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
16,276
|
|
|
$
|
24,925
|
|
|
$
|
14,050
|
|
Adjustments to reconcile net income
to net cash provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations,
net of tax
|
|
|
|
|
|
|
|
|
|
|
903
|
|
Loss (gain) on disposal of
discontinued operations, net of tax
|
|
|
868
|
|
|
|
2,915
|
|
|
|
(5,315
|
)
|
Gain on sale of business, net of tax
|
|
|
|
|
|
|
(3,376
|
)
|
|
|
|
|
Loss (gain) on sale of fixed assets
|
|
|
948
|
|
|
|
(1,419
|
)
|
|
|
(454
|
)
|
Depreciation and amortization
|
|
|
74,823
|
|
|
|
75,020
|
|
|
|
76,634
|
|
Provision for allowance for
doubtful accounts
|
|
|
1,799
|
|
|
|
3,650
|
|
|
|
1,218
|
|
Retirement benefits
|
|
|
(20,345
|
)
|
|
|
16,186
|
|
|
|
6,282
|
|
Deferred income taxes
|
|
|
(9,125
|
)
|
|
|
(10,477
|
)
|
|
|
(8,226
|
)
|
Net (payments) proceeds from asset
securitization
|
|
|
(2,642
|
)
|
|
|
2,182
|
|
|
|
(84,238
|
)
|
Changes in current assets and
liabilities, net of effects of acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts and trade notes receivable
|
|
|
(7,357
|
)
|
|
|
5,354
|
|
|
|
(39,557
|
)
|
Inventories
|
|
|
(343
|
)
|
|
|
(37,210
|
)
|
|
|
114
|
|
Other current assets
|
|
|
(5,400
|
)
|
|
|
(16,969
|
)
|
|
|
8,705
|
|
Accounts payable
|
|
|
(17,595
|
)
|
|
|
20,494
|
|
|
|
31,911
|
|
Accrued expenses and other current
liabilities
|
|
|
(3,312
|
)
|
|
|
(26,384
|
)
|
|
|
(12,649
|
)
|
Other operating activities
|
|
|
(5,428
|
)
|
|
|
8,595
|
|
|
|
15,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing
operations
|
|
|
23,167
|
|
|
|
63,486
|
|
|
|
4,576
|
|
Net cash used for discontinued
operations
|
|
|
(1,786
|
)
|
|
|
(1,582
|
)
|
|
|
(1,068
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
21,381
|
|
|
|
61,904
|
|
|
|
3,508
|
|
Cash flows from investing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures for plant and
equipment of continuing operations
|
|
|
(42,825
|
)
|
|
|
(39,054
|
)
|
|
|
(36,055
|
)
|
Capital expenditures for plant and
equipment of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(381
|
)
|
Divestitures, net of cash, of
discontinued operations
|
|
|
|
|
|
|
|
|
|
|
19,685
|
|
Acquisitions, net of cash acquired,
of continuing operations
|
|
|
(1,908
|
)
|
|
|
(2,533
|
)
|
|
|
|
|
Cash adjustments to purchase price
of prior acquisition
|
|
|
|
|
|
|
8,505
|
|
|
|
(8,478
|
)
|
Proceeds from the sale of assets
and businesses
|
|
|
9,287
|
|
|
|
11,872
|
|
|
|
1,750
|
|
Buy-out of operating lease
|
|
|
|
|
|
|
|
|
|
|
(25,000
|
)
|
Other investing activities
|
|
|
(368
|
)
|
|
|
1,826
|
|
|
|
(1,183
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing
activities
|
|
|
(35,814
|
)
|
|
|
(19,384
|
)
|
|
|
(49,662
|
)
|
Cash flows from financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (repayments) borrowings under
short-term facilities
|
|
|
(2,119
|
)
|
|
|
(3,533
|
)
|
|
|
4,608
|
|
Proceeds from revolving credit
facility
|
|
|
949,867
|
|
|
|
661,162
|
|
|
|
670,092
|
|
Principal payments on revolving
credit facility
|
|
|
(901,482
|
)
|
|
|
(688,159
|
)
|
|
|
(598,514
|
)
|
Cash dividends paid
|
|
|
(25,937
|
)
|
|
|
(26,049
|
)
|
|
|
(25,640
|
)
|
Other financing activities
|
|
|
(2,192
|
)
|
|
|
4,777
|
|
|
|
3,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for)
financing activities
|
|
|
18,137
|
|
|
|
(51,802
|
)
|
|
|
53,640
|
|
Effect of exchange rate changes on
cash
|
|
|
(230
|
)
|
|
|
(160
|
)
|
|
|
953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and
cash equivalents
|
|
|
3,474
|
|
|
|
(9,442
|
)
|
|
|
8,439
|
|
Cash and cash equivalents at
beginning of period
|
|
|
13,939
|
|
|
|
23,381
|
|
|
|
14,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of period
|
|
$
|
17,413
|
|
|
$
|
13,939
|
|
|
$
|
23,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
44,092
|
|
|
$
|
39,900
|
|
|
$
|
36,640
|
|
Income taxes
|
|
$
|
9,487
|
|
|
$
|
22,199
|
|
|
$
|
11,871
|
|
See accompanying notes to consolidated financial statements.
39
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2005, 2004 and 2003
|
|
1.
|
Summary
of significant accounting policies
|
Nature
of Operations
Ferro Corporation (Company or Ferro) is
a worldwide producer of performance materials for manufacturers.
Ferro produces a variety of coatings and performance chemicals
by utilizing organic and inorganic chemistry. The Companys
materials are used extensively in the markets of building and
renovation, automotive, major appliances, household furnishings,
transportation, electronics and industrial products.
Ferros products are sold principally in the United States
and Europe; however, operations also extend to the Latin America
and Asia Pacific regions.
Principles
of Consolidation
The consolidated financial statements include the accounts of
the Company and its majority owned and controlled subsidiaries.
Intercompany accounts, transactions and profits have been
eliminated. Minority interests in consolidated subsidiaries are
classified as other non-current liabilities. Investments in
affiliated companies, over which Ferro has significant
influence, but does not have effective control, are accounted
for using the equity method and classified in other non-current
assets. Financial results for acquisitions are included in the
Companys consolidated financial statements from the date
of acquisition.
Use of
Estimates and Assumptions in the Preparation of Financial
Statements
The preparation of financial statements in conformity with
U.S. 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. The more significant estimates and
judgments pertain to environmental and other contingent
liabilities, income taxes, pension and other postretirement
benefits, inventories, restructuring and cost reduction
programs, revenue recognition, valuation of goodwill and other
intangibles, assessment of long-lived assets, asset retirement
obligations, and derivative financial instruments. Actual
results could differ from those estimates.
Currency
Translation
Operations in
non-U.S. subsidiaries
are recorded in local currencies, which are in most cases also
the functional currencies for financial reporting purposes. The
results of operations for
non-U.S. subsidiaries
are translated from local currencies into U.S. dollars
using the average exchange rate during each period, which
approximates the results that would be obtained using actual
exchange rates on the dates of individual transactions. Assets
and liabilities are translated using exchange rates at the end
of the period with translation adjustments recorded as a
separate component of accumulated other comprehensive income
(loss) in shareholders equity. Transaction gains and
losses are recorded as incurred in foreign currency
transactions, net, in the consolidated statements of income.
For the U.S. parent and for subsidiaries that also use the
U.S. dollar as the functional currency, remeasurement and
transaction gains and losses are reflected in net income.
Revenue
Recognition
The Company recognizes revenue when persuasive evidence of an
arrangement exists, the selling price is fixed and determinable,
collection is reasonably assured, and title has passed to its
customers. Provision is made for uncollectible accounts based on
historical experience and specific circumstances, as
appropriate. Accounts deemed to be uncollectible or to require
excessive collection costs are written off against the provision
for doubtful accounts. Customer rebates are accrued over the
rebate periods based upon estimated attainments of the
provisions in the rebate agreements using available information
and recorded as reductions of sales.
40
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In 2000, the Emerging Issues Task Force reached consensus on
Issue 00-10,
Accounting for Shipping and Handling Fees and Costs,
which required all amounts billed to customers related to
shipping and handling fees to be classified as revenue with
related costs being recorded in cost of sales. In 2004, the
Company identified that shipping and handling fees were embedded
in amounts billed to customers, and the related costs were being
reported as a reduction of revenues. Such costs for 2005 and
2004 were $37.9 million and $36.8 million,
respectively and are reported in cost of sales. Shipping and
handling costs for 2003 are reported as a reduction of revenues
because the amount, which management believes is not material to
sales and cost of sales, could not be determined due to
extensive financial systems implementations in that year.
Stock-based
Compensation
The Company has stock-based employee compensation plans, which
are more fully described in Note 4. The Company accounts
for its stock-based compensation under the recognition and
measurement principles of Accounting Principles Board Opinion
No. 25 (APB No. 25) and related interpretations.
Compensation costs, if any, for stock-based awards are
recognized over the vesting periods of the awards. Substantially
all stock options granted had an exercise price equal to the
market value of the underlying common stock on the date of the
grant and, therefore, had no compensation costs. Compensation
costs for performance share awards are based on the quoted price
of the Companys common stock at the end of each period.
The initial performance share costs are charged to unearned
compensation in Shareholders Equity and amortized to
expense over the term of the performance share plans.
The following table shows pro forma information regarding net
income and earnings per share as if the Company had accounted
for stock options based on the fair value at the grant date
under the fair value recognition provisions of FASB Statement
No. 123 Accounting for Stock-Based
Compensation. The fair value for these options was
estimated at the date of grant using a Black-Scholes
option-pricing model.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands,
|
|
|
|
except per share data)
|
|
|
Income available to common
shareholders from continuing operations as reported
|
|
$
|
15,654
|
|
|
$
|
26,135
|
|
|
$
|
7,550
|
|
Add: Stock-based employee
compensation expense included in reported income, net of tax
|
|
|
175
|
|
|
|
143
|
|
|
|
143
|
|
Deduct: Total stock-based employee
compensation expense determined under fair value methods for all
awards, net of tax
|
|
|
(3,353
|
)
|
|
|
(3,490
|
)
|
|
|
(3,406
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common
shareholders from continuing operations pro forma
|
|
$
|
12,476
|
|
|
$
|
22,788
|
|
|
$
|
4,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share from
continuing operations as reported
|
|
$
|
0.37
|
|
|
$
|
0.62
|
|
|
$
|
0.18
|
|
Basic earnings per share from
continuing operations pro forma
|
|
$
|
0.29
|
|
|
$
|
0.54
|
|
|
$
|
0.10
|
|
Diluted earnings per share from
continuing operations as reported
|
|
$
|
0.37
|
|
|
$
|
0.62
|
|
|
$
|
0.18
|
|
Diluted earnings per share from
continuing operations pro forma
|
|
$
|
0.29
|
|
|
$
|
0.54
|
|
|
$
|
0.10
|
|
Weighted-average fair value of
options granted
|
|
$
|
5.17
|
|
|
$
|
6.65
|
|
|
$
|
7.12
|
|
Expected life of option in years
|
|
|
6.80
|
|
|
|
6.80
|
|
|
|
7.35
|
|
Risk-free interest rate
|
|
|
3.80
|
%
|
|
|
3.30
|
%
|
|
|
4.02
|
%
|
Expected volatility
|
|
|
29.93
|
%
|
|
|
28.07
|
%
|
|
|
28.90
|
%
|
Expected dividend yield
|
|
|
2.97
|
%
|
|
|
2.40
|
%
|
|
|
2.43
|
%
|
There was no impact of the pro forma expense on discontinued
operations for 2005, 2004, or 2003.
41
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Postretirement
and Other Employee Benefits
Costs are recognized as employees render the services necessary
to earn the related benefits.
Research
and Development
The costs of research and development are charged as an expense
in the period in which they are incurred.
Restructuring
and Cost Reduction Programs
Costs associated with exit and disposal activities are
recognized when liabilities are incurred. Reserves are
established for such activities by estimating employee
termination costs utilizing detailed restructuring plans
approved by management. Reserve calculations are based upon
various factors including an employees length of service,
contract provisions, salary level and health care benefit
choices. The Company believes the estimates and assumptions used
to calculate these restructuring provisions are appropriate, and
although significant changes are not anticipated, actual costs
could differ from the estimates should changes be made in the
nature or timing of the restructuring plans. The resulting
changes in costs could have a material impact on the
Companys results of operations, financial position, or
cash flows.
Income
Taxes
Income taxes are determined using the liability method of
accounting for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting
for Income Taxes (FAS No. 109). Under
FAS No. 109, income tax expense includes U.S. and
international income taxes plus the provision for
U.S. taxes on undistributed earnings of international
subsidiaries not deemed to be permanently invested. Tax credits
and other incentives reduce tax expense in the year the credits
are claimed. Deferred tax assets are recognized if it is more
likely than not that the assets will be realized in future
years. Valuation allowances are recorded against net deferred
tax assets for which management believes realization is not more
likely than not.
Earnings
per Share
Basic earnings per share is calculated by dividing net income
available to common shareholders by the weighted average number
of shares outstanding for the period. Diluted earnings per share
is calculated by dividing net income available to common
shareholders by the weighted average number of shares
outstanding for the period, adjusted for the effect of the
assumed exercise of all dilutive options outstanding at the end
of the period.
Cash
Equivalents
Cash equivalents consist of highly liquid instruments with
original maturities of three months or less and are carried at
cost, which approximates market value.
Allowance
for Doubtful Accounts
Provision is made for uncollectible accounts based on historical
experience and specific circumstances, as appropriate. Accounts
deemed to be uncollectible or to require excessive collection
costs are written off against the allowance for doubtful
accounts. The allowance for possible losses in the collection of
accounts and trade notes receivable totaled $7.5 million
and $9.2 million at December 31, 2005 and 2004,
respectively. Bad debt expense was $1.8 million,
$3.7 million, and $1.2 million for 2005, 2004 and
2003, respectively.
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 inventories where
the last-in,
first-out (LIFO) method is used. Inventory valuation is
42
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
periodically evaluated primarily based upon the age of the
inventory, but also considers assumptions of future demand and
market conditions. As a result of the evaluation, the inventory
may be written down to the lower of cost or realizable value. If
actual circumstances are less favorable than those projected by
management, additional write-downs may be required.
Property,
Plant and Equipment
Property, plant and equipment are capitalized at cost.
Acquisitions, additions and betterments, either to provide
necessary capacity, improve the efficiency of production units,
modernize or replace older facilities or to install equipment
for environmental protection are capitalized. The Company
capitalizes interest costs incurred during the period of
construction of plants and equipment. Repair and maintenance
costs are charged against earnings as incurred, except for major
planned maintenance activities. Such activities generally
include relining smelter furnaces; related costs are accrued in
advance of when the costs are expected to be incurred which
normally ranges between 18 and 24 months.
Depreciation of plant and equipment is provided on a
straight-line basis for financial reporting purposes, generally
over the following estimated useful lives of the assets:
|
|
|
Buildings
|
|
20 to 40 years
|
Machinery and equipment
|
|
5 to 15 years
|
At December 31, 2005 and 2004, estimated liabilities for
asset retirement obligations (AROs) were
$1.0 million and $0.1 million, respectively. In
determining the amounts recorded relating to conditional AROs,
the Company utilizes an expected value technique whereby
potential settlement dates and related probabilities are based
upon managements judgment, taking into consideration the
Companys historical practices, current business
intentions, and other relevant information. Legal obligations
exist in connection with the retirement of assets at many of the
Companys operating facilities that would be triggered upon
closure of the facilities or abandonment of existing operations.
If certain operating facilities were to be closed, for which
there are no current intentions to do so, changes to or
settlements of the related conditional AROs could significantly
affect the Companys results of operations and cash flows
at that time.
Valuation
of Goodwill and Other Intangibles
The Company adopted Financial Accounting Standards Board
(FASB) Statement No. 142, Goodwill and
Other Intangible Assets, (FAS No. 142) for
goodwill and intangible assets acquired after June 30, 2001
as of July 1, 2001. FAS No. 142 was adopted in
its entirety as of January 1, 2002 and accordingly, the
Companys goodwill and intangible assets with indefinite
useful lives are no longer being amortized.
Fair value is estimated using the discounted cash flow method.
The Company uses projections of market growth, internal sales
efforts, input cost movements, and cost reduction opportunities
to project future cash flows. Certain corporate expenses and
assets and liabilities are allocated to the reporting units in
this process. Using a risk adjusted, weighted average
cost-of-capital,
the Company discounts the cash flow projections to the annual
measurement date, October 31st. If the fair value of any of
the reporting units were determined to be less than its carrying
value, the Company would proceed to the second step and obtain
independent appraisals of its assets. In 2005 and 2004, the fair
value exceeded the carrying value, and therefore, it was not
necessary to obtain independent appraisals.
Assessment
of Long-Lived Assets
The Companys long-lived assets include property, plant,
equipment, goodwill and other intangible assets. Property, plant
and equipment are depreciated on a straight-line basis over
their estimated useful lives.
43
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Property, plant and equipment are reviewed for impairment
whenever events or circumstances indicate that the undiscounted
net cash flows to be generated by their use and eventual
disposition is less than their recorded value. In the event of
impairment, a loss is recognized for the excess of the recorded
value over fair value. The long-term nature of these assets
requires the estimation of cash inflows and outflows several
years into the future and only takes into consideration
technological advances known at the time of review.
Due to depressed conditions in the electronics industry in late
2004 and 2005, the Company specifically evaluated its
electronics assets in Holland. The Company also evaluated its
Italian tile and Belgium polymer additives manufacturing assets
because of sluggish market conditions in these regions. In each
situation, management concluded that the assets were not
impaired.
Asset
Securitization
Certain of the Companys receivables are sold to a
wholly-owned unconsolidated qualified special purpose entity,
Ferro Finance Corporation (FFC). FFC can sell, under
certain conditions, an undivided fractional ownership interest
in the pool of receivables to multi-seller receivables
securitization companies (commercial paper conduits).
Additionally, under this program, receivables of certain
European subsidiaries were sold directly to other commercial
paper conduits during 2003. The Company and certain European
subsidiaries, on behalf of FFC and the commercial paper
conduits, provide service, administration and collection of the
receivables. In accordance with FASB Statement No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, neither amounts
borrowed under the program nor servicing liabilities are
recorded on the Companys balance sheet.
The Company retains interest in the receivables transferred to
FFC and the commercial paper conduits in the form of notes
receivable to the extent that receivables transferred exceed
advances. FFC and the commercial paper conduits have no recourse
to the Companys other assets for failure of debtors to pay
when due. The Company and certain European subsidiaries, on a
monthly basis, measure the fair value of the notes receivable
based on managements best estimate of the undiscounted
expected future cash collections on the transferred receivables.
Environmental
and Other Contingent Liabilities
The Companys operations are subject to various hazards
incidental to the production of some of its products, including
the use, handling, processing, and storage of hazardous
materials. The Company expenses recurring costs associated with
control and disposal of hazardous materials in current
operations. Accruals for environmental remediation and other
contingent liabilities, including those relating to ongoing,
pending or threatened litigation, are recorded if available
information indicates it is probable that a liability has been
incurred and the amount of the liability can be reasonably
estimated. The amount accrued for environmental remediation
reflects the Companys assumptions about remediation
requirements at the contaminated site, the nature of the remedy,
existing technology, the outcome of discussions with regulatory
agencies and other potentially responsible parties at
multi-party sites, and the number and financial viability of
other potentially responsible parties. Estimated costs are not
discounted due to the uncertainty with respect to the timing of
related payments. The Company actively monitors the status of
sites, and as assessments and cleanups proceed, accruals are
reviewed periodically and adjusted, if necessary, as additional
information becomes available. If the loss is neither probable
nor reasonably estimable, but is reasonably possible, the
Company provides appropriate disclosure if the contingency is
material. Changes in the estimates on which the accruals are
based, unanticipated government enforcement actions, or changes
in health, safety, environmental regulation, and testing
requirements could result in higher or lower costs.
Derivative
Financial Instruments
The Company employs derivative financial instruments, primarily
foreign currency forward exchange contracts and foreign currency
options, to hedge certain anticipated transactions, firm
commitments, or assets
44
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and liabilities denominated in foreign currencies. Gains and
losses on foreign currency forward exchange contracts and
foreign currency options are recognized as foreign currency
transaction gains and losses.
The Company purchases portions of its natural gas requirements
under fixed price contracts, which in certain circumstances,
although unlikely because committed quantities are below
expected usage, could result in the Company settling its
obligations under these contracts in cash at prevailing market
prices. In compliance with FASB Statement No. 133,
Accounting for Derivative Instruments and Hedging
Activities, (FAS No. 133), as amended by
Statement No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities,
(FAS No. 149), the Company marked these contracts to
fair value and recognized the resulting gains or losses as
miscellaneous income or expense, respectively.
The Company consigns, from various financial institutions,
precious metals (primarily silver, gold, platinum and palladium,
collectively metals) used in the production of
certain products for customers. Under these consignment
arrangements, the financial institutions provide the Company
with metals for a specified period of one year or less in
duration, for which the Company pays a fee. Under these
arrangements, the financial institutions own the metals, and
accordingly, the Company does not report these consigned
materials as inventory on its consolidated balance sheet. These
agreements are cancelable by either party at the end of each
consignment period, however, because the Company has access to a
number of consignment arrangements with available capacity,
consignment needs can be shifted among the other participating
institutions. In certain cases, these other participating
institutions may require cash deposits to provide additional
collateral beyond the underlying precious metals. Fees for these
contracts are recorded as cost of sales.
Reclassifications
Certain reclassifications have been made to prior year balances
to conform to current year presentation.
Recently
Adopted Accounting Pronouncements
In June 2001, the FASB issued Statement No. 143,
Accounting for Asset Retirement Obligations,
(FAS No. 143). FAS 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 a
liability is initially recorded, the entity capitalizes a 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
useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. The
Company adopted FAS No. 143 as of January 1,
2003, and recognized asset retirement obligations of
$0.1 million. The ongoing expense on an annual basis
resulting from the adoption of FAS No. 143 is not
material to the Companys results of operations.
FASB Interpretation No. 47, Accounting for
Conditional Asset Retirement Obligations, (Interpretation
No. 47) was issued in March 2005 and is effective for
fiscal years ending after December 15, 2005. Interpretation
No. 47 clarifies that the term conditional asset
retirement obligation as used in FASB Statement
No. 143, Accounting for Asset Retirement
Obligation, refers to an unconditional legal obligation to
perform an asset retirement activity in which the timing or
method of settlement are conditional on a future event. This
obligation should be recognized at its fair value, if that value
can be reasonably estimated. The Company adopted Interpretation
No. 47 as of January 1, 2005, and recorded additional
conditional asset retirement obligations of $0.9 million;
the effect of Interpretation No. 47 on the Companys
net income and earnings per share for the years ended
December 31, 2003 and 2004, is not material.
In July 2002, the FASB issued Statement No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities, (FAS No. 146). FAS No. 146
applies to costs from activities such as eliminating or reducing
product lines, terminating employees and contracts, and
relocating plant facilities or personnel. The Company adopted
FAS No. 146 as of January 1, 2003, and
accordingly, records exit or disposal costs when they are
incurred and can
45
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
be measured at fair value. The adoption of FAS No. 146
did not have an impact on the financial statements because the
Company recorded restructuring and integration charges as
summarized in Note 9 of the Companys consolidated
financial statements using the guidance under FASB Statement
No. 88, Employers Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits and FASB Statement No. 112,
Employers Accounting for Postemployment
Benefits.
The FASB published Interpretation No. 46,
Consolidation of Variable Interest Entities,
(Interpretation No. 46) in January 2003 and
Interpretation No. 46R of the same name (Interpretation
No. 46R) in December 2003. Interpretation No. 46
addresses consolidation by business enterprises of variable
interest entities and requires existing unconsolidated variable
interest entities to be consolidated by their primary
beneficiaries if the entities do not effectively disperse risk
among the parties involved. Interpretation No. 46R
clarifies some of the provisions of FASB Interpretation
No. 46 and exempts certain entities from its requirements.
Under the transition provisions of Interpretation No. 46R,
special effective dates apply to enterprises that have fully or
partially applied Interpretation No. 46 prior to issuance
of Interpretation No. 46R. The Company adopted
Interpretation No. 46 as of October 1, 2003, and
Interpretation No. 46R as of January 1, 2004. The
adoption of these Interpretations did not have a material impact
on the results of operations or financial position of the
Company. In June 2003, the Company bought out its asset
defeasance program that would have required consolidation under
Interpretation No. 46.
In January 2004, the FASB issued FASB Staff Position
(FSP)
No. FAS 106-1,
Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of
2003,
(FSP No. 106-1).
FSP
No. 106-1
was superseded by FSP
No. 106-2
of the same name, issued in May 2004. It was effective for the
first interim or annual period beginning after June 15,
2004, and applied only to sponsors of single-employer defined
benefit postretirement health care plans for which a) the
employer concluded that prescription drug benefits available
under the plan to some or all participants for some or all
future years are actuarially equivalent to Medicare
Part D and thus qualify for the subsidy under the Medicare
Prescription Drug Improvement and Modernization Act of 2003 and
b) the expected subsidy offset or reduced the
employers share of the cost of the underlying
post-retirement prescription drug coverage on which the subsidy
is based. The Company adopted FSP
No. 106-2
as of July 1, 2004, and had a reduction of approximately
$0.1 million in the Companys net periodic
postretirement pension cost in each of the third and fourth
quarters of 2004, and a reduction of $0.2 million to the
accumulated postretirement benefit obligation as of
December 31, 2004.
In October 2004, the American Jobs Creation Act of 2004 (the
Act) was signed into Federal law. The FASB issued
two staff positions to address the accounting for income taxes
in conjunction with the Act. The Act, when fully phased-in,
includes a tax deduction of up to 9 percent of the lesser
of (a) qualified production activities income or
(b) taxable income, both as defined in the Act. FSP
No. 109-1,
Application of FASB Statement No. 109, Accounting for
Income Taxes, to the Tax Deduction on Qualified Production
Activities provided by the American Jobs Creation Act of
2004, (FSP
No. 109-1)
was effective upon its release in December 2004. FSP
No. 109-1
requires companies to treat the tax deduction as a special
deduction instead of a change in tax rate that would have
impacted existing deferred tax balances. Adoption of FSP
No. 109-1
did not have a material impact on the Companys income tax
provision.
In addition, the Act includes a special one-time tax deduction
of 85 percent of certain foreign earnings that are
repatriated no later than in the 2005 tax year. FSP
No. FAS 109-2,
Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the American Jobs
Creation Act of 2004, (FSP
No. 109-2)
was issued in December 2004 and was effective upon issuance. FSP
No. 109-2
established accounting and disclosure requirements for
enterprises in the process of evaluating the repatriation
provision of the Act. Based on the Companys analysis,
repatriation under the Act would not have provided significant
additional benefits, and therefore, the application of FSP
No. 109-2
did not affect income tax expense in the period of enactment or
any related disclosures.
In December 2004, the FASB issued Statement No. 153,
Exchanges of Nonmonetary Assets,
(FAS No. 153). This statement, effective for fiscal
periods beginning after June 15, 2005, amends APB Opinion
No. 29 to eliminate
46
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the exception for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash
flows of the entity are expected to change significantly as a
result of the exchange. The adoption of FAS No. 153
had no impact on the results of operations or the financial
position of the Company.
Newly
Issued Accounting Pronouncements
The FASBs Emerging Issues Task Force (the
EITF) ratified Issue No.
03-1,
The Meaning of
Other-Than-Temporary
Impairment and Its Application to Certain Investments, in
March 2004. The issue provided guidance for evaluating whether
an investment is
other-than-temporarily
impaired and was effective for other- than-temporary impairment
evaluations made in reporting periods beginning after
June 15, 2004. However, the guidance contained in
paragraphs 10-20
was delayed by FSP EITF Issue
No. 03-1-1,
Effective Date of Paragraphs 10 20 of
EITF Issue
No. 03-1,
The Meaning of
Other-Than-Temporary
Impairment and Its Application to Certain Investments, in
September 2004; the delay of that effective date will be
superseded concurrent with the final issuance of FSP EITF
Issue 03-1-a.
The adoption of EITF Issue
No. 03-1
is not expected to have a material impact on the Companys
results of operations or financial position.
The FASB issued Statement No. 151, Inventory
Costs, (FAS No. 151) in November 2004.
FAS No. 151 is effective for fiscal years beginning
after June 15, 2005, and amends the guidance of ARB
No. 43 to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs and wasted
material (spoilage). FAS No. 151 requires that those
items be recognized as current-period charges regardless of
whether they meet the criterion of so abnormal. The
adoption of FAS No. 151 as of January 1, 2006, is
not expected to have a material impact on the results of
operations or financial position of the Company.
In December 2004, the FASB issued Statement No. 123R,
Share-Based Payment, (FAS No. 123R) that
requires public entities to measure the cost of employee
services received in exchange for an award of equity instruments
based on the grant-date fair value of the award. That cost will
be recognized over the period during which the employee is
required to provide services in exchange for the award.
FAS No. 123R is effective for interim and annual
periods beginning after June 15, 2005, and applies to all
outstanding and unvested share-based payment awards as of the
adoption date. In April 2005, the Securities and Exchange
Commission published a rule allowing public companies with
calendar year ends to delay the quarter in which they begin to
expense stock options to first quarter 2006 from third quarter
2005. The Company plans to adopt FAS No. 123R
beginning January 1, 2006, using the modified prospective
method and expects to incur pre-tax charges of approximately
$3 million to $4 million for 2006.
In May 2005, the FASB issued Statement No. 154,
Accounting Changes and Error Corrections a
replacement of APB Opinion No. 20 and FASB Statement
No. 3, (FAS No. 154). This Statement
requires retrospective application to prior periods
financial statements of changes in accounting principle, unless
it is impracticable to determine either the period-specific
effects or the cumulative effect of the change or unless
specific transition provisions are proscribed in the accounting
pronouncements. FAS No. 154 does not change the
accounting guidance for reporting a correction of an error in
previously issued financial statements or a change in accounting
estimate. FAS No. 154 is effective for accounting
changes and error corrections made after December 31, 2005.
The Company will apply this standard prospectively.
In September 2005, the EITF reached a consensus on Issue
No. 04-13,
Accounting for Purchase and Sales of Inventory with the
Same Counterparty, that requires companies to recognize an
exchange of finished goods for raw materials or
work-in-progress
within the same line of business at fair value. All other
exchanges of inventory should be reflected at the recorded
amount. This consensus is effective for transactions completed
after March 31, 2006, and is not expected to have a
material impact on the results of operations or financial
position of the Company.
In March 2006, the FASB issued Statement No. 156
Accounting for Servicing of Financial Assets
an amendment of FASB Statement No. 140,
(FAS No. 156). This statement requires an entity to
recognize at fair value, if practicable, a servicing asset or
liability each time it undertakes an obligation to service a
financial asset by
47
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
entering into a servicing contract in certain situations
primarily relating to off-balance sheet arrangements. Entities
may chose between two subsequent measurement methods for each
class of separately recognized servicing assets and servicing
liabilities. FAS No. 156 is effective for fiscal years
beginning after September 15, 2006. The provisions of
FAS No. 156 are to be applied prospectively to
transactions entered into after its adoption. The Company will
adopt FAS No. 156 as of January 1, 2007, as
permitted, and is currently evaluating the implementation
options; at this time, the Company is uncertain as to the impact
on the Companys results of operations and financial
position.
The FASB published Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, (Interpretation
No. 48) in June 2006. This interpretation requires
companies to determine whether it is more likely than not that a
tax position will be sustained upon examination by the
appropriate taxing authorities before any part of the benefit
can be recorded in the financial statements. Interpretation
No. 48 also provides guidance on derecognition,
classification, accounting in interim periods, and disclosure
requirements for tax contingencies. This interpretation is
effective for fiscal years beginning after December 15,
2006. The Company is currently assessing the impact that
Interpretation No. 48 will have on the Companys
results of operations and financial position.
In September 2006, the FASB published Staff Position
No. AUG AIR-1, Accounting for Planned Maintenance
Activities. This staff position prohibits the use of the
accrue-in-advance
method of accounting for planned major maintenance activities.
It is effective for fiscal years beginning after
December 15, 2006, and is to be applied retrospectively.
When adopted in fiscal 2007, the staff position will increase
retained earnings as of the beginning of 2005 by approximately
$1.6 million, increase 2005 income from continuing
operations by approximately $0.4 million and increase
2005 net income by approximately by $0.3 million.
In September 2006, the FASB issued Statement No. 157,
Fair Value Measurements, (FAS No. 157).
FAS No. 157 defines fair value, establishes a
framework and gives guidance regarding the methods used for
measuring fair value, and expands disclosures about fair value
measurements. Accordingly, FAS No. 157 does not
require any new fair value measurements, but will change current
practice for some entities. FAS No. 157 is effective
for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. The Company will apply this standard prospectively.
In September 2006, the U.S. Securities and Exchange
Commission (SEC) released Staff Accounting
Bulletin No. 108, Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements,
(SAB No. 108) which provides interpretive
guidance on the SECs views regarding the process of
quantifying materiality of financial statement misstatements.
SAB No. 108 is effective for years ending after
November 15, 2006, with early application for the first
interim period ending after November 15, 2006. The Company
does not believe that the application of SAB No. 108
will have a material effect on the Companys results of
operations or financial position.
Inventories as of December 31 are comprised of the
following:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Raw materials
|
|
$
|
62,488
|
|
|
$
|
61,249
|
|
Work in process
|
|
|
34,122
|
|
|
|
35,091
|
|
Finished goods
|
|
|
133,060
|
|
|
|
135,541
|
|
|
|
|
|
|
|
|
|
|
FIFO cost (approximates
replacement cost)
|
|
|
229,670
|
|
|
|
231,881
|
|
LIFO reserve
|
|
|
(14,413
|
)
|
|
|
(11,755
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
215,257
|
|
|
$
|
220,126
|
|
|
|
|
|
|
|
|
|
|
48
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The portion of inventories valued by the LIFO method at
December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
United States
|
|
|
14.9%
|
|
|
|
14.9%
|
|
Consolidated
|
|
|
7.0%
|
|
|
|
6.7%
|
|
The LIFO reserve increased by $2.7 million in 2005,
compared with an increase of $2.2 million in 2004.
|
|
3.
|
Financing
and short-term and long-term debt
|
Notes and loans payable at December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Loans payable to banks
|
|
$
|
5,866
|
|
|
$
|
8,159
|
|
Current portion of long-term debt
|
|
|
1,689
|
|
|
|
1,515
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,555
|
|
|
$
|
9,674
|
|
|
|
|
|
|
|
|
|
|
Long-term debt at December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
$200,000 Senior notes, 9.125%, due
2009*
|
|
$
|
198,909
|
|
|
$
|
197,549
|
|
$25,000 Debentures, 7.625%, due
2013*
|
|
|
24,877
|
|
|
|
24,864
|
|
$25,000 Debentures, 7.375%, due
2015*
|
|
|
24,965
|
|
|
|
24,961
|
|
$50,000 Debentures, 8.0%, due 2025*
|
|
|
49,550
|
|
|
|
49,526
|
|
$55,000 Debentures, 7.125%, due
2028*
|
|
|
54,532
|
|
|
|
54,511
|
|
Revolving credit agreement
|
|
|
186,100
|
|
|
|
137,400
|
|
Capitalized lease obligations (see
Note 17)
|
|
|
7,364
|
|
|
|
8,161
|
|
Other notes
|
|
|
1,560
|
|
|
|
1,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
547,857
|
|
|
|
498,829
|
|
Less: Current portion
|
|
|
1,689
|
|
|
|
1,515
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
546,168
|
|
|
$
|
497,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Net of unamortized discounts |
The aggregate maturities of long-term debt are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
(Dollars in thousands)
|
|
$
|
1,689
|
|
|
|
1,243
|
|
|
|
933
|
|
|
|
200,839
|
|
|
|
905
|
|
Revolving
Credit and Term Loan Agreement
At December 31, 2005, the Company had borrowed
$186.1 million under a $300 million revolving credit
facility that was scheduled to expire in September 2006
(Prior Revolving Credit Facility). The average
interest rates for borrowings against the prior revolving credit
facility at December 31, 2005 and 2004, were 6.4% and 4.0%,
respectively.
The Prior Revolving Credit Facility contained financial
covenants relating to total debt, fixed charges and EBITDA,
cross default provisions with other debt obligations, and
customary operating covenants that limited its
49
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
ability to engage in certain activities, including significant
acquisitions. In addition, when the Companys senior credit
rating was downgraded below Ba2 by Moodys in March 2006,
the Company and its domestic material subsidiaries were required
to grant security interests in their tangible and intangible
assets (with the exception of the receivables sold as part of
the Companys asset securitization program),
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 lenders under the senior credit
facility. This lien grant and pledge of stock was substantially
completed in April 2006. Liens on principal domestic
manufacturing properties and the stock of domestic subsidiaries
were also granted to and shared with the holders of the
Companys senior notes and debentures, as required by their
indentures.
In March 2006, the Company accepted a commitment from a
syndicate of lenders to underwrite a $700 million credit
facility (the New Credit Facility) and, in June
2006, finalized the agreement. The New Credit Facility is
comprised of a five year, $250 million multi-currency
senior revolving credit facility and a six year,
$450 million senior delayed-draw term loan facility. Under
the terms of the New Credit Facility, the Company can request
that the revolving credit facility be increased by
$50 million at no additional fee.
The New Credit Facility was entered into to replace the Prior
Revolving Credit Facility that was scheduled to expire in
September 2006. In addition, the financing, through the term
loan facility, provided capital resources sufficient to
refinance the $200 million of senior notes and
$155 million of debentures that could have become
immediately due and payable due to defaults associated with the
Companys delayed SEC financial filings for 2005. Because
one of the purposes of the term loan facility is to fund the
potential acceleration of the senior notes and debentures, the
term facility contains certain restrictions including, but not
limited to, the following:
|
|
|
|
|
$355 million of the facility is reserved to repay the
senior notes and debentures;
|
|
|
|
$95 million of the facility is immediately available for
refunding indebtedness other than the senior notes and
debentures;
|
|
|
|
The Company may access up to $55 million of the
$355 million reserved to repay the senior notes and
debentures if these obligations have not already been paid in
full and no event of default for these obligations exists and is
continuing; and
|
|
|
|
The Company may draw on the delayed-draw facility for up to one
year with any unused commitment under the term facility
terminating on June 6, 2007.
|
At the close of the New Credit Facility in June 2006, the
Company drew $95 million of the term loan facility to
partially repay the old revolving credit facility. In addition,
during the third quarter of 2006, the Company drew down another
$155 million of the term loan facility to repay
$155 million of outstanding debentures, as bondholders
accelerated payment on these obligations due to the previously
mentioned 2005 SEC financial reporting delays. See further
discussion under Senior Notes and Debentures below.
The New Credit Facility bears interest at a rate equal to, at
the Companys option, either (1) LIBOR or (2) the
Alternate Base Rate (ABR) which is the higher of the
Prime Rate and the Federal Funds Effective Rate plus 0.5%; plus,
in each case, applicable margins based on the Companys
index debt rating. The New Credit Facility is secured by
substantially all of the Companys assets, including the
assets and 100% of the shares of the Companys material
domestic subsidiaries and 65% of the shares of the
Companys first tier foreign subsidiaries, but
excluding trade receivables sold pursuant to the Companys
accounts receivable sales programs (see below). These liens are
shared with the holders of the Companys senior notes, as
required under the respective indenture.
The New Credit Facility contains customary operating covenants
that limit the Companys ability to engage in certain
activities, including limitations on additional loans and
investments; creation of additional liens; prepayments,
redemptions and repurchases of debt; and mergers, acquisitions
and asset sales. The Company is also subject to customary
financial covenants including a leverage ratio and a fixed
charge coverage ratio. Additional covenants of the New Credit
Facility require the Company to file its 2005
Form 10-K
by November 15, 2006, and its 2006
Forms 10-Q
by the earlier of three months after the 2005
Form 10-K
is filed or January 15, 2007. Failure to satisfy
50
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
certain of these covenants, either immediately or after a brief
period allowing the company to satisfy the covenant, would
result in an event of default. If any event of default should
occur and be continuing and a waiver not have been obtained, the
obligations under the New Credit Facility may become immediately
due and payable at the option of providers of more than 50% of
the credit facility commitment.
Senior
Notes and Debentures
At December 31, 2005, the Company had $355.0 million
principal amount outstanding under debentures and senior notes,
which had an estimated fair market value of $353.2 million.
At December 31, 2004, the Company had $355.0 million
principal amount outstanding, with an estimated fair market
value of $387.1 million. Fair market value represents a
third partys indicative bid prices for these obligations.
The Companys senior credit rating was Ba1 by Moodys
Investor Service, Inc. (Moodys) and BB by
Standard & Poors Rating Group
(S&P) at December 31, 2005. In March 2006,
Moodys downgraded its rating to B1 and then withdrew its
ratings, and S&P downgraded its rating to B+. See further
information regarding this matter in Note 22.
The indentures under which the senior notes and the debentures
were issued contain operating covenants that limit the
Companys ability to engage in certain activities,
including limitations on consolidations, mergers, and transfers
of assets; and sale and leaseback transactions. The indentures
contain cross-default provisions with other debt obligations
that exceed $10 million of principal outstanding. In
addition, the terms of the indentures require, among other
things, the Company to file with the Trustee copies of its
annual reports on
Form 10-K,
quarterly reports on
Form 10-Q
and an Officers Certificate relating to the Companys
compliance with the terms of the indentures within 120 days
after the end of its fiscal year. The Company has been in
default on these reporting requirements since it delayed filing
its
Form 10-Q
for the second quarter of 2004 due to the restatement of its
2003 and first quarter 2004 results. As the Company anticipated
and planned for, in March and April 2006, the Company received
notices of default from a holder and the Trustee of the senior
notes and debentures of which $355 million was outstanding.
The notices of default related only to reporting requirements
and the related Officers Certificate. Under the terms of
the indentures, the Company had 90 days from the notices of
default in which to cure the deficiencies identified in the
notices of default or obtain waivers, or events of default would
have occurred and the holders of the senior notes or debentures
or the Trustee could declare the principal immediately due and
payable. At the end of these periods, the deficiencies had not
been cured and waivers had not been obtained. During July and
August 2006, the bondholders accelerated the payment of the
principal amount of the debentures, of which $155 million
was outstanding, and the Company financed the accelerated
repayments by use of the aforementioned $450 million term
loan facility.
As of the date of this filing, the $200 million senior
notes currently remain outstanding, although they could be
declared immediately due and payable at any time. In the event
the bondholders of the senior notes provide a notice of
acceleration prior to the Company curing the existing reporting
default, the Company believes it has sufficient liquidity
resources, primarily through the term loan facility, to fully
satisfy any potential acceleration. In addition, the senior
notes are redeemable at the option of the Company at any time
for the principal amount of the senior notes then outstanding
plus the sum of any accrued but unpaid interest and the present
value of any remaining scheduled interest payments. The senior
notes are redeemable at the option of the holders only upon a
change in control of the Company combined with a rating by
either Moodys or S&P below investment grade as defined
in the indenture. Currently, the rating by S&P of the senior
notes is below investment grade.
Asset
Securitization Program
The Company has a $100 million program to sell
(securitize), on an ongoing basis, a pool of its U.S. trade
accounts receivable. This program serves to accelerate cash
collections of the Companys trade accounts receivable at
favorable financing costs and helps manage the Companys
liquidity requirements. In 2005, the Company amended the program
to resolve issues related to a credit rating downgrade and
delayed SEC filings and to extend the program through June 2006.
In June 2006, the Company amended the program to extend it up to
June 2, 2009, to cure a default resulting from a credit
rating downgrade, and to modify the reporting requirements to
more closely match those in the New Credit Facility. While the
Company expects to maintain a satisfactory U.S. asset
51
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
securitization program to help meet the Companys liquidity
requirements, factors beyond the Companys control such as
prevailing economic, financial and market conditions may prevent
the Company from doing so.
Under this program, certain of the Companys receivables
are sold to Ferro Finance Corporation (FFC), a
wholly-owned unconsolidated qualified special purpose entity
(QSPE), as defined by Statement of Financial
Accounting Standards No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, (FAS No. 140). FFC finances its
acquisition of trade accounts receivable assets by issuing
financial interests to multi-seller receivables securitization
companies (commercial paper conduits). At
December 31, 2004, $3.6 million had been advanced to
the Company, net of repayments, under this program. During the
twelve months ended December 31, 2005, $946.2 million
of accounts receivable were sold under this program and
$948.8 million of receivables were collected and remitted
to FFC and the commercial paper conduits, resulting in a net
decrease in advances of $2.6 million and total advances
outstanding at December 31, 2005, of $1.0 million.
The Company on behalf of FFC and the commercial paper conduits
provides normal collection and administration services with
respect to the receivables. In accordance with
FAS No. 140, no servicing asset or liability is
reflected on the Companys consolidated balance sheet. FFC
and the commercial paper conduits have no recourse to the
Companys other assets for failure of debtors to pay when
due as the assets transferred are legally isolated in accordance
with the bankruptcy laws of the United States. Under
FAS No. 140 and FASB Interpretation No. 46R,
Consolidation of Variable Interest Entities, neither
the amounts advanced nor the corresponding receivables sold are
reflected in the Companys consolidated balance sheet as
the trade receivables have been de-recognized with an
appropriate accounting loss recognized.
The Company retains a beneficial interest in the receivables
transferred to FFC in the form of a note receivable to the
extent that cash flows collected from receivables transferred
exceed cash flows used by FFC to pay the commercial paper
conduits. The note receivable balance was $111.9 million as
of December 31, 2005, and $108.5 million as of
December 31, 2004. The Company, on a monthly basis,
measures the fair value of the retained interests using
managements 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.
Other
Financing Arrangements
In addition, the Company maintains other lines of credit and
receivable sales programs to provide global flexibility for the
Companys liquidity requirements. Most of these facilities,
including receivable sales programs, are uncommitted lines for
the Companys international operations. At
December 31, 2005, the unused portions of these lines
provided approximately $15.0 million of additional
liquidity. The receivable sales are generally without recourse.
At December 31, 2005, the amount of outstanding receivables
sold under these international receivable sales programs was
less than $20 million. The Company had a
2.4 million guarantee, which was outstanding at
December 31, 2005, and was terminated in May 2006, to
support the borrowing facilities of an unconsolidated affiliate.
Liquidity
The Companys level of debt and debt service requirements
could have important consequences to its business operations and
uses of cash flows. In addition, a reduction in overall demand
for the Companys products, as well as the potential
requirement to repay the senior notes due to the Companys
delayed SEC filings, could adversely affect cash flows. At
December 31, 2005, the Company had a $300.0 million
revolving credit facility of which $113.9 million was
available. This liquidity, along with the liquidity from the
Companys asset securitization program of which
$99.0 million was available as of December 31, 2005,
other financing arrangements, available cash flows from
operations, asset sales, and the New Credit Facility, should
allow the Company to meet its funding requirements and other
commitments. As of August 31, 2006, the Company had
borrowed $165.5 million against its $250 million
revolving credit facility and drawn $49.2 million on the
$100 million asset securitization program. In addition, the
52
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Company had drawn $250 million on the $450 million
term loan facility, although the $200 million remaining
availability is reserved for the repayment of the
91/8% senior
notes should they be accelerated by the bondholders.
|
|
4.
|
Stock-based
compensation plans
|
In April 2003, shareholders of the Company approved the 2003
Long-Term Incentive Compensation Plan (the Plan).
The Plan authorizes several different types of long-term
incentives. The available incentives include stock options,
stock appreciation rights, restricted shares, performance shares
and common stock awards. The shares of common stock to be issued
under the Plan may be either authorized but unissued shares or
shares held as treasury stock. The effective date of the Plan is
January 1, 2003. The number of shares of common stock
reserved for awards under the Plan is 3,250,000 shares. At
December 31, 2005, there were 914,225 shares available
for grant.
Previous Employee Stock Option Plans and a 1997 Performance
Share Plan authorized different types of long-term incentives,
including stock options, stock appreciation rights, performance
shares and common stock awards. No further grants may be made
under Ferros previous Employee Stock Option Plans or under
Ferros 1997 Performance Share Plan. However, any
outstanding awards or grants made under these plans will
continue until the end of their specified term.
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 Company pays 50% cash and 50% common
stock for the value of any earned performance shares.
Performance share awards in the amount of 127,900 shares at
a weighted-average market price of $19.39 per share were
granted in 2005 (119,100 shares at $26.26 in 2004 and
135,500 shares at $21.26 in 2003). The Company accrues
amounts based on performance reflecting the fair value of cash
and common stock, which is anticipated to be earned. The effects
of the plan on the Companys operations were expenses
(credits) of $(0.5) million, $(0.6) million, and
$1.2 million in 2005, 2004 and 2003, respectively.
Information pertaining to stock options is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
Outstanding at January 1, 2003
|
|
|
3,814,182
|
|
|
$
|
21.86
|
|
Granted in 2003
|
|
|
830,800
|
|
|
|
21.44
|
|
Exercised in 2003
|
|
|
(202,833
|
)
|
|
|
20.56
|
|
Canceled in 2003
|
|
|
(232,341
|
)
|
|
|
23.29
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2003
|
|
|
4,209,808
|
|
|
|
21.75
|
|
Granted in 2004
|
|
|
831,250
|
|
|
|
25.49
|
|
Exercised in 2004
|
|
|
(340,367
|
)
|
|
|
19.41
|
|
Canceled in 2004
|
|
|
(160,560
|
)
|
|
|
23.37
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2004
|
|
|
4,540,131
|
|
|
|
22.56
|
|
Granted in 2005
|
|
|
751,500
|
|
|
|
19.55
|
|
Exercised in 2005
|
|
|
(112,809
|
)
|
|
|
16.39
|
|
Canceled in 2005
|
|
|
(348,922
|
)
|
|
|
22.63
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2005
|
|
|
4,829,900
|
|
|
|
22.23
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31,
2003
|
|
|
2,627,387
|
|
|
$
|
21.06
|
|
Exercisable at December 31,
2004
|
|
|
2,836,687
|
|
|
|
21.60
|
|
Exercisable at December 31,
2005
|
|
|
3,712,869
|
|
|
|
22.26
|
|
53
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Significant option groups outstanding at December 31, 2005
and the related weighted-average price for the exercisable
options and remaining life information are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
Outstanding
|
|
|
Weighted-Average
|
|
|
Weighted-
|
|
|
Exercisable
|
|
|
Weighted-
|
|
|
|
as of
|
|
|
Remaining
|
|
|
Average
|
|
|
as of
|
|
|
Average
|
|
Range of Exercise Prices
|
|
12/31/2005
|
|
|
Contractual Life
|
|
|
Exercise Price
|
|
|
12/31/2005
|
|
|
Exercise Price
|
|
|
$14.00-17.00
|
|
|
150,585
|
|
|
|
0.1
|
|
|
$
|
15.75
|
|
|
|
150,585
|
|
|
$
|
15.75
|
|
$17.01-22.00
|
|
|
2,430,461
|
|
|
|
5.9
|
|
|
|
20.13
|
|
|
|
1,689,811
|
|
|
|
20.10
|
|
$22.01-27.00
|
|
|
2,145,408
|
|
|
|
5.7
|
|
|
|
24.76
|
|
|
|
1,769,402
|
|
|
|
24.51
|
|
$27.01-30.00
|
|
|
103,446
|
|
|
|
3.1
|
|
|
|
28.52
|
|
|
|
103,071
|
|
|
|
28.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total options
|
|
|
4,829,900
|
|
|
|
5.6
|
|
|
|
22.23
|
|
|
|
3,712,869
|
|
|
|
22.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options have a term of 10 years and vest evenly over
four years on the anniversary of the grant date. In the case of
death, retirement, disability or change in control, the stock
options become 100% vested and exercisable.
|
|
5.
|
Serial
convertible preferred stock
|
The Company is authorized to issue up to 2,000,000 shares
of serial convertible preferred stock without par value. In
1989, Ferro issued 1,520,215 shares of 7% Series A
ESOP Convertible Preferred Stock (Series A Preferred
Stock) to the Trustee of the Ferro Employee Stock
Ownership Plan (ESOP). The Series A Preferred
Stock was issued at a price of $46.375 per share for a
total consideration of $70.5 million. As of
December 31, 1999, all shares of the Series A
Preferred Stock were allocated to participating individual
employee accounts. The Trustee may redeem the Series A
Preferred Stock to provide for distributions to participants or
to satisfy an investment election provided to participants, or
to provide loans to or withdrawals by participants. The
Series A Preferred Stock is redeemable at the option of the
Company, in whole or in part, at any time after July 1,
1999, and under certain other circumstances if the Company
terminates the Plan or future contributions to the Plan, in the
event of changes in Federal tax laws that would preclude the
Company from claiming a tax deduction for dividends paid on the
Series A Preferred Stock, or if the Plan is determined not
to be a qualified plan within the meanings of
Section 401(a) or 4975(e)(7)
of the Internal Revenue Code.
In any redemption other than plan termination or the termination
of future contributions to the Plan, the redemption price is
fixed at $46.375 per preferred share plus earned but unpaid
dividends as of the date of redemption. In addition, the Trustee
is entitled, at any time, to cause any or all shares of
Series A Preferred Stock to be converted into shares of
common stock at a fixed conversion rate of 2.5988 shares
(adjusted for stock splits) of common stock for each one share
of Series A Preferred Stock.
Each share of Series A Preferred Stock carries one vote,
voting together with the common stock on most matters. The
Series A Preferred Stock accrues dividends at an annual
rate of 7% on shares outstanding. The dividends are cumulative
from the date of issuance. To the extent the Company is legally
permitted to pay dividends and the Board of Directors declares a
dividend payable, the Company pays dividends on a quarterly
basis. In the case of liquidation or dissolution of the Company,
the holders of the Series A Preferred Stock are entitled to
receive $46.375 per preferred share, or $25.00 per
preferred share in the event of involuntary liquidation, plus
earned but unpaid dividends, before any amount shall be paid or
distributed to holders of the Companys common stock.
There were 442,271 and 489,649 shares of Series A
Preferred Stock outstanding at December 31, 2005 and 2004,
respectively. During 2005, 2004 and 2003, respectively,
47,378 shares, 113,793 shares, and 101,060 shares
were redeemed as permitted by the Plan.
The Company did not purchase common stock on the open market in
2005, 2004 or 2003. At December 31, 2005, the Company had
remaining authorization to acquire 4,201,216 shares under
its current treasury stock purchase program. Until the Company
becomes current in its filings with the Securities and Exchange
Commission,
54
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the Company is prohibited from purchasing additional shares. In
addition, the New Credit Facility limits the Companys
ability to purchase shares.
The Company maintained a Shareholder Rights Plan (the
Plan) whereby, until the occurrence of certain
events, each share of the outstanding common stock represented
ownership of one right (Right). The Rights expired
on April 8, 2006.
|
|
7.
|
Earnings
per share computation
|
Information concerning the calculation of basic and diluted
earnings per share is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Basic earnings per share
computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common
shareholders
|
|
$
|
14,786
|
|
|
$
|
23,220
|
|
|
$
|
11,962
|
|
Less: Income (loss) from
discontinued operations
|
|
|
(868
|
)
|
|
|
(2,915
|
)
|
|
|
4,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,654
|
|
|
$
|
26,135
|
|
|
$
|
7,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares
outstanding
|
|
|
42,309
|
|
|
|
41,981
|
|
|
|
40,903
|
|
Basic earnings per share from
continuing operations
|
|
$
|
0.37
|
|
|
$
|
0.62
|
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common
shareholders
|
|
$
|
14,786
|
|
|
$
|
23,220
|
|
|
$
|
11,962
|
|
Less: Income (loss) from
discontinued operations
|
|
|
(868
|
)
|
|
|
(2,915
|
)
|
|
|
4,412
|
|
Plus: Convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,654
|
|
|
$
|
26,135
|
|
|
$
|
7,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares
outstanding
|
|
|
42,309
|
|
|
|
41,981
|
|
|
|
40,903
|
|
Assumed conversion of convertible
preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed exercise of stock options
|
|
|
36
|
|
|
|
254
|
|
|
|
184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average diluted shares
outstanding
|
|
|
42,345
|
|
|
|
42,235
|
|
|
|
41,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share from
continuing operations
|
|
$
|
0.37
|
|
|
$
|
0.62
|
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The convertible preferred shares were anti-dilutive for the
years ended December 31, 2005, 2004 and 2003, and thus not
included in the diluted shares outstanding.
In September 2001, the Company acquired from OM Group, Inc.
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. In the first
quarter of 2003, the Company paid $8.5 million in cash for
certain purchase price settlements with
dmc2.
In the second quarter of 2004, the Company received
approximately $8.5 million in cash from
dmc2
as the final settlement of the purchase price, which was
recorded as a reduction to goodwill.
55
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
9.
|
Restructuring
and cost reduction programs
|
The following table summarizes the activities relating to the
Companys reserves for restructuring and cost reduction
programs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Severance
|
|
|
Costs
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
Balance, December 31, 2003
|
|
$
|
13,797
|
|
|
$
|
181
|
|
|
$
|
13,978
|
|
Gross charges
|
|
|
3,497
|
|
|
|
2,509
|
|
|
|
6,006
|
|
Cash payments
|
|
|
(12,397
|
)
|
|
|
(458
|
)
|
|
|
(12,855
|
)
|
Non-cash write-offs
|
|
|
|
|
|
|
(1,256
|
)
|
|
|
(1,256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
4,897
|
|
|
|
976
|
|
|
|
5,873
|
|
Gross charges
|
|
|
5,201
|
|
|
|
|
|
|
|
5,201
|
|
Cash payments
|
|
|
(6,342
|
)
|
|
|
(910
|
)
|
|
|
(7,252
|
)
|
Non-cash write-offs
|
|
|
(1,524
|
)
|
|
|
|
|
|
|
(1,524
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
$
|
2,232
|
|
|
$
|
66
|
|
|
$
|
2,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges for 2005 and 2004 relate to the Companys ongoing
cost reduction and restructuring programs. These programs
include employment cost reductions in response to a slowdown in
general economic conditions. Total gross charges for the year
ended December 31, 2005, were $5.2 million, of which
$3.5 million and $1.7 million were included in cost of
sales, and selling and general and administrative expenses,
respectively. Total gross charges for the year ended
December 31, 2004 were $6.0 million, of which
$2.6 million, $2.5 million and $0.9 million were
included in the cost of sales, selling and general and
administrative expenses, and miscellaneous expense,
respectively. Total gross charges for the year ended
December 31, 2003, were $13.0 million, of which
$2.4 million, $10.1 million and $0.5 million were
included in cost of sales, selling and general and
administrative expenses, and miscellaneous expense,
respectively. No charges for discontinued operations were
incurred in 2005, 2004 or 2003.
The remaining reserve balance for restructuring and cost
reduction programs of $2.3 million at December 31,
2005, primarily represents future cash payments expected to be
made during 2006 except where certain legal or contractual
restrictions on the Companys ability to complete the
program exist. The Company will continue to evaluate further
steps to reduce costs and improve efficiencies.
|
|
10.
|
Discontinued
operations
|
On September 30, 2002, the Company completed the sale of
its Powder Coatings business unit in separate transactions with
Rohm and Haas Company and certain of its wholly-owned
subsidiaries and certain wholly-owned subsidiaries of Akzo Nobel
NV. On June 30, 2003, the Company completed the sale of its
Petroleum Additives business to Dover Chemicals and its
Specialty Ceramics business to CerCo LLC. For all periods
presented, the Powder Coatings, Petroleum Additives and
Specialty Ceramics businesses have been reported as discontinued
operations.
There were no sales, income before taxes, or related tax expense
from discontinued operations in 2005 or 2004. For the year ended
December 31, 2003, sales from discontinued operations were
$30.0 million, losses before tax from discontinued
operations were $1.5 million, and the related tax benefits
were $0.6 million. In connection with certain divestitures,
the Company has continuing obligations with respect to
environmental remediation. The Company accrued $3.1 million
as of December 31, 2005 and 2004, for these matters. These
amounts are based on managements best estimate of the
nature and extent of soil
and/or
groundwater contamination, as well as expected remedial actions
as determined by agreements with relevant authorities, where
applicable, and existing technologies. For 2003, the results of
discontinued operations also include the operating earnings of
the discontinued units prior to their sale, as well as interest
expense, foreign currency gains and losses, other income or
expenses and
56
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
income taxes directly related to, or allocated to, the
discontinued operations. Interest was allocated to discontinued
operations assuming debt levels approximating the estimated or
actual debt reductions upon disposal of the operations and the
Companys actual weighted average interest rates for the
respective years.
Disposal of discontinued operations resulted in pre-tax (losses)
gains of $(1.4) million, $(3.8) million, and
$7.7 million for the years ended December 31, 2005,
2004 and 2003, respectively. The related tax (benefits) expenses
were $(0.5) million, $(0.9) million, and
$2.4 million for the years ended December 31, 2005,
2004 and 2003, respectively. Selling prices are subject to
certain post-closing adjustments with respect to assets sold to
and liabilities assumed by the buyers. The gain (loss) on
disposal of discontinued operations includes post-closing
adjustments to the selling prices and ongoing legal costs and
reserve adjustments directly related to discontinued operations.
|
|
11.
|
Contingent
liabilities
|
In February 2003, the Company was requested to produce documents
in connection with an investigation by the United States
Department of Justice into possible antitrust violations in the
heat stabilizer industry. In April 2006, the Company was
notified by the Department of Justice that the Government had
closed its investigation and that the Company was relieved of
any obligation to retain documents that were responsive to the
Governments earlier document request. Before closing its
investigation, the Department of Justice took no action against
the Company or any current or former employee of the Company.
The Company was previously named as a defendant in several
lawsuits alleging civil damages and requesting injunctive relief
relating to the conduct the Government was investigating. The
Company is vigorously defending itself in those actions, and
management does not expect these lawsuits to have a material
effect on the consolidated financial position, results of
operations, or cash flows of the Company.
In a July 23, 2004, press release, Ferro announced that its
Polymer Additives business performance in the second quarter
fell short of expectations and that its Audit Committee would
investigate possible inappropriate accounting entries in
Ferros Polymer Additives business. A consolidated putative
securities class action lawsuit arising from and related to the
July 23, 2004, announcement is currently pending in the
United States District Court for the Northern District of Ohio
against Ferro, its deceased former Chief Executive Officer, its
Chief Financial Officer, and a former operating Vice President
of Ferro. This claim is based on alleged violations of Federal
securities laws. Ferro and the named executives consider these
allegations to be unfounded, are vigorously defending this
action and have notified Ferros directors and officers
liability insurer of the claim. Because this action is in its
preliminary stage, the outcome of this litigation cannot be
determined at this time.
Also, following the July 23, 2004, announcement, two
derivative lawsuits were commenced in the United States
District Court for the Northern District of Ohio on behalf of
Ferro against Ferros Directors, its deceased former Chief
Executive Officer, and Chief Financial Officer. Two other
derivative actions were subsequently filed in the Court of
Common Pleas for Cuyahoga County, Ohio. The state court actions
were removed to the United States District Court for the
Northern District of Ohio and all of the derivative lawsuits
were then consolidated into a single action. The derivative
lawsuits alleged breach of fiduciary duties and
mismanagement-related claims. On March 21, 2006, the Court
dismissed the consolidated derivative action without prejudice.
On April 8, 2006, plaintiffs filed a motion seeking relief
from the judgment dismissing the derivative lawsuit and seeking
to further amend their complaint following discovery, which was
denied. On April 13, 2006, plaintiffs also filed a Notice
of Appeal to the Sixth Circuit Court of Appeals. The Directors
and named executives consider the allegations contained in the
derivative actions to be unfounded, have vigorously defended
this action and will defend against the new filings. The Company
has notified Ferros directors and officers liability
insurer of the claim. Because this appeal is in the preliminary
stage, the outcome of this litigation cannot be determined at
this time.
On June 10, 2005, a putative class action lawsuit was filed
against Ferro, and certain former and current employees alleging
breach of fiduciary duty with respect to ERISA plans. The
Company considers these allegations
57
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
to be unfounded, is vigorously defending this action, and has
notified Ferros fiduciary liability insurer of the claim.
Because this action is in the preliminary stage, the ultimate
outcome of this litigation cannot be determined at this time.
However, management does not expect the ultimate outcome of the
lawsuit to have a material effect on the financial position,
results of operations or cash flows of the Company.
On October 15, 2004, the Belgian Ministry of Economic
Affairs Commercial Policy Division (the
Ministry) served on Ferros Belgian subsidiary
a mandate requiring the production of certain documents related
to an alleged cartel among producers of butyl benzyl phthalate
(BBP) from 1983 to 2002. Subsequently, German and
Hungarian authorities initiated their own national
investigations in relation to the same allegations. Ferros
Belgian subsidiary acquired its BBP business from Solutia Europe
S.A./N.V. (SOLBR) in August 2000. Ferro promptly
notified SOLBR of the Ministrys actions and requested
SOLBR to indemnify and defend Ferro and its Belgian subsidiary
with respect to these investigations. In response to
Ferros notice, SOLBR exercised its right under the 2000
acquisition agreement to take over the defense and settlement of
these matters, subject to reservation of rights. In December
2005, the Hungarian authorities imposed a de minimus fine
on Ferros Belgian subsidiary, and the Company expects the
German and Belgian authorities also to assess fines for the
alleged conduct. Management cannot predict the amount of fines
that will ultimately be assessed and cannot predict the degree
to which SOLBR will indemnify Ferros Belgian subsidiary
for such fines.
In October 2005, the Company performed a routine environmental,
health and safety audit of its Bridgeport, New Jersey facility.
In the course of this audit, internal environmental, health and
safety auditors assessed the Companys compliance with the
New Jersey Department of Environmental Protections
(NJDEP) laws and regulations regarding water
discharge requirements pursuant to the New Jersey Water
Pollution Control Act (WPCA). On October 31,
2005, the Company disclosed to the NJDEP that it had identified
potential violations of the WPCA and the Company commenced an
investigation and committed to report any violations and to
undertake any necessary remedial actions. In September 2006, the
Company entered into an agreement with the NJDEP under which the
Company paid the State of New Jersey a civil administrative
penalty of $0.2 million in full settlement of the
violations.
As of December 31, 2005, the Company had accrued
liabilities of $6.6 million for environmental remediation
costs, of which $1.2 million related to Superfund sites. As
of December 31, 2004, the Company had accrued liabilities
of $6.4 million of which $0.6 million related to
Superfund sites.
There are various other lawsuits and claims pending against the
Company and its consolidated subsidiaries. In the opinion of
management, the ultimate liabilities, if any, and expenses
resulting from such lawsuits and claims will not materially
affect the consolidated financial position, results of
operations, or cash flows of the Company.
|
|
12.
|
Research
and development expense
|
Amounts expended for development or significant improvement of
new and/or
existing products, services and techniques for continuing
operations were $38.4 million, $42.4 million, and
$40.2 million in 2005, 2004 and 2003, respectively.
58
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Information concerning the pension and other post-retirement
benefit plans of the Company is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Change in benefit
obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of
year
|
|
$
|
488,748
|
|
|
$
|
436,667
|
|
|
$
|
53,011
|
|
|
$
|
56,283
|
|
Service cost
|
|
|
16,375
|
|
|
|
14,610
|
|
|
|
799
|
|
|
|
902
|
|
Interest cost
|
|
|
26,213
|
|
|
|
25,375
|
|
|
|
3,160
|
|
|
|
3,361
|
|
Amendments
|
|
|
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
Effect of curtailment
|
|
|
|
|
|
|
(137
|
)
|
|
|
|
|
|
|
|
|
Effect of settlements
|
|
|
(1,125
|
)
|
|
|
(902
|
)
|
|
|
|
|
|
|
|
|
Plan participants
contributions
|
|
|
672
|
|
|
|
599
|
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(22,812
|
)
|
|
|
(23,052
|
)
|
|
|
(3,672
|
)
|
|
|
(3,518
|
)
|
Acquisitions
|
|
|
|
|
|
|
(532
|
)
|
|
|
|
|
|
|
|
|
Actuarial loss (gain)
|
|
|
41,468
|
|
|
|
23,290
|
|
|
|
5,199
|
|
|
|
(4,017
|
)
|
Exchange rate effect
|
|
|
(21,840
|
)
|
|
|
12,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
527,699
|
|
|
$
|
488,748
|
|
|
$
|
58,497
|
|
|
$
|
53,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation at
end of year
|
|
$
|
498,351
|
|
|
$
|
460,854
|
|
|
$
|
58,497
|
|
|
$
|
53,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at
beginning of year
|
|
$
|
312,107
|
|
|
$
|
292,383
|
|
|
$
|
|
|
|
$
|
|
|
Actual return on plan assets
|
|
|
31,361
|
|
|
|
23,320
|
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
40,856
|
|
|
|
11,492
|
|
|
|
3,672
|
|
|
|
3,518
|
|
Plan participants
contributions
|
|
|
672
|
|
|
|
599
|
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(22,812
|
)
|
|
|
(23,052
|
)
|
|
|
(3,672
|
)
|
|
|
(3,518
|
)
|
Effect of settlements
|
|
|
(1,125
|
)
|
|
|
(902
|
)
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
|
|
|
|
|
(532
|
)
|
|
|
|
|
|
|
|
|
Exchange rate effect
|
|
|
(15,224
|
)
|
|
|
8,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end
of year
|
|
$
|
345,835
|
|
|
$
|
312,107
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of accrued
costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(181,864
|
)
|
|
$
|
(176,641
|
)
|
|
$
|
(58,497
|
)
|
|
$
|
(53,011
|
)
|
Unrecognized net actuarial loss
(gain)
|
|
|
140,483
|
|
|
|
123,636
|
|
|
|
(4,926
|
)
|
|
|
(8,796
|
)
|
Unrecognized prior service cost
(benefit)
|
|
|
7,619
|
|
|
|
1,968
|
|
|
|
(2,718
|
)
|
|
|
(4,839
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(33,762
|
)
|
|
$
|
(51,037
|
)
|
|
$
|
(66,141
|
)
|
|
$
|
(66,646
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the
balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid benefit cost
|
|
$
|
97
|
|
|
$
|
17
|
|
|
$
|
|
|
|
$
|
|
|
Accrued benefit liability
|
|
|
(150,148
|
)
|
|
|
(151,535
|
)
|
|
|
(66,141
|
)
|
|
|
(66,646
|
)
|
Intangible assets
|
|
|
1,405
|
|
|
|
1,635
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive
income
|
|
|
114,884
|
|
|
|
98,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(33,762
|
)
|
|
$
|
(51,037
|
)
|
|
$
|
(66,141
|
)
|
|
$
|
(66,646
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average assumptions as
of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.38
|
%
|
|
|
5.63
|
%
|
|
|
5.90
|
%
|
|
|
6.10
|
%
|
Expected return on plan assets
|
|
|
7.39
|
%
|
|
|
7.51
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Rate of compensation increase
|
|
|
3.29
|
%
|
|
|
3.25
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
59
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans with
|
|
|
|
Pension Plans with
|
|
|
Accumulated Benefit
|
|
|
|
Benefit Obligations in
|
|
|
Obligations in
|
|
|
|
Excess of Plan Assets
|
|
|
Excess of Plan Assets
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Benefit obligations
|
|
$
|
525,189
|
|
|
$
|
486,734
|
|
|
$
|
483,305
|
|
|
$
|
444,999
|
|
Plan assets
|
|
|
343,054
|
|
|
|
310,018
|
|
|
|
330,285
|
|
|
|
295,894
|
|
For measurement purposes, the assumed increase in the cost of
covered pre-Medicare health care benefits was 10.0% for 2005,
gradually decreasing to 5.1% for 2013 and later years, and the
assumed increase in the cost of covered post-Medicare health
care benefits was 10.3% for 2005, gradually decreasing to 5.2%
for 2013 and later years.
In December 2003 the new Medicare Prescription Drug, Improvement
and Modernization Act became law and will provide a basic
subsidy of 28% of certain retiree health care
beneficiaries drug costs if the benefit is at least
actuarially equivalent to the Medicare benefit. See Note 1
regarding impact of adoption during 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands)
|
|
|
Components of net periodic
cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
16,375
|
|
|
$
|
14,610
|
|
|
$
|
12,995
|
|
|
$
|
799
|
|
|
$
|
902
|
|
|
$
|
888
|
|
Interest cost
|
|
|
26,213
|
|
|
|
25,375
|
|
|
|
24,105
|
|
|
|
3,160
|
|
|
|
3,361
|
|
|
|
3,979
|
|
Expected return on plan assets
|
|
|
(22,095
|
)
|
|
|
(21,810
|
)
|
|
|
(20,194
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
(86
|
)
|
|
|
80
|
|
|
|
28
|
|
|
|
(558
|
)
|
|
|
(558
|
)
|
|
|
(558
|
)
|
Net amortization and deferral
|
|
|
6,825
|
|
|
|
6,130
|
|
|
|
4,594
|
|
|
|
(232
|
)
|
|
|
(97
|
)
|
|
|
|
|
Curtailment and settlement effects
|
|
|
(353
|
)
|
|
|
(66
|
)
|
|
|
1,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
26,879
|
|
|
$
|
24,319
|
|
|
$
|
23,212
|
|
|
$
|
3,169
|
|
|
$
|
3,608
|
|
|
$
|
4,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection with the Companys divestment of the
Petroleum Additives and Specialty Ceramics businesses during
2003, a curtailment expense of $0.7 million was recognized
as part of the gain on disposal of discontinued operations.
Additionally, as a result of a cost reduction and restructuring
program implemented in 2003 at an international subsidiary, a
$1.0 million expense was recorded for special termination
benefits.
A one-percentage point change in the assumed health care cost
trend rates would have the following effect:
|
|
|
|
|
|
|
|
|
|
|
1-Percentage
|
|
|
1-Percentage
|
|
|
|
Point Increase
|
|
|
Point Decrease
|
|
|
|
(Dollars in thousands)
|
|
|
Effect on total of service and
interest cost component
|
|
$
|
255
|
|
|
$
|
215
|
|
Effect on post-retirement benefit
obligation
|
|
$
|
4,491
|
|
|
$
|
3,796
|
|
The Company expects to contribute approximately
$43.9 million to its pension and other post-retirement
benefit plans in 2006.
The expected return on assets at the beginning of the year is
based on the weighted-average of the expected return for the
target asset allocations of the principal asset categories held
by each plan. In determining the expected return, the Company
considers both historical performance and an estimate of future
long-term rates of return. The Company consults with and
considers the opinion of its actuaries in developing appropriate
return assumptions.
60
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The measurement dates used to determine pension and other
postretirement benefit measurements are September 30 for
the United States plans and December 31 for the
international plans. The weighted average asset allocations of
the pension benefit plans at their measurement dates were:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Debt Securities
|
|
|
39
|
%
|
|
|
40
|
%
|
Equity Securities
|
|
|
51
|
|
|
|
57
|
|
Other
|
|
|
10
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
The Company establishes asset allocation ranges for each major
category of plan assets. The risks inherent in the various asset
categories are considered along with the benefit obligations,
financial status and short-term liquidity needs of the fund.
Listed below are the ranges of percentages for each asset
category on a weighted-average basis:
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
|
Maximum
|
|
|
Debt securities
|
|
|
21%
|
|
|
|
42%
|
|
Equity securities
|
|
|
12%
|
|
|
|
57%
|
|
The Companys pension plans held 424,651 and
424,651 shares of the Companys common stock with a
market value of $8.0 million and $9.8 million at
December 31, 2005 and 2004, respectively, and received
$0.2 million of dividends from the Companys common
stock in both 2005 and 2004.
At December 31, 2005, retiree benefit payments, which
reflect expected future service, were anticipated to be paid as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Benefits
|
|
|
Other Benefits
|
|
|
|
Pension
|
|
|
Before
|
|
|
After
|
|
|
|
Benefits
|
|
|
Medicare Subsidy
|
|
|
Medicare Subsidy
|
|
|
|
(Dollars in thousands)
|
|
|
2006
|
|
$
|
24,055
|
|
|
$
|
4,724
|
|
|
$
|
4,300
|
|
2007
|
|
|
25,446
|
|
|
|
4,769
|
|
|
|
4,320
|
|
2008
|
|
|
26,991
|
|
|
|
4,869
|
|
|
|
4,352
|
|
2009
|
|
|
28,461
|
|
|
|
4,884
|
|
|
|
4,348
|
|
2010
|
|
|
29,864
|
|
|
|
4,940
|
|
|
|
4,391
|
|
2011-2015
|
|
|
178,988
|
|
|
|
24,403
|
|
|
|
21,610
|
|
The Company also sponsors unfunded nonqualified defined benefit
retirement plans for certain employees and for these plans
expensed $2.3 million, $2.1 million and
$2.1 million in 2005, 2004 and 2003, respectively. For
2005, components of the expense were service cost of
$0.2 million, interest cost of $1.0 million,
amortization of prior service cost of $0.2 million, and
amortization of net loss of $0.9 million. At
December 31, 2005, the benefit obligation was
$16.1 million, the unrecognized actuarial loss was
$7.6 million, the accrued benefit liability was
$15.6 million, and the accumulated other comprehensive loss
was $7.2 million. At December 31, 2005, the Company
held $9.2 million of investments designated to fund benefit
payments. At December 31, 2005, benefit payments were
expected to be paid as follows: $11.4 million in 2006
primarily related to a lump sum payment to the beneficiary of
the Companys deceased former Chief Executive Officer,
$0.4 million in each of 2007 through 2010, and
$3.1 million for the five year period of
2011-2015.
The parent company and certain subsidiaries have defined
contribution retirement plans covering certain employees. The
Companys contributions are determined by the terms of the
plans subject to the limitations that they shall not exceed the
amounts deductible for income taxes. Generally, benefits under
these plans vest gradually
61
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
over a period of five years from date of employment and are
based on the employees contributions. The expense
applicable to these plans was $5.6 million,
$5.2 million, and $5.6 million in 2005, 2004 and 2003,
respectively.
In February 2006, the Company announced changes to certain of
its postretirement benefit plans. See additional information
regarding this matter in Note 22.
Income tax expense (benefit) from continuing operations is
comprised of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
(240
|
)
|
|
$
|
2,151
|
|
|
$
|
(2,611
|
)
|
Foreign
|
|
|
16,022
|
|
|
|
11,484
|
|
|
|
13,543
|
|
State and local
|
|
|
271
|
|
|
|
194
|
|
|
|
(328
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,053
|
|
|
|
13,829
|
|
|
|
10,604
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
|
(5,258
|
)
|
|
|
(3,650
|
)
|
|
|
(3,529
|
)
|
Foreign
|
|
|
(2,948
|
)
|
|
|
(6,780
|
)
|
|
|
(4,157
|
)
|
State and local
|
|
|
(919
|
)
|
|
|
(47
|
)
|
|
|
(540
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,125
|
)
|
|
|
(10,477
|
)
|
|
|
(8,226
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax
|
|
$
|
6,928
|
|
|
$
|
3,352
|
|
|
$
|
2,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the 2005 income tax expense of $6.9 million,
certain net tax benefits of $5.4 million were allocated
directly to shareholders equity.
The above taxes are based on earnings (losses) from continuing
operations before income taxes. These earnings (losses)
aggregated $(13.5) million, $(0.1) million, and
$(14.7) million for domestic operations, and
$37.6 million, $31.3 million, and $26.7 million
for foreign operations in 2005, 2004 and 2003, respectively.
A reconciliation of the statutory federal income tax rate and
the effective tax rate follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Statutory federal income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
U.S. tax cost of foreign
dividends
|
|
|
6.3
|
|
|
|
4.2
|
|
|
|
10.4
|
|
Extraterritorial income exclusion
|
|
|
(6.2
|
)
|
|
|
(4.4
|
)
|
|
|
(11.9
|
)
|
Net adjustment of prior year
accrual
|
|
|
(3.1
|
)
|
|
|
(6.6
|
)
|
|
|
(0.2
|
)
|
ESOP dividend tax benefit
|
|
|
(3.0
|
)
|
|
|
(2.5
|
)
|
|
|
(8.0
|
)
|
Adjustment of valuation allowances
|
|
|
1.0
|
|
|
|
(9.9
|
)
|
|
|
(14.2
|
)
|
Foreign tax rate difference
|
|
|
0.9
|
|
|
|
(9.1
|
)
|
|
|
3.9
|
|
Miscellaneous
|
|
|
(2.1
|
)
|
|
|
4.0
|
|
|
|
4.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
28.8
|
%
|
|
|
10.7
|
%
|
|
|
19.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of deferred tax assets and liabilities at
December 31 were:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Pension and other benefit programs
|
|
$
|
79,712
|
|
|
$
|
81,194
|
|
Foreign tax credit carryforwards
|
|
|
32,587
|
|
|
|
17,428
|
|
Net operating loss carryforwards
|
|
|
32,257
|
|
|
|
25,527
|
|
Other credit carryforwards
|
|
|
7,976
|
|
|
|
2,394
|
|
Accrued liabilities
|
|
|
7,699
|
|
|
|
8,212
|
|
Reserve for doubtful accounts
|
|
|
3,132
|
|
|
|
4,341
|
|
Inventories
|
|
|
2,907
|
|
|
|
3,525
|
|
State and local
|
|
|
962
|
|
|
|
3,287
|
|
Other
|
|
|
1,147
|
|
|
|
6,870
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
168,379
|
|
|
|
152,778
|
|
Deferred tax
liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
depreciation and amortization
|
|
|
70,949
|
|
|
|
69,327
|
|
Other
|
|
|
516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
71,465
|
|
|
|
69,327
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset before
valuation allowance
|
|
|
96,914
|
|
|
|
83,451
|
|
Valuation allowance
|
|
|
(9,651
|
)
|
|
|
(8,163
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
87,263
|
|
|
$
|
75,288
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2005, the Company had benefits from
domestic federal and state operating loss carryforwards in the
amount of $8.0 million and foreign operating loss
carryforwards of $24.3 million for tax purposes, some of
which can be carried forward indefinitely and others expire in
one to twenty years. A valuation allowance of $9.7 million
has been established due to the uncertainty of realizing certain
state and foreign operating loss carryforwards. The
$1.5 million increase in the valuation allowance was the
result of an increase of $1.2 million relating to state net
operating losses, combined with a net $0.3 million increase
in the valuation reserve for certain foreign net operating
losses. At December 31, 2005, $1.4 million of the
valuation allowance relates to
dmc2
pre-acquisition losses, and any future reduction of this portion
of the valuation allowance will be recognized as a reduction of
goodwill and other noncurrent intangibles, rather than as tax
benefits in the statement of income.
At December 31, 2005, the Company had benefits from foreign
tax credit carryforwards of $32.6 million for tax purposes.
These can be carried forward for ten years. $3.2 million
will expire in 2011, $7.3 million will expire in 2012,
$6.8 million will expire in 2013, $4.3 million will
expire in 2014 and $11.0 million will expire in 2015. In
managements opinion, it is more likely than not that the
credits will be utilized before the expiration periods.
Of the total net deferred tax assets, $40.7 million and
$45.6 million were classified as current assets,
$61.1 million and $46.7 million as non-current assets,
$0.5 million and $1.7 million as current liabilities,
and $14.0 million and $15.3 million as non-current
liabilities at December 31, 2005 and 2004, respectively.
Undistributed earnings of the Companys foreign
subsidiaries amounted to approximately $127.6 million at
December 31, 2005. Deferred income taxes are not provided
on these earnings as it is intended that these earnings be
indefinitely invested in these entities.
63
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
15.
|
Reporting
for segments
|
Under the provisions of FASBs Statement No. 131,
Disclosures about Segments of an Enterprise and Related
Information, (FAS No. 131), the Company has six
reportable segments: Performance Coatings, Electronic Materials,
Color and Glass Performance Materials, Polymer Additives,
Specialty Plastics and Other, which is comprised of two business
units, Pharmaceuticals and Fine Chemicals, which do not meet the
quantitative thresholds for separate disclosure. The Company
uses the criteria outlined in FAS No. 131 to identify
segments which management has concluded are its seven major
business units. Further, the Company has concluded that it is
appropriate to aggregate its Tile and Porcelain Enamel business
units into one reportable segment, Performance Coatings, based
on their similar economic and operating characteristics.
The accounting policies of the segments are consistent with
those described for the Companys consolidated financial
statements in the summary of significant accounting policies
(see Note 1). The Company measures segment income for
reporting purposes as net operating profit before interest and
taxes. Net operating profit also excludes unallocated corporate
expenses and charges associated with employment cost reduction
programs and certain integration costs related to the
acquisition of certain businesses of
dmc2.
Net sales to external customers by segment (inter-segment sales
are not material):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in millions)
|
|
|
Performance Coatings
|
|
$
|
488.5
|
|
|
$
|
466.5
|
|
|
$
|
425.1
|
|
Electronic Materials
|
|
|
355.7
|
|
|
|
388.3
|
|
|
|
338.3
|
|
Color and Glass Performance
Materials
|
|
|
359.6
|
|
|
|
355.9
|
|
|
|
305.4
|
|
Polymer Additives
|
|
|
300.6
|
|
|
|
280.2
|
|
|
|
240.4
|
|
Specialty Plastics
|
|
|
279.1
|
|
|
|
265.0
|
|
|
|
236.0
|
|
Other
|
|
|
98.8
|
|
|
|
87.8
|
|
|
|
70.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated sales
|
|
$
|
1,882.3
|
|
|
$
|
1,843.7
|
|
|
$
|
1,615.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income and reconciliation to income (loss) before taxes by
segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in millions)
|
|
|
Performance Coatings
|
|
$
|
31.6
|
|
|
$
|
23.9
|
|
|
$
|
26.2
|
|
Electronic Materials
|
|
|
13.5
|
|
|
|
33.2
|
|
|
|
21.0
|
|
Color and Glass Performance
Materials
|
|
|
38.9
|
|
|
|
37.1
|
|
|
|
41.7
|
|
Polymer Additives
|
|
|
18.5
|
|
|
|
(.9
|
)
|
|
|
2.5
|
|
Specialty Plastics
|
|
|
13.4
|
|
|
|
9.6
|
|
|
|
12.8
|
|
Other
|
|
|
2.1
|
|
|
|
3.6
|
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment income
|
|
|
118.0
|
|
|
|
106.5
|
|
|
|
107.3
|
|
Unallocated expenses
|
|
|
(47.9
|
)
|
|
|
(36.8
|
)
|
|
|
(50.1
|
)
|
Interest expense
|
|
|
(46.9
|
)
|
|
|
(42.0
|
)
|
|
|
(43.1
|
)
|
Interest earned
|
|
|
.5
|
|
|
|
.9
|
|
|
|
.9
|
|
Foreign currency
|
|
|
(1.3
|
)
|
|
|
(3.0
|
)
|
|
|
(1.2
|
)
|
Gain on sale of businesses
|
|
|
.1
|
|
|
|
5.2
|
|
|
|
|
|
Miscellaneous net
|
|
|
1.6
|
|
|
|
.4
|
|
|
|
(1.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes from
continuing operations
|
|
$
|
24.1
|
|
|
$
|
31.2
|
|
|
$
|
12.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Depreciation and amortization by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in millions)
|
|
|
Performance Coatings
|
|
$
|
13.3
|
|
|
$
|
13.3
|
|
|
$
|
12.4
|
|
Electronic Materials
|
|
|
19.3
|
|
|
|
19.8
|
|
|
|
19.7
|
|
Color and Glass Performance
Materials
|
|
|
10.4
|
|
|
|
11.5
|
|
|
|
11.2
|
|
Polymer Additives
|
|
|
10.6
|
|
|
|
10.6
|
|
|
|
8.9
|
|
Specialty Plastics
|
|
|
4.2
|
|
|
|
4.5
|
|
|
|
5.2
|
|
Other
|
|
|
7.3
|
|
|
|
5.1
|
|
|
|
5.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment depreciation and
amortization
|
|
|
65.1
|
|
|
|
64.8
|
|
|
|
62.8
|
|
Other
|
|
|
9.7
|
|
|
|
10.2
|
|
|
|
13.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated depreciation
and amortization
|
|
$
|
74.8
|
|
|
$
|
75.0
|
|
|
$
|
76.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at December 31 by segment:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in millions)
|
|
|
Performance Coatings
|
|
$
|
339.8
|
|
|
$
|
347.7
|
|
Electronic Materials
|
|
|
382.9
|
|
|
|
400.9
|
|
Color and Glass Performance
Materials
|
|
|
249.0
|
|
|
|
275.3
|
|
Polymer Additives
|
|
|
235.5
|
|
|
|
243.6
|
|
Specialty Plastics
|
|
|
98.6
|
|
|
|
105.9
|
|
Other
|
|
|
117.5
|
|
|
|
113.6
|
|
|
|
|
|
|
|
|
|
|
Total segment assets
|
|
|
1,423.3
|
|
|
|
1,487.0
|
|
Other assets
|
|
|
245.2
|
|
|
|
246.4
|
|
|
|
|
|
|
|
|
|
|
Total consolidated assets
|
|
$
|
1,668.5
|
|
|
$
|
1,733.4
|
|
|
|
|
|
|
|
|
|
|
Segment assets primarily consist of trade receivables,
inventories, intangibles, and property, plant and equipment, net
of applicable reserves. Other assets include cash, deferred
taxes, pension assets, and other items.
65
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Intangible assets at December 31 by segment:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in millions)
|
|
|
Performance Coatings
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
46.5
|
|
|
$
|
46.7
|
|
Other intangibles
|
|
|
.3
|
|
|
|
.3
|
|
Accumulated amortization
|
|
|
(.4
|
)
|
|
|
(.4
|
)
|
|
|
|
|
|
|
|
|
|
Total Performance Coatings
|
|
|
46.4
|
|
|
|
46.6
|
|
Electronic Materials
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
161.1
|
|
|
|
162.3
|
|
Other intangibles
|
|
|
21.9
|
|
|
|
21.9
|
|
Accumulated amortization
|
|
|
(16.3
|
)
|
|
|
(15.8
|
)
|
|
|
|
|
|
|
|
|
|
Total Electronic Materials
|
|
|
166.7
|
|
|
|
168.4
|
|
Color and Glass Performance
Materials
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
65.6
|
|
|
|
65.0
|
|
Other intangibles
|
|
|
4.4
|
|
|
|
4.4
|
|
Accumulated amortization
|
|
|
(2.8
|
)
|
|
|
(2.4
|
)
|
|
|
|
|
|
|
|
|
|
Total Color and
Glass Performance Materials
|
|
|
67.2
|
|
|
|
67.0
|
|
Polymer Additives
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
39.5
|
|
|
|
39.9
|
|
Other intangibles
|
|
|
42.4
|
|
|
|
42.4
|
|
Accumulated amortization
|
|
|
(9.0
|
)
|
|
|
(9.0
|
)
|
|
|
|
|
|
|
|
|
|
Total Polymer Additives
|
|
|
72.9
|
|
|
|
73.3
|
|
Specialty Plastics
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
20.7
|
|
|
|
20.8
|
|
Other intangibles
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
|
(3.8
|
)
|
|
|
(3.8
|
)
|
|
|
|
|
|
|
|
|
|
Total Specialty Plastics
|
|
|
16.9
|
|
|
|
17.0
|
|
Other
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
42.3
|
|
|
|
41.4
|
|
Other intangibles
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
|
(1.7
|
)
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
Total Other
|
|
|
40.6
|
|
|
|
40.2
|
|
|
|
|
|
|
|
|
|
|
Total consolidated intangible
assets, net
|
|
$
|
410.7
|
|
|
$
|
412.5
|
|
|
|
|
|
|
|
|
|
|
66
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Expenditures for long-lived assets (including acquisitions) by
segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in millions)
|
|
|
Performance Coatings
|
|
$
|
13.9
|
|
|
$
|
12.9
|
|
|
$
|
8.8
|
|
Electronic Materials
|
|
|
6.8
|
|
|
|
3.6
|
|
|
|
4.8
|
|
Color and Glass Performance
Materials
|
|
|
4.6
|
|
|
|
4.8
|
|
|
|
7.5
|
|
Polymer Additives
|
|
|
3.7
|
|
|
|
4.7
|
|
|
|
5.1
|
|
Specialty Plastics
|
|
|
2.3
|
|
|
|
3.2
|
|
|
|
2.7
|
|
Other
|
|
|
9.4
|
|
|
|
9.9
|
|
|
|
4.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment expenditures for
long-lived assets
|
|
|
40.7
|
|
|
|
39.1
|
|
|
|
33.8
|
|
Other
|
|
|
2.1
|
|
|
|
|
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated expenditures
for long-lived assets
|
|
$
|
42.8
|
|
|
$
|
39.1
|
|
|
$
|
36.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic revenues are based on the region in which the
customer invoice is generated. The United States of America is
the single largest country for customer sales. No other single
country represents greater than 10% of the Companys
consolidated sales. Net sales by geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in millions)
|
|
|
United States
|
|
$
|
925.9
|
|
|
$
|
900.0
|
|
|
$
|
776.4
|
|
International
|
|
|
956.4
|
|
|
|
943.7
|
|
|
|
839.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,882.3
|
|
|
$
|
1,843.7
|
|
|
$
|
1,615.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Except for the United States of America, no single country has
greater than 10% of consolidated long-lived assets. Long-lived
assets by geographic region at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in millions)
|
|
|
United States
|
|
$
|
604.8
|
|
|
$
|
626.8
|
|
|
$
|
649.3
|
|
International
|
|
|
337.0
|
|
|
|
384.4
|
|
|
|
386.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
941.8
|
|
|
$
|
1,011.2
|
|
|
$
|
1,035.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.
|
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 due to the short
period to maturity of the instruments.
The Company manages currency risks principally by entering into
forward contracts to mitigate the impact of currency
fluctuations on transactions and other exposures. The maturity
of such foreign currency forward contracts is consistent with
the underlying exposure, generally less than one year. The
Company does not engage in speculative transactions for trading
purposes. The contracts are
marked-to-market
at the end of each reporting period, with the corresponding gain
or loss included in the consolidated statement of income. At
December 31, 2005, the notional amount and fair value of
these forward contracts was $119.3 million and
$0.1 million, respectively. At December 31, 2004, the
notional amount and fair value of these forward contracts was
$116.7 million and $(0.7) million, respectively. These
forward contracts are executed with major reputable
multinational financial institutions. Accordingly, the Company
does not anticipate counter-party default.
67
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company purchases portions of its natural gas requirements
under fixed price contracts, which in certain circumstances,
although unlikely because committed quantities are below
expected usage, could result in the Company settling its
obligations under these contracts in cash at prevailing market
prices. In compliance with FASB Statement No. 133,
Accounting for Derivative Instruments and Hedging
Activities, (FAS No. 133), as amended by
Statement No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities,
(FAS No. 149), the Company marked these contracts to
fair value and recognized the resulting gains or losses as
miscellaneous income or expense, respectively. Natural gas
contracts at December 31, 2005, and 2004, respectively, for
1.2 million and 1.5 million MMBTUs of natural
gas had fair values of $2.1 million and
$(0.9) million. Purchase commitments at December 31,
2005, for natural gas were $10.6 million.
The Company also hedges a portion of its exposure to changes in
the pricing of certain nickel and zinc commodities using
derivative financial instruments. Nickel and zinc are raw
materials used in the Companys tile, porcelain enamel, and
color and glass product lines. The hedges are accomplished
principally through swap arrangements that allow the Company to
fix the pricing of the commodities for future purchases. While
hedged quantities are below expected usage, these swap
arrangements, unlike the natural gas contracts, do not provide
for physical delivery of the commodity but require the Company
to settle its obligations in cash at the maturity of the
contracts. In compliance with FAS No. 133 and
FAS No. 149, the Company marks these contracts to fair
value and recognizes the resulting gains or losses as other
comprehensive income. After the contracts mature and the
materials are sold, the gains and losses are recognized as a
part of cost of goods sold. Nickel and zinc contracts at
December 31, 2005, for 3,092 metric tons had a fair value
of $0.1 million. There were no such contracts at
December 31, 2004.
The Company consigns, from various financial institutions,
precious metals (primarily silver, gold, platinum and palladium,
collectively metals) used in the production of
certain products for customers. Under these consignment
arrangements, the financial institutions provide the Company
with metals for a specified period of one year or less in
duration, for which the Company pays a fee. Under these
arrangements, the financial institutions own the metals, and
accordingly, the Company does not report these consigned
materials as part of its inventory on its consolidated balance
sheet. These agreements are cancelable by either party at the
end of each consignment period, however, because the Company has
access to a number of consignment arrangements with available
capacity, consignment needs can be shifted among the other
participating institutions. In certain cases, these other
participating institutions may require cash deposits to provide
additional collateral beyond the underlying precious metals. In
the fourth quarter of 2005, due to the Companys delay in
filing consolidated financial statements, certain financial
institutions began to require the Company to make deposits. At
December 31, 2005, the Company had outstanding deposits of
$19.0 million, which are included in other current assets
in the Companys consolidated balance sheets. The fair
value of the Companys rights and obligations under these
arrangements at December 31, 2005 and 2004 was not material.
Cost of sales related to the consignment arrangements fees
were $1.6 million for 2005, $2.4 million for 2004, and
$1.6 million for 2003. At December 31, 2005 and 2004,
the Company had 5.9 million and 9.4 million troy
ounces of metals (primarily silver) on consignment for periods
of less than one year with market values of $99.3 million
and $106.4 million, respectively.
The consignment arrangements allow for the Company to replace
the metals used in the manufacturing process by obtaining
replacement quantities on the spot market and to charge the
customer for the cost of the replacement quantities. In certain
circumstances, customers request, at the time an order is
placed, a fixed price for the portion of the sales price
relating to metals content in the finished goods. In these
instances, the Company will enter into a fixed price sales
contract to establish the cost for the customer at the estimated
future delivery date. At the same time, the Company enters into
a forward purchase arrangement with a metal supplier to
completely cover the value of the fixed price sales contract. At
December 31, 2005 and 2004, the Company had 3,000 and
599,000 troy ounces of metals (primarily silver) with market
values of $0.1 million and $1.7 million, respectively,
under fixed price contracts for future metal consignment
replenishments. In accordance with FAS No. 133, the
market value of these
68
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
fixed price contracts is analyzed quarterly. Due to the short
duration of the contracts (generally three months or less), the
difference between the contract values and market values at any
financial reporting date is not material.
Rent expense for all operating leases was approximately
$14.5 million in 2005, $13.9 million in 2004, and
$10.7 million in 2003. Amortization of assets recorded
under capital leases is recorded as depreciation expense.
The Company has a number of capital lease arrangements relating
primarily to buildings and production equipment. Assets held
under capitalized leases and included in property, plant and
equipment at December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Gross amounts capitalized
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
3,100
|
|
|
$
|
3,100
|
|
Equipment
|
|
|
9,583
|
|
|
|
9,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,683
|
|
|
|
12,498
|
|
Accumulated amortization
|
|
|
|
|
|
|
|
|
Buildings
|
|
|
(1,434
|
)
|
|
|
(1,356
|
)
|
Equipment
|
|
|
(5,848
|
)
|
|
|
(4,915
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,282
|
)
|
|
|
(6,271
|
)
|
|
|
|
|
|
|
|
|
|
Net capital lease assets
|
|
$
|
5,401
|
|
|
$
|
6,227
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2005, future minimum lease payments under
all non-cancelable leases are as follows:
|
|
|
|
|
|
|
|
|
|
|
Capitalized
|
|
|
Operating
|
|
|
|
Leases
|
|
|
Leases
|
|
|
|
(Dollars in thousands)
|
|
|
2006
|
|
$
|
1,628
|
|
|
$
|
11,516
|
|
2007
|
|
|
1,424
|
|
|
|
8,004
|
|
2008
|
|
|
1,222
|
|
|
|
5,070
|
|
2009
|
|
|
1,115
|
|
|
|
3,133
|
|
2010
|
|
|
1,109
|
|
|
|
2,195
|
|
Thereafter
|
|
|
5,385
|
|
|
|
9,656
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
11,883
|
|
|
$
|
39,574
|
|
|
|
|
|
|
|
|
|
|
Less amount representing executory
costs
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net minimum lease payments
|
|
|
11,860
|
|
|
|
|
|
Less amount representing imputed
interest
|
|
|
4,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of net minimum lease
payments
|
|
|
7,364
|
|
|
|
|
|
Less current portion
|
|
|
1,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term obligations at
December 31, 2005
|
|
$
|
6,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
December 31,
|
|
|
|
Economic Life
|
|
2005
|
|
|
2004
|
|
|
|
|
|
(Dollars in millions)
|
|
|
Goodwill
|
|
Indefinite
|
|
$
|
423.6
|
|
|
$
|
425.0
|
|
Patents
|
|
9-15 years
|
|
|
6.7
|
|
|
|
5.9
|
|
Non-compete
|
|
3-5 years
|
|
|
3.3
|
|
|
|
3.0
|
|
Other
|
|
1 year-indefinite
|
|
|
11.1
|
|
|
|
11.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross intangible assets
|
|
|
|
|
444.7
|
|
|
|
445.0
|
|
Accumulated amortization
|
|
|
|
|
34.0
|
|
|
|
32.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Net intangible assets
|
|
|
|
$
|
410.7
|
|
|
$
|
412.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense from continuing operations relating to
intangible assets was $0.8 million, $1.0 million, and
$1.7 million for the years ended December 31, 2005,
2004, and 2003, respectively. Amortization expense from
continuing operations related to amortizable other non-current
assets and original issue discounts was $5.6 million,
$6.2 million and $8.5 million for the years ended
December 31, 2005, 2004 and 2003, respectively.
|
|
19.
|
Property,
plant and equipment
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in millions)
|
|
|
Land
|
|
$
|
38.9
|
|
|
$
|
43.7
|
|
Buildings
|
|
|
251.7
|
|
|
|
274.3
|
|
Machinery and equipment
|
|
|
822.8
|
|
|
|
842.6
|
|
Leased property under capitalized
leases
|
|
|
12.7
|
|
|
|
12.5
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment
|
|
|
1,126.1
|
|
|
|
1,173.1
|
|
Total accumulated depreciation
|
|
|
595.0
|
|
|
|
574.4
|
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
$
|
531.1
|
|
|
$
|
598.7
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense from continuing operations was
$68.4 million, $67.8 million, and $66.4 million
for the years ended December 31, 2005, 2004, and 2003,
respectively.
In October 2005, the Dutch government placed a lien on one of
the Companys facilities in the Netherlands as collateral
for any future payment relating to an unresolved environmental
claim. Negotiations are ongoing relating to the environmental
issue. The Company does not believe the ultimate resolution of
this matter will have a material effect on the Companys
financial position or results of operations.
|
|
20.
|
Summarized
financial information of unconsolidated affiliates accounted for
under the equity method
|
The Company has entered into several joint ventures in foreign
countries through investments in the common stock of affiliate
companies. The Companys percentage of ownership interest
in these affiliated companies ranges from 20% to 50% and the
affiliates operate in Spain, Italy, South Korea and Thailand.
Because the Company does not have effective control of these
affiliates, the results of operations and financial positions of
these entities have not been consolidated. However, since the
Company exercises significant influence over the affiliates, the
related investments have been accounted for under the equity
method. The Companys investment in unconsolidated
affiliates accounted for under the equity method was
$12.7 million and $12.4 million at December 31,
2005 and
70
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2004, respectively. The Company recorded $2.5 million,
$1.7 million and $2.2 million of income in the
miscellaneous (income) expense caption in the accompanying
consolidated statements of income for the years ended
December 31, 2005, 2004 and 2003, respectively. The income
amounts recorded represent the Companys proportionate
share of the combined net income of unconsolidated affiliates
accounted for under the equity method.
Condensed income statement information for 2005, 2004 and 2003
and condensed balance sheet information as of December 31,
2005 and 2004, of the combined unconsolidated affiliates
accounted for under the equity method were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands)
|
|
|
Net sales
|
|
$
|
77,697
|
|
|
$
|
75,187
|
|
|
$
|
69,897
|
|
Cost of sales
|
|
|
57,381
|
|
|
|
56,621
|
|
|
|
53,107
|
|
Income (loss) from continuing
operations
|
|
|
8,877
|
|
|
|
7,008
|
|
|
|
6,727
|
|
Net income
|
|
|
5,987
|
|
|
|
5,202
|
|
|
|
3,909
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Current assets
|
|
$
|
44,530
|
|
|
$
|
47,556
|
|
Non-current assets
|
|
|
27,948
|
|
|
|
29,995
|
|
Current liabilities
|
|
|
28,690
|
|
|
|
32,819
|
|
Non-current liabilities
|
|
|
6,315
|
|
|
|
8,831
|
|
|
|
21.
|
Related
party transactions
|
Ferro had the following transactions with its unconsolidated
affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands)
|
|
|
Sales
|
|
$
|
5,132
|
|
|
$
|
19,354
|
|
|
$
|
5,456
|
|
Purchases
|
|
|
5,573
|
|
|
|
6,374
|
|
|
|
2,229
|
|
Dividends and interest received
|
|
|
1,069
|
|
|
|
147
|
|
|
|
|
|
Commissions and royalties received
|
|
|
292
|
|
|
|
352
|
|
|
|
335
|
|
Commissions and royalties paid
|
|
|
191
|
|
|
|
|
|
|
|
|
|
A Ferro Director, Mr. Weisser, is the Chairman and Chief
Executive Officer of Bunge Limited (Bunge) and
another Ferro Director, Mr. Bulkin, also serves on the
board of Bunge. Bunge has a controlling interest in Central Soya
Company from which Ferro purchased raw materials totaling
$11.2 million in 2005, $14.3 million in 2004, and
$7.0 million in 2003. Purchase commitments at
December 31, 2005, for these raw materials were
$5.2 million. In addition, Mr. Weisser is a member of
the board of directors of International Paper Company from which
Ferro purchased other items totaling $0.8 million in 2005.
Payables related to these purchases were less than
$0.1 million at both December 31, 2005 and 2004.
The Company had a 2.4 million guarantee, which was
outstanding at both December 31, 2005 and 2004, and was
terminated in May 2006, to support the borrowing facilities of
an unconsolidated affiliate, and also had $2.8 million due
to Ferro Finance Corporation at December 31, 2005 and 2004.
71
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Credit
Ratings Downgrade
In March 2006, the Companys senior credit rating was
downgraded to B1 by Moodys. Moodys then withdrew its
ratings. Moodys cited the absence of audited financials
for a sustained period of time and the concern that there may be
additional delays in receiving audited financial statements for
2005. Moodys also noted that the Companys business
profile is consistent with a rating in the Ba category,
according to Moodys rating methodology for the chemical
industry. Moodys indicated it could reassign ratings to
the Company once it has filed audited financials for 2004 and
2005 with the Securities and Exchange Commission. Also in March
2006, S&P lowered its rating to B+. S&P cited delays in
filing, a recent absence of transparency with regard to current
results and near term prospects, and a diminished business
profit that resulted in weak operating margins and earnings.
Although there are negative implications to these actions, the
Company anticipates that it will continue to have access to
sufficient liquidity, albeit at higher borrowing costs.
Moodys rating downgrade triggered the springing lien in
the Companys prior revolving credit facility. Under the
terms of that agreement, the lenders became entitled to security
interests in the Companys and its domestic material
subsidiaries tangible and intangible assets (with the
exception of the receivables sold as part of the Companys
asset securitization program) and the pledge of 100% of the
stock of the Companys domestic material subsidiaries and
65% of the stock of the Companys foreign material
subsidiaries. This lien grant and pledge of stock was
substantially completed in April 2006. Under the terms of the
Companys senior unsecured notes and debentures, the
holders of the Companys notes became equally secured with
the revolving credit lenders with security interests in the
Companys principal domestic manufacturing facilities and
the pledge of 100% of the stock of the Companys domestic
subsidiaries. The Company obtained a waiver from the lenders in
the revolving credit facility in place at the time (Prior
Revolving Credit Facility) to extend reporting
requirements through June 2006 for the 2004, 2005 and 2006
periods. The extension gave the Company time to put in place the
New Credit Facility as described below.
New
Credit Facility
In March 2006, the Company accepted a commitment from a
syndicate of lenders to underwrite a $700 million credit
facility (the New Credit Facility) and, in June
2006, finalized the agreement. The New Credit Facility is
comprised of a five year, $250 million multi-currency
senior revolving credit facility and a six year,
$450 million senior delayed-draw term loan facility. Under
the terms of the New Credit Facility, the Company can request
that the revolving credit facility be increased by
$50 million at no additional fee.
The New Credit Facility was entered into to replace the Prior
Revolving Credit Facility that was scheduled to expire in
September 2006. In addition, the financing, through the term
loan facility, provided capital resources sufficient to
refinance the $200 million of senior notes and
$155 million of debentures that could have become
immediately due and payable due to defaults associated with the
Companys delayed SEC financial filings for 2005. Because
one of the purposes of the term loan facility is to fund the
potential acceleration of the senior notes and debentures, the
term facility contains certain restrictions including, but not
limited to, the following:
|
|
|
|
|
$355 million of the facility is reserved to repay the
senior notes and debentures;
|
|
|
|
$95 million of the facility is immediately available for
refunding indebtedness other than the senior notes and
debentures;
|
|
|
|
The Company may access up to $55 million of the
$355 million reserved to repay the senior notes and
debentures if these obligations have not already been paid in
full and no event of default for these obligations exists and is
continuing; and
|
|
|
|
The Company may draw on the delayed-draw facility for up to one
year with any unused commitment under the term facility
terminating on June 6, 2007.
|
72
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At the close of the New Credit Facility in June 2006, the
Company drew $95 million of the term loan facility to
partially repay the old revolving credit facility. In addition,
during the third quarter of 2006, the Company drew down another
$155 million of the term loan facility to repay
$155 million of outstanding debentures, as bondholders
accelerated payment on these obligations due to the previously
mentioned 2005 SEC financial reporting delays. See further
discussion under Accelerated Repayment of Debentures
below.
The New Credit Facility bears interest at a rate equal to, at
the Companys option, either (1) LIBOR or (2) the
Alternate Base Rate (ABR) which is the higher of the
Prime Rate and the Federal Funds Effective Rate plus 0.5%; plus,
in each case, applicable margins based on the Companys
index debt rating. The New Credit Facility is secured by
substantially all of the Companys assets, including the
assets and 100% of the shares of the Companys material
domestic subsidiaries and 65% of the shares of the
Companys first tier foreign subsidiaries, but
excluding trade receivables sold pursuant to the Companys
accounts receivable sales programs. These liens are shared with
the holders of the Companys senior notes, as required
under the respective indenture.
The New Credit Facility contains customary operating covenants
that limit the Companys ability to engage in certain
activities, including limitations on additional loans and
investments; creation of additional liens; prepayments,
redemptions and repurchases of debt; and mergers, acquisitions
and asset sales. The Company is also subject to customary
financial covenants including a leverage ratio and a fixed
charge coverage ratio. Additional covenants of the New Credit
Facility require the Company to file its 2005
Form 10-K
by November 15, 2006, and its 2006
Forms 10-Q
by the earlier of three months after the 2005
Form 10-K
is filed or January 15, 2007. Failure to satisfy certain of
these covenants, either immediately or after a brief period
allowing the company to satisfy the covenant, would result in an
event of default. If any event of default should occur and be
continuing and a waiver not have been obtained, the obligations
under the New Credit Facility may become immediately due and
payable at the option of providers of more than 50% of the
credit facility commitment.
Accelerated
Repayment of Debentures
As the Company anticipated and planned for, in March and April
2006, the Company received notices of default from a holder and
the Trustee of the senior notes and debentures of which
$355 million was outstanding. The notices of default
related only to reporting requirements and the related
Officers Certificate. Under the terms of the indentures,
the Company had 90 days from the notices of default to cure
the deficiencies identified in the notices of default or obtain
waivers, or events of default would have occurred and the
holders or the bondholders of the senior notes or debentures
could declare the principal immediately due and payable. At the
end of these periods, the deficiencies had not been cured and
waivers had not been obtained. During July and August 2006, the
bondholders accelerated the payment of the principal amount of
the debentures, of which $155 million was outstanding, and
the Company financed the accelerated repayments by use of the
aforementioned $450 million term loan facility.
Asset
Securitization Program
In June 2006, the Company amended the asset securitization
program to extend it up to June 2, 2009, to cure a default
resulting from a credit rating downgrade, and to modify the
reporting requirements to more closely match those in the New
Credit Facility. While the Company expects to maintain a
satisfactory U.S. asset securitization program to help meet
the Companys liquidity requirements, factors beyond the
Companys control such as prevailing economic, financial
and market conditions may prevent the Company from doing so.
Pension
and Other Postretirement Benefits
On April 1, 2006, the Company froze retirement benefit
accumulations for its largest defined benefit pension plan,
which covers certain salaried and certain hourly employees in
the United States. The affected employees now receive benefits
in the Companys defined contribution plan that previously
covered only U.S. salaried employees hired after
June 30, 2003. The new plan supports a diverse and mobile
workforce with a competitive, flexible and
73
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
portable retirement benefit, while lowering and providing
greater predictability to the Companys cost structure.
These changes do not affect current retirees or former employees.
Additionally, the Company limited eligibility for the retiree
medical and life insurance coverage for all eligible nonunion
employees. Only employees age 55 or older with 10 or more
years of service as of December 31, 2006, will be eligible
for post-retirement medical and life insurance benefits.
Moreover, these benefits will be available only to those
employees who retire by December 31, 2007, after having
advised the Company of their retirement plans by March 31,
2007. These changes do not affect current retirees.
The Company estimates that the changes in these retirement plans
will reduce expenses by $30 to $40 million in total over
the upcoming five years. Ferro expects its overall net periodic
cost (U.S. pension, U.S. retiree medical, and
non-U.S. pension)
to decrease approximately $5.2 million from 2005 to 2006,
primarily due to $10.0 million in expense reductions
relating to the aforementioned changes in the pension and
retiree medical programs, offset by $4.2 million in charges
primarily relating to a lump sum payment to the beneficiary of
its deceased former Chief Executive Officer from a nonqualified
defined benefit retirement plan.
Legal
Proceedings
In February 2003, the Company was requested to produce documents
in connection with an investigation by the United States
Department of Justice into possible antitrust violations in the
heat stabilizer industry. In April 2006, the Company was
notified by the Department of Justice that the Government had
closed its investigation and that the Company was relieved of
any obligation to retain documents that were responsive to the
Governments earlier document request.
Four derivative lawsuits were commenced in 2004 and subsequently
consolidated into a single action in the United States District
Court for the Northern District of Ohio. These lawsuits alleged
breach of fiduciary duties and mismanagement-related claims. On
March 31, 2006, the Court dismissed the consolidated
derivative action without prejudice. On April 8, 2006,
plaintiffs filed a motion seeking relief from the judgment
dismissing the derivative lawsuit and seeking to further amend
their complaint following discovery, which was denied. On
April 13, 2006, plaintiffs also filed a Notice of Appeal to
the Sixth Circuit Court of Appeals.
In October 2005, the Company disclosed to the New Jersey
Department of Environmental Protection (NJDEP)
that it had identified potential violations of the New Jersey
Water Pollution Control Act and the Company commenced an
investigation and committed to report any violations and to
undertake any necessary remedial actions. In September 2006, the
NJDEP and the Company entered into a settlement for
$0.2 million.
74
Item 9
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Changes in Accountants. On May 12, 2006,
the Audit Committee dismissed KPMG LLP, which had served as
Ferros auditors for the fiscal year ended
December 31, 2004, and prior years, as the Companys
independent registered public accountants. The audit reports of
KPMG on the consolidated financial statements of Ferro and its
subsidiaries as of and for the years ended December 31,
2004 and December 31, 2003 did not contain an adverse
opinion or a disclaimer of opinion, and were not qualified or
modified as to uncertainty, audit scope or accounting
principles, except that the report for year ended
December 31, 2004, stated that Ferro had restated its
fiscal 2003 consolidated financial statements and stated that
certain liquidity uncertainties facing Ferro raised substantial
doubt about its ability to continue as a going concern.
On May 18, 2006, the Company announced that its Audit
Committee had appointed a new independent registered public
accounting firm to conduct the 2005 audit, subject only to
completion of the new firms customary client acceptance
procedures. On June 5, 2006, the Company announced that
those procedures had been completed and that Deloitte &
Touche LLP had been engaged as the Companys new
independent registered public accountants.
Disagreements with Auditors. There was no
disagreement with Deloitte & Touch LLP on accounting
and financial statement disclosure. The only disagreements that
KPMG communicated to the Audit Committee during the 2003 and
2004 fiscal years or the period from December 31, 2004 to
May 12, 2006 involved the Audit Committees internal
investigation of irregular accounting entries as follows:
In early July 2004, as a result of issues discovered by
management during the performance of certain of the
Companys internal control procedures in connection with
the preparation of the Companys second quarter 2004
financial statements, the Company commenced an internal
investigation into certain potentially inappropriate accounting
entries made in the Companys domestic Polymer Additives
business unit.
Following an initial investigation, management reached the
preliminary conclusion that inappropriate accounting in the
Companys Polymer Additives business unit both overstated
the units historical performance and undermined the
reliability of the units forecasting process. On
July 23, 2004, the Company issued a press release
announcing that the Companys Polymer Additives business
units performance in the second quarter fell short of
expectations and that the Companys Audit Committee had
engaged independent legal counsel (Jones Day) and an independent
public accounting firm (Ernst & Young LLP) to conduct
an investigation under its auspices.
On September 15, 2004, the Company announced it would be
restating certain previously-filed information and reported that
the independent investigation conducted under the auspices of
the Audit Committee had generally confirmed managements
preliminary conclusions reported in the Companys
July 23, 2004, press release. The September 15 release
reported that the investigative team had concluded that all of
the potentially irregular accounting entries were made at the
Polymer Additives business unit and were made without senior
managements knowledge or involvement. The release also
reported that the investigative team concluded that
substantially all of the irregular accounting entries were made
by a subordinate divisional employee who had since left the
Company.
At a meeting of the Audit Committee on September 23, 2004,
KPMG expressed its concern about several emails reviewed during
the initial phase of the investigation and expressed its desire
to have more work done to determine whether those emails raised
additional concerns. In response to KPMGs expressed
concerns, the Audit Committee directed Jones Day and
Ernst & Young to conduct further investigation through
additional email searches, interviews of participants in the
questioned email exchanges and any other person who might have
relevant knowledge, and other documents as they deemed
appropriate.
On October 25, 2004, the Audit Committee met by
teleconference and received the report of Jones Day and
Ernst & Young concerning the expanded email review
requested by KPMG. The investigators reported to the Audit
Committee that they had not found illegal acts or an intent to
commit fraud, but found some evidence of immaterial mistakes in
the timing of recording expenses as required by generally
accepted accounting principles. These findings were reported to
KPMG and, on November 19, 2004, the Audit Committee
concluded that the additional work done by Jones Day and
Ernst & Young indicated no evidence of fraud and no
reasonable need to expand the investigation. KPMG had expressed
disagreement with the investigators findings and the Audit
Committee invited KPMG to provide a written list of any
recommendations it might have and the rationale therefore.
75
Following the November 19, 2004, meeting, Jones Day and
Ernst & Young had discussions with KPMG concerning what
additional investigatory work would be needed to address
KPMGs concerns. In addition, at about the same time the
investigators learned that the former subordinate division
employee who was responsible for the irregular accounting
entries at the Companys Polymer Additives Division was
willing, for the first time, to be interviewed. In that
interview, the former employee confirmed the irregular entries
that the investigators had reported earlier and the fact that he
had made those entries without any knowledge or involvement of
senior management. The employee also raised some suspicions of
irregular accounting entries in another smaller business unit.
In late December 2004, following discussions with the
investigation team, the Chair of the Audit Committee and the
Companys now-deceased Chief Executive Officer met by
teleconference with KPMG. At that meeting, the Audit Committee
Chair advised KPMG that the Audit Committee was willing, as
requested by KPMG, to go forward with further investigation
procedures to determine whether there was a pervasive pattern of
intentional, inappropriate spreading of expenses, emphasized
that independent investigators needed to exercise
discretion and make independent judgments, and emphasized the
need to complete the investigation expeditiously.
On January 18, 2005, in a press release the Company
reported KPMG had requested Jones Day and Ernst & Young
to perform additional procedures, including the review of
certain electronic files. In addition, the release disclosed
that the former subordinate division employee had been
interviewed and had confirmed the irregular entries that the
investigators had reported earlier and the fact that he had made
the entries without any knowledge or involvement of senior
management and of the suspicions he had raised about the other
business unit (which were also to be reviewed by the
investigation team).
Jones Day and Ernst & Young delivered their third phase
investigation report to the Audit Committee on March 9,
2005. In that report, the investigators concluded:
|
|
|
|
|
The investigative team did not find evidence of a systemic or
pervasive pattern or practice of managing earnings by
inappropriately spreading expenses over reporting periods or any
other means or conduct that constituted illegal acts,
|
|
|
|
The leadership of Ferros finance organization strives to
apply generally accepted accounting principles and produce
accurate financial records, and
|
|
|
|
All of the individuals potentially responsible for irregular
accounting entries either had resigned before the investigation
started or had been terminated by the Company.
|
On March 15 and April 4, 2005, following delivery of the
Jones Day/Ernst & Young report on the additional
procedures, KPMG advised the Audit Committee that it was
dissatisfied with the conclusions of Jones Day and
Ernst & Young and that it regarded the investigation as
inadequate for its purposes. KPMG indicated that further
investigation would be necessary to constitute a
predicate for an audit report and further that such
further investigation should be undertaken by a new
investigative team.
After further deliberations by the Audit Committee during April
2005, on April 21, 2005, the Company announced that Jones
Day and Ernst & Young had completed the additional
procedures requested by KPMG and reported the
investigators findings. The release also noted that
investigators had again confirmed their earlier conclusions that
substantially all of the irregular entries had been made by the
former subordinate divisional employee and that the entries were
made without any knowledge or involvement of senior management.
The April 21, 2005, press release also reported that,
despite the findings and conclusions of the investigation, KPMG
had advised the Audit Committee that KPMG was unable to conclude
at that time that the investigation was adequate for its
purposes, that KPMG believed further investigation was necessary
to constitute a predicate for its audit of the Companys
financial statements, and that KPMG had proposed that such
investigative work should be undertaken by a new
investigation team. The Companys Audit Committee had
evaluated both KPMGs position and the Jones
Day/Ernst & Young reports relating to the issues raised
by KPMG. On the basis of that evaluation, the Company reported
that the Audit Committee believed it could rely in good faith on
the judgments and conclusions of the independent investigators,
that additional investigation was neither necessary nor
justified, and that the only
76
additional work that was necessary was routine audit
examinations that fell outside the province of the investigation
team.
While the Audit Committee continued to believe its reliance on
the judgments and conclusions of the investigative team was
justified, the April 21, 2005, press release disclosed that
the Audit Committee had responded to KPMGs expressed
concerns in such a way that KPMG would be able to complete its
audit of the Companys financial statements. To that end,
the Audit Committee engaged a second independent investigative
team, consisting of independent legal counsel (Venable LLP) and
independent forensic accountants (Navigant Consulting).
In an October 31, 2005, press release, the Company reported
that the Venable/Navigant team had completed its investigation.
Venable and Navigant reported to the Audit Committee that,
although they found evidence of Ferro accounting personnel
spreading expenses and some other misapplications of generally
accepted accounting principles to achieve internal forecasts,
they did not find that this was done with the intent to affect
reported earnings in a way that misleads the investing public.
The investigators also indicated that, while they found a lax
tone with respect to GAAP compliance among certain former
members of the Companys finance organization, they were
comfortable that the then-current senior management of the
Company, including the chief executive officer and chief
financial officer, set a positive tone with respect to
accounting practices. Consequently, the Venable/Navigant team
concluded that it found no pervasive pattern or practice of
engaging in fraudulent earnings management, that is, the
misapplication of generally accepted accounting principles with
the intent to affect reported earnings in a way that misleads
the investing public.
The Company has authorized KPMG to respond fully to the
inquiries of the successor independent registered public
accounting firm concerning the subject matter of the
disagreements discussed in the preceding paragraphs.
Reportable Events. In managements
assessment of internal controls as of December 31, 2004,
included under Item 9A of the Companys Annual Report
on
Form 10-K
for the fiscal year ended December 31, 2004, management
identified the following material weaknesses of internal control
over financial reporting: (i) inadequately trained and
insufficient numbers of accounting personnel coupled with
insufficient accounting policies and procedures;
(ii) non-adherence to policies and procedures associated
with the financial statement reporting process;
(iii) failure to consistently reconcile and perform timely
reviews of accounting reconciliations, data files and journal
entries; (iv) failure to properly identify and ensure
receipt of agreements for review by accounting personnel; and
(v) failure to consistently review the calculations and
accounting for amounts due to employees under various
compensation plans, and concluded that the Companys
internal control over financial reporting was not effective as
of December 31, 2004. KPMGs report under Item 9A
included KPMGs opinion that managements assessment
was fairly stated in all material respects and that, because of
the effect of the material weaknesses identified by management
described above, the Company had not maintained effective
internal control over financial reporting as of
December 31, 2004.
During the course of the Venable/Navigant investigation, on
October 26, 2005, KPMG requested that senior Company
financial personnel review entries that had been made during the
period being restated by one former and one current member of
the Companys finance function so as to be able to provide
KPMG with management representations concerning those entries.
The report of KPMG on the consolidated financial statements of
the Company for the years ended December 31, 2003 and
December 31, 2004 included in the
Form 10-K
for the fiscal year ended December 31, 2004 stated, as
described above, that the Company restated its fiscal 2003
consolidated financial statements. Representatives of KPMG will
not attend the Annual Meeting.
Item 9A
Controls and Procedures
|
|
(a)
|
Evaluation
of Disclosure Controls and Procedures
|
Pursuant to
Rule 13a-15(e)
of the Securities Exchange Act of 1934 (the Exchange
Act), the Companys management, under the supervision
and with the participation of the Chief Executive Officer and
the Chief Financial Officer, evaluated the effectiveness of the
design and operation of the Companys disclosure controls
and procedures as of December 31, 2005. Based on that
evaluation, and the material weaknesses noted below, management
concluded that the disclosure controls and procedures were not
effective as of December 31, 2005.
77
Procedures were undertaken in order for management to conclude
that reasonable assurance exists regarding the reliability of
the consolidated financial statements contained in this filing.
Accordingly, management believes that the consolidated financial
statements included in this
Form 10-K
present fairly, in all material respects, the financial
position, results of operations and cash flows for the periods
presented.
|
|
(b)
|
Managements
Report on Internal Control over Financial Reporting
|
The Companys management is responsible for establishing
and maintaining adequate internal control over financial
reporting as such term is identified in Exchange Act
Rule 13a-15(f).
The Companys internal control system is a process designed
by, or under the supervision of, the issuers principal
executive and principal financial officers, or persons
performing similar functions, and effected by the issuers
board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with U.S. generally
accepted accounting principles (U.S. GAAP).
The Companys internal control over financial reporting
includes policies and procedures that pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect transactions and dispositions of assets; provide
reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with
U.S. GAAP, and that receipts and expenditures are being
made only in accordance with the authorization of its management
and directors; and provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition use
or disposition of the Companys assets that could have a
material effect on its consolidated financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to risk that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Companys
internal control over financial reporting as of
December 31, 2005. In making this assessment, the Company
used the control criteria framework of the Committee of
Sponsoring Organizations of the Treadway Commission published in
its report entitled Internal Control-Integrated
Framework. As a result of its assessment, management
identified material weaknesses in the Companys internal
control over financial reporting. Based on the weaknesses
identified as described below, management concluded that the
Companys internal control over financial reporting was not
effective as of December 31, 2005. The independent
registered public accounting firm that audited the
Companys consolidated financial statements has issued an
audit report on managements assessment of, and the
effectiveness of, the Companys internal control over
financial reporting as of December 31, 2005. This report
appears in Item 9A(e).
A material weakness is a significant deficiency, or combination
of significant deficiencies, that results in a more than a
remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected.
As a result of its assessment, the Company has identified the
following material weaknesses in internal control over financial
reporting as of December 31, 2005:
1. Inadequately trained and insufficient numbers of
accounting personnel coupled with insufficient accounting
policies and procedures. A number of the
Companys finance and accounting personnel were
inadequately trained and lacked the appropriate expertise in
accounting principles generally accepted in the United States of
America (U.S. GAAP) to prepare financial
information for inclusion in the Companys consolidated
financial statements. Also, staffing levels in the accounting
functions in certain locations were insufficient given the
complexity of the various accounting systems and the
Companys geographic dispersion. Furthermore, the
Companys accounting policies and procedures were either
insufficiently prescriptive or insufficiently comprehensive to
ensure proper and consistent application of U.S. GAAP
throughout the organization. This resulted in insufficient
processes and procedures in accounting for employee benefit
obligations, property, plant and equipment, leases, derivatives,
revenues, customer rebates, and income taxes.
78
This material weakness was also a contributing factor to the
following material weaknesses:
2. Failure to consistently reconcile and perform timely
reviews of accounting reconciliations, data files and journal
entries. Specifically, deficiencies were noted in
the following areas: a) inadequate support for and
inconsistent performance of management approval of post-closing
and nonstandard journal entries in many business units;
b) inconsistent performance of account reconciliations and
analysis for all significant accounts on a timely basis;
c) inconsistent review of account reconciliations; and
d) inconsistent review of changes to certain key data
files. As a result, adjustments were required to correct accrued
liabilities, accounts receivable, income taxes, intercompany
accounts, other assets, and related income statement accounts in
the consolidated financial statements.
3. Failure to properly identify and ensure receipt of
agreements for review by accounting
personnel. The Company did not have appropriate
controls in place to ensure that all agreements with financial
reporting implications were received by accounting personnel for
timely review and analysis. Specifically, controls were not
designed and documented properly to ensure that all procurement
contracts and customer agreements would be accounted for
properly or in a timely manner.
|
|
(c)
|
Changes
in Internal Control over Financial Reporting and Other
Remediation
|
During 2005, the Company continued remediation activities, some
of which began during 2004 and others which were undertaken
during 2005. Several of these activities were completed during
2005 which had or should have a positive affect on the
Companys internal control over financial reporting.
Changes in the Companys internal control over financial
reporting and other remediation activities during the quarters
ended March 31, June 30, September 30, and
December 31, 2005, that materially improved, or are
reasonably likely to improve, the Companys internal
control over financial reporting:
The following actions listed below are remedial actions taken in
response to the material weaknesses identified by management:
|
|
|
|
|
Added the positions of Chief Accounting Officer and Director of
Financial Reporting to the accounting organization, as well as
added upgraded technical resources within the Corporate
accounting staff (including the use of contract personnel);
|
|
|
|
Adopted an account reconciliation policy that includes the
assignment of all accounts to specific associates, monthly
deadlines for completing reconciliations and review of the
reconciliation of each account on a monthly or quarterly basis
depending on the nature of the account;
|
|
|
|
Initiated an analysis of the global accounting organization to
assess whether any additional resources are needed; resulting in
the addition of several positions;
|
|
|
|
Further refinement, expansion and communication of the
Accounting Policies and Procedures manual; and
|
|
|
|
Migration of two international sites of the Companys
various stand-alone information systems to the global SAP
platform with the objective of having one integrated system with
improved corporate oversight.
|
Except as disclosed above, there were no changes in the
Companys internal control over financial reporting during
the quarters ended March 31, June 30,
September 30, and December 31, 2005, that materially
affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.
|
|
(d)
|
Additional
Changes in Internal Control over Financial Reporting and Other
Remediation
|
During 2006, the Company continued its remediation activities,
including those underway during 2005. At the date of the filing
of this
Form 10-K,
many of these activities were completed, which had or are
expected to have a significant positive effect on the
Companys internal control over financial reporting.
Changes in the Companys internal control over financial
reporting and other remediation activities subsequent to
December 31, 2005, that materially improved, or are
reasonably likely to improve, the Companys internal
control over financial reporting:
|
|
|
|
|
Reorganized the Companys finance organization such that
there is now a bifurcation between the accounting and financial
planning and analysis functions; added additional personnel due
to this change;
|
79
|
|
|
|
|
Conducted in-person regional training sessions in Asia, Europe
and the United States for over 100 accounting personnel;
topics covered included revenue recognition, accounting for
leases, derivative financial instruments, asset impairments,
postretirement benefits, asset retirement obligations,
environmental and other contingencies, account reconciliations,
journal entry support, and internal controls;
|
|
|
|
Conducted in-person training session on derivative contracts
with members of centralized purchasing department;
|
|
|
|
Upgraded the position of Manager of Financial Reporting and
added the position or Manager of Financial Accounting as well as
other additions to the Corporate accounting staff;
|
|
|
|
Continued refinement, expansion and communication of the
Accounting Policies and Procedures manual; updates included,
among others, issuance of expanded revenue recognition policy,
lease accounting policy, and development of checklist for
identification of potential derivatives in raw material purchase
agreements;
|
|
|
|
Simplified attainment matricies underlying a major incentive
compensation program;
|
|
|
|
Initiated revisions of year end reporting packages to provide
greater oversight ability with respect to, among other areas,
restructuring costs, environmental contingencies, and defined
benefit plans;
|
|
|
|
Established new general ledger accounts to simplify
reconciliation and tracking processes for various matters,
including legal contingencies and environmental
contingencies; and
|
|
|
|
Continued migration of the Companys various stand-alone
information systems to the global SAP platform with the
objective of having one integrated system with improved
corporate oversight; two more locations migrated onto SAP thus
far into 2006.
|
The Company will continue to evaluate the effectiveness of its
controls and procedures (both disclosure controls and procedures
and internal control over financial reporting) on an ongoing
basis, including consideration of the material weaknesses
identified above, or other deficiencies it identifies. The
Company will implement further actions as necessary in its
continuing assessment of disclosure controls and internal
controls over financial reporting. While the Company believes
that its remedial measures have substantially improved the
Companys control processes and procedures, there is no
absolute assurance that the continuing implementation of these
measures will succeed in making the Companys internal
controls over financial reporting effective.
|
|
(e)
|
Report of
Independent Registered Public Accounting Firm
|
To the Board of Directors and Shareholders of
Ferro Corporation
Cleveland, Ohio
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control over
Financial Reporting (Item 9A(b)), that Ferro Corporation
and subsidiaries (the Company) did not maintain
effective internal control over financial reporting as of
December 31, 2005, because of the effect of the material
weaknesses identified in managements assessment, based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Companys management is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express an opinion on managements assessment and an
opinion on the effectiveness of the Companys internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
80
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
Companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the Companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
A material weakness is a significant deficiency, or combination
of significant deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. The
following material weaknesses have been identified and included
in managements assessment as of December 31, 2005:
1. Inadequately trained and insufficient numbers of
accounting personnel coupled with insufficient accounting
policies and procedures. A number of the
Companys finance and accounting personnel were
inadequately trained and lacked the appropriate expertise in
accounting principles generally accepted in the United States of
America (U.S. GAAP) to prepare financial
information for inclusion in the Companys consolidated
financial statements. Also, staffing levels in the accounting
functions in certain locations were insufficient given the
complexity of the various accounting systems and the
Companys geographic dispersion. Furthermore, the
Companys accounting policies and procedures were either
insufficiently prescriptive or insufficiently comprehensive to
ensure proper and consistent application of U.S. GAAP
throughout the organization. This resulted in insufficient
processes and procedures in accounting for employee benefit
obligations, property, plant and equipment, leases, derivatives,
revenues, customer rebates, and income taxes.
This material weakness was also a contributing factor to the
following material weaknesses:
2. Failure to consistently reconcile and perform timely
reviews of accounting reconciliations, data files and journal
entries. Specifically, deficiencies were noted in
the following areas: a) inadequate support for and
inconsistent performance of management approval of post-closing
and nonstandard journal entries in many business units;
b) inconsistent performance of account reconciliations and
analysis for all significant accounts on a timely basis;
c) inconsistent review of account reconciliations; and
d) inconsistent review of changes to certain key data
files. As a result, adjustments were required to correct accrued
liabilities, accounts receivable, income taxes, intercompany
accounts, other assets, and related income statement accounts in
the consolidated financial statements.
3. Failure to properly identify and ensure receipt of
agreements for review by accounting
personnel. The Company did not have appropriate
controls in place to ensure that all agreements with financial
reporting implications were received by accounting personnel for
timely review and analysis. Specifically, controls were not
designed and documented properly to ensure that all procurement
contracts and customer agreements would be accounted for
properly or in a timely manner.
These material weaknesses were considered in determining the
nature, timing, and extent of audit tests applied in our audit
of the consolidated financial statements and financial statement
schedule as of and for the year ended December 31, 2005, of
the Company and this report does not affect our report on such
financial statements and financial statement schedule.
81
In our opinion, managements assessment that the Company
did not maintain effective internal control over financial
reporting as of December 31, 2005, is fairly stated, in all
material respects, based on the criteria established in Internal
Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Also, in
our opinion, because of the effect of the material weaknesses
described above on the achievement of the objectives of the
control criteria, the Company has not maintained effective
internal control over financial reporting as of
December 31, 2005, based on the criteria established in
Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement
schedule as of and for the year ended December 31, 2005, of
the Company and our report dated September 29, 2006,
expressed an unqualified opinion on those consolidated financial
statements and financial statement schedule.
/s/ Deloitte & Touche LLP
Cleveland, Ohio
September 29, 2006
Item 9B
Other Information
None.
82
PART III
Item 10
Directors and Executive Officers of the
Registrant
Directors
of the Registrant
Set forth below are the name, age, positions held with the
Company, term of office, business experience during the past
five years and other public company directorships held by each
individual serving as a Director of the Company as of
September 29, 2006. There is no family relationship between
any of Ferros Directors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year First Became a
|
|
Current
|
|
Committee
|
Name
|
|
Age
|
|
Ferro Director
|
|
Term Expires
|
|
Assignments
|
|
Michael H. Bulkin
|
|
|
68
|
|
|
|
1998
|
|
|
|
2007
|
|
|
Governance, Nomination &
Compensation Committee (Chair), Technology Strategy Committee
|
Sandra Austin Crayton
|
|
|
58
|
|
|
|
1994
|
|
|
|
2008
|
|
|
Technology Strategy Committee
(Chair), Finance Committee
|
Jennie S. Hwang, Ph.D.
|
|
|
59
|
|
|
|
2001
|
|
|
|
2006
|
|
|
Audit Committee, Technology
Strategy Committee
|
James F. Kirsch
|
|
|
49
|
|
|
|
2005
|
|
|
|
2006
|
|
|
|
William B. Lawrence
|
|
|
62
|
|
|
|
1999
|
|
|
|
2008
|
|
|
Audit Committee (Chair),
Governance, Nomination & Compensation Committee
|
Michael F. Mee
|
|
|
64
|
|
|
|
2001
|
|
|
|
2007
|
|
|
Finance Committee (Chair),
Governance, Nomination & Compensation Committee
|
William J. Sharp
|
|
|
64
|
|
|
|
1998
|
|
|
|
2007
|
*
|
|
Governance, Nomination &
Compensation Committee, Finance Committee, Audit Committee
|
Dennis W. Sullivan
|
|
|
67
|
|
|
|
1992
|
|
|
|
2008
|
|
|
Audit Committee, Technology
Strategy Committee
|
Alberto Weisser
|
|
|
51
|
|
|
|
2000
|
|
|
|
2007
|
|
|
Audit Committee, Finance Committee
|
|
|
|
* |
|
Mr. Sharp has been nominated for election at the annual
meeting of the Companys shareholders to be held on
November 3, 2006, due to a vacancy in the class of
Directors whose term expires at such meeting. |
Michael H. Bulkin Mr. Bulkin is a
private investor. In 1965, he joined McKinsey &
Company, Inc. (an international management consulting firm). He
became a principal in 1970 and was elected a director in 1976.
While serving with McKinsey & Company, Mr. Bulkin
held several leadership positions including Managing Director of
various offices, Chairman of the Partner Evaluation and
Compensation Committee and member of the Shareholders Committee,
Executive Committee, Strategy Development Committee,
Professional Personnel Committee and Partner Election Committee.
Mr. Bulkin retired from McKinsey & Company in
1993. Mr. Bulkin also serves as a director of Bunge
Limited, a global food and agribusiness company operating in the
farm-to-consumer
food chain.
Sandra Austin Crayton Ms. Crayton is a
Managing Director with Alvarez and Marsal, a professional
services firm. Ms. Crayton joined the firm in January 2006.
Prior to that, Ms. Crayton was President and CEO of
PhyServ, LLC, a health care billing, collections, receivables
and information company. Ms. Crayton was appointed Senior
Vice President and General Manager of the Medical/ Surgical and
Psychiatry Management Centers of University Hospitals of
Cleveland in 1988. From 1990 to 1994, she served as Executive
Vice President and Chief
83
Operating Officer of The University of Chicago Hospitals. In
1994, she was appointed President of Caremark Clinical
Management Services, a division of Caremark Rx, Inc. In 1995,
Ms. Crayton was named President of Caremark Physician
Services, a division of Caremark, Inc., which provides physician
practice management services. Between 1997 and 1999,
Ms. Crayton was President and Chief Executive Officer of
Sedona Health Care Group, Inc. In 1999, she became President and
CEO of PhyServ LLC and retired from that position on
June 1, 2001, when the company was sold. Ms. Crayton
also serves as a director of NCCI Holdings, Inc. (a
workers compensation database management firm).
Jennie S. Hwang, Ph.D. Dr. Hwang
has over 25 years of experience in the chemical coating,
materials and electronics industries through her management
and/or
ownership of businesses. Since 1994, she has served as the
President of H-Technologies Group, encompassing international
business, worldwide manufacturing services, intellectual
property management and joint ventures. Dr. Hwang was also
the CEO of International Electronic Materials Corporation, a
manufacturing company she founded, which was later acquired.
Prior to establishing these companies, Dr. Hwang held
various senior executive positions with Lockheed Martin Corp.,
SCM Corp., and The Sherwin-Williams Company. Dr. Hwang
holds a Ph.D. in engineering and two M.S. degrees in liquid
crystals and chemistry. She has served as National President of
the Surface Mount Technology Association and in other global
leadership positions and is a worldwide speaker and author of
300 publications and several internationally used textbooks on
leading technologies and global market thrusts. Dr. Hwang
has been elected to the National Academy of Engineering and is a
board member of Second Bancorp, Inc. (a bank holding company),
Singapore Asahi Chemical Industries, Pte. Ltd. (a Singapore
chemical company), and Case Western Reserve University.
James F. Kirsch Mr. Kirsch was appointed
Chief Executive Officer and a Director following the unexpected
death of Mr. Hector R. Ortino, the Companys Chairman
and Chief Executive Officer, in November 2005. Mr. Kirsch
joined Ferro in October 2004 as its President and Chief
Operating Officer. Prior to joining Ferro, Mr. Kirsch
served as President of Premix Inc. and Quantum Composites, Inc.,
manufacturers of thermoset molding compounds, parts and
sub-assemblies for the automotive, aerospace, electrical and
HVAC industries. Prior to that, from 2002 through 2004, he
served as President of Quantum Composites. From 2000 through
2002, he served as President and director of Ballard Generation
Systems and Vice President for Ballard Power Systems in Burnaby,
British Columbia, Canada. Mr. Kirsch started his career
with The Dow Chemical Company, where he spent 19 years and
held various positions of increasing responsibility, including
global business director of Propylene Oxide and Derivatives and
Global Vice President of Electrochemicals.
William B. Lawrence Before the sale of TRW
Inc. to Northrop Grumman in December 2002 and his retirement
from TRW in February 2003, Mr. Lawrence served as
TRWs Executive Vice President, General Counsel &
Secretary. TRW was a provider of advanced technology products
and services for the global automotive, aerospace and
information systems markets. Mr. Lawrence first joined TRW
in 1976 as counsel specializing in securities and finance. He
held positions of increasing responsibility within the TRW law
department until his appointment as TRWs Executive Vice
President of Planning, Development and Government Affairs in
1989. In 1997, Mr. Lawrence was named to the additional
position of Executive Vice President, General Counsel &
Secretary. Mr. Lawrence also serves as a director of Brush
Engineered Materials Inc., a manufacturer of high-performance
engineered materials.
Michael F. Mee At the time of his retirement
in March 2001, Mr. Mee served as Executive Vice President
and Chief Financial Officer of Bristol Myers Squibb Company, a
pharmaceutical and related health care products company.
Mr. Mee joined Bristol Myers Squibb in 1994 as its Chief
Financial Officer and later assumed additional responsibility
for Corporate Development and Global Business Services. In 1999,
he was made Executive Vice President and became a member of the
Office of the Chairman in 2000. Before joining Bristol Myers
Squibb, Mr. Mee was involved in the reorganization of Wang
Laboratories as Chairman of the Board and earlier as Executive
Vice President and Chief Financial Officer of the company. Prior
to joining Wang Laboratories in 1990, Mr. Mee had positions
of increasing responsibility with Norton Company, Monsanto
Company and Chrysler Corporation. Mr. Mee also serves as a
director of Lincoln National Corporation, an insurance and
financial services company.
William J. Sharp Mr. Sharp serves as a
consultant to various private equity groups. In 2001,
Mr. Sharp retired as President of North American Tire for
The Goodyear Tire & Rubber Company, a tire, engineered
rubber products and chemicals manufacturer. Mr. Sharp began
his career with Goodyear in 1964. Following various
84
assignments in the United States and abroad, he was named
director of European Tire Production in 1984. He was appointed
Vice President of Tire Manufacturing in 1987 and later Executive
Vice President of Product Supply in 1991. In 1992, he became
President and General Manager of Goodyears European
Regional Operations. He was elected President of Goodyear Global
Support Operations in 1996. Mr. Sharp is also a director of
Jiangsu Xingda Tyre Cord Co. Ltd., a Chinese tire component
supplier.
Dennis W. Sullivan Mr. Sullivan retired
as Executive Vice President of Parker Hannifin Corporation, a
producer of motion and control components for commercial,
industrial and aerospace markets, on December 31, 2003.
Mr. Sullivan began his career with Parker in 1960. He
became Group Vice President in 1972, President of the Fluid
Connectors Group in 1976, Corporate Vice President in 1978,
President of the Fluidpower Group in 1979 and President of the
Industrial Sector in 1980. He became an Executive Vice President
of Parker in 1981.
Alberto Weisser Mr. Weisser is Chairman
and Chief Executive Officer of Bunge Limited, a global food and
agribusiness company operating in the
farm-to-consumer
food chain. Mr. Weisser joined Bunge as Chief Financial
Officer in July 1993. In 1999, he was appointed Chief Executive
Officer and then Chairman later that year. He has served as a
member of the Bunge Board of Directors since May 1997. Before
joining Bunge, Mr. Weisser served in various
finance-related positions for the BASF Group for 15 years
in Germany, the United States, Mexico and Brazil.
Mr. Weisser is also a member of Rabobanks North
American Agribusiness Advisory Board. Mr. Weisser is also a
member of the Board of Directors of International Paper Company.
Executive
Officers of the Registrant
Information regarding executive officers of Ferro is contained
under Part I of this Annual Report on
Form 10-K.
Audit
Committee Matters
Ferro has a standing Audit Committee of its Board of Directors,
which assists the Board with oversight of the integrity of
Ferros financial statements, Ferros compliance with
legal and regulatory requirements relating to its financial
reports (including the annual Audit Committee report as required
by the Securities Exchange Act of 1934), Ferros external
independent auditors qualifications, independence, and
performance, the performance of Ferros internal audit and
risk management functions, compliance with Ferros legal
and ethical policies and Ferros accounting practices and
internal controls. The Audit Committee is not, however,
responsible for conducting audits, preparing financial
statements, or the accuracy of any financial statements or
filings, all of which remain the responsibility of management
and the independent auditors. The Committees charter may
be found on Ferros website (www.ferro.com).
The members of the Audit Committee are Dr. Hwang and
Messrs. Lawrence, Sharp, Sullivan and Weisser.
Mr. Lawrence serves as the Chair. Each member of the Audit
Committee is independent as required under
section 301 of the Sarbanes-Oxley Act of 2002, as well as
under the standards contained in section 303A of the New
York Stock Exchange listing standards. The Board has determined,
in its best judgment, that more than one member of the Audit
Committee has the accounting and related financial management
experience and expertise to qualify as an audit committee
financial expert as defined in section 407 of
the Sarbanes-Oxley Act and the Securities and Exchange
Commissions rules under that statute. The Board, however,
has designated Alberto Weisser as the Audit Committees
named financial expert. The Board has further determined that
each member of the Audit Committee has the requisite financial
literacy required under section 303A of the New York Stock
Exchange listing standards to serve on the Audit Committee.
Code of
Ethics
Ferro has adopted a series of policies dealing with business
conduct and ethics. These policies apply to all Ferro Directors,
officers and employees. A summary of these policies may be found
on Ferros website (www.ferro.com) and the full text
of the policies is available in print, free of charge, by
writing to: General Counsel, Ferro Corporation, 1000 Lakeside
Avenue, Cleveland, Ohio
44114-1147
USA. Under the Audit Committees charter, the Committee is
charged with responsibility to assure that all exceptions to and
waivers of the Companys ethical and internal control
policies are properly disclosed, documented and approved by the
Committee and that no employee is disciplined, punished or
otherwise disadvantaged as a consequence of reporting
85
in good faith violations of the Companys policies.
Exceptions, waivers and amendments of those policies may be
made, if at all, only by the Committee and, in the event any
such exceptions, waivers or amendments are granted, a
description of the change or event will be posted on
Ferros website within four business days. Finally, further
to assure compliance, Ferro maintains a hotline that allows
employees throughout the world to report confidentially any
detected violations of these legal and ethical conduct policies
consistent with local legal requirements and subject to local
legal limitations.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934
requires the Companys officers and Directors, and persons
who own more than 10% of a registered class of the
Companys equity securities, to file reports of ownership
and changes in ownership with the Securities and Exchange
Commission. Officers, Directors and greater than ten percent
shareholders are required by Securities and Exchange Commission
regulation to furnish Ferro with copies of all
Section 16(a) forms they file.
To the Companys knowledge, based solely on review of the
copies of such reports furnished to the Company, during the
fiscal year ended December 31, 2005 or with respect to such
fiscal year, all Section 16(a) filing requirements were met.
Item 11
Executive Compensation
Executive
Compensation
The following table shows on an accrual basis the elements of
compensation paid or awarded during 2005, 2004 and 2003 to each
person serving as the Chief Executive Officer, the other four
highest paid executive officers as of December 31, 2005,
and an additional executive officer who would have been among
the four highest paid executive officers as of December 31,
2005, but was no longer serving as an executive officer as of
such date.
Summary
Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
Performance Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
|
|
|
Value
|
|
|
|
|
|
All
|
|
|
|
|
Name and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
|
|
|
of
|
|
|
|
|
|
Other
|
|
|
Total
|
|
Principal Position
|
|
|
|
|
Annual Compensation
|
|
|
Options
|
|
|
Options
|
|
|
Shares
|
|
|
|
|
|
Compen-
|
|
|
Compen-
|
|
Footnote
|
|
|
|
|
Salary
|
|
|
Bonus(1)
|
|
|
Other(2)
|
|
|
Awarded(3)
|
|
|
Awarded(4)
|
|
|
Awarded(5)
|
|
|
Payout(6)
|
|
|
sation(7)
|
|
|
sation(8)
|
|
Units
|
|
Year
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Shares
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
James F.
Kirsch(9)
|
|
|
2005
|
|
|
|
508,333
|
|
|
|
254,167
|
|
|
|
87,507
|
|
|
|
|
|
|
|
|
|
|
|
484,750
|
|
|
|
|
|
|
|
18,616
|
|
|
|
1,353,373
|
|
President and
|
|
|
2004
|
|
|
|
104,167
|
|
|
|
35,826
|
|
|
|
9,225
|
|
|
|
125,000
|
|
|
|
735,000
|
|
|
|
|
|
|
|
|
|
|
|
13,171
|
|
|
|
897,389
|
|
Chief Executive Officer
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hector R.
Ortino(9)
|
|
|
2005
|
|
|
|
700,000
|
|
|
|
173,660
|
|
|
|
144,504
|
|
|
|
162,000
|
|
|
|
826,200
|
|
|
|
581,700
|
|
|
|
257,826
|
|
|
|
60,036
|
|
|
|
2,743,926
|
|
Chairman and
|
|
|
2004
|
|
|
|
800,000
|
|
|
|
292,020
|
|
|
|
171,986
|
|
|
|
175,000
|
|
|
|
1,188,250
|
|
|
|
1,050,400
|
|
|
|
417,417
|
|
|
|
111,940
|
|
|
|
4,032,013
|
|
Chief Executive Officer
|
|
|
2003
|
|
|
|
793,750
|
|
|
|
336,360
|
|
|
|
179,637
|
|
|
|
175,000
|
|
|
|
1,235,325
|
|
|
|
850,400
|
|
|
|
769,907
|
|
|
|
127,319
|
|
|
|
4,292,698
|
|
James C. Bays
|
|
|
2005
|
|
|
|
300,000
|
|
|
|
142,621
|
|
|
|
30,263
|
|
|
|
44,000
|
|
|
|
224,400
|
|
|
|
116,340
|
|
|
|
39,779
|
|
|
|
20,598
|
|
|
|
874,001
|
|
Vice President and
|
|
|
2004
|
|
|
|
258,000
|
|
|
|
77,671
|
|
|
|
34,201
|
|
|
|
39,000
|
|
|
|
264,810
|
|
|
|
183,820
|
|
|
|
68,624
|
|
|
|
17,598
|
|
|
|
904,724
|
|
General Counsel
|
|
|
2003
|
|
|
|
258,000
|
|
|
|
56,290
|
|
|
|
17,493
|
|
|
|
35,000
|
|
|
|
247,065
|
|
|
|
127,560
|
|
|
|
75,346
|
|
|
|
19,560
|
|
|
|
801,314
|
|
M. Craig
Benson(10)
|
|
|
2005
|
|
|
|
250,000
|
|
|
|
0
|
|
|
|
18,847
|
|
|
|
33,000
|
|
|
|
168,300
|
|
|
|
141,547
|
|
|
|
0
|
|
|
|
15,565
|
|
|
|
594,259
|
|
Vice President,
|
|
|
2004
|
|
|
|
229,583
|
|
|
|
61,305
|
|
|
|
6,577
|
|
|
|
20,000
|
|
|
|
135,800
|
|
|
|
217,958
|
|
|
|
0
|
|
|
|
15,659
|
|
|
|
666,882
|
|
Electronic Materials
|
|
|
2003
|
|
|
|
215,000
|
|
|
|
34,061
|
|
|
|
9,350
|
|
|
|
7,000
|
|
|
|
49,413
|
|
|
|
106,300
|
|
|
|
99,078
|
|
|
|
15,268
|
|
|
|
528,470
|
|
Thomas M.
Gannon(11)
|
|
|
2005
|
|
|
|
365,000
|
|
|
|
57,623
|
|
|
|
36,628
|
|
|
|
57,000
|
|
|
|
290,700
|
|
|
|
164,815
|
|
|
|
39,779
|
|
|
|
23,757
|
|
|
|
978,302
|
|
Vice President and
|
|
|
2004
|
|
|
|
350,000
|
|
|
|
110,138
|
|
|
|
30,344
|
|
|
|
52,000
|
|
|
|
353,080
|
|
|
|
246,844
|
|
|
|
|
|
|
|
20,571
|
|
|
|
1,110,977
|
|
Chief Financial Officer
|
|
|
2003
|
|
|
|
224,145
|
|
|
|
61,430
|
|
|
|
8,729
|
|
|
|
50,000
|
|
|
|
352,950
|
|
|
|
145,800
|
|
|
|
|
|
|
|
47,155
|
|
|
|
840,209
|
|
Dale G.
Kramer(12)
|
|
|
2005
|
|
|
|
295,000
|
|
|
|
78,359
|
|
|
|
36,670
|
|
|
|
44,000
|
|
|
|
224,400
|
|
|
|
166,754
|
|
|
|
28,426
|
|
|
|
19,504
|
|
|
|
849,113
|
|
Vice President,
|
|
|
2004
|
|
|
|
295,000
|
|
|
|
74,998
|
|
|
|
38,303
|
|
|
|
55,000
|
|
|
|
373,450
|
|
|
|
254,722
|
|
|
|
40,149
|
|
|
|
18,392
|
|
|
|
1,095,014
|
|
Performance Chemicals
|
|
|
2003
|
|
|
|
295,000
|
|
|
|
39,557
|
|
|
|
22,013
|
|
|
|
55,000
|
|
|
|
388,245
|
|
|
|
180,710
|
|
|
|
66,571
|
|
|
|
18,963
|
|
|
|
1,011,059
|
|
Celeste B.
Mastin(13)
|
|
|
2005
|
|
|
|
230,833
|
|
|
|
50,536
|
|
|
|
15,340
|
|
|
|
33,000
|
|
|
|
168,300
|
|
|
|
137,669
|
|
|
|
|
|
|
|
16,845
|
|
|
|
619,523
|
|
Vice President,
|
|
|
2004
|
|
|
|
181,667
|
|
|
|
49,666
|
|
|
|
7,773
|
|
|
|
11,500
|
|
|
|
78,085
|
|
|
|
91,910
|
|
|
|
|
|
|
|
42,829
|
|
|
|
451,930
|
|
Growth & Development
|
|
|
2003
|
|
|
|
79,227
|
|
|
|
8,358
|
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,580
|
|
|
|
97,269
|
|
86
Footnotes to Summary Compensation Table
|
|
|
(1) |
|
Bonuses with respect to fiscal 2005 were paid under the
Companys annual incentive compensation plan. Under such
plan, each participant was eligible to receive a bonus of up to
250% of his or her target incentive multiplied by his or her
annual salary as of December 31, 2005, or $1,125,000 (250%
times 75% times $600,000) with respect to Mr. Kirsch,
$1,500,000 (250% times 75% times $800,000) with respect to
Mr. Ortino, $337,500 (250% times 45% times $300,000) with
respect to Mr. Bays, $281,250 (250% times 45% times
$250,000) with respect to Mr. Benson, $456,250 (250% times
50% times $365,000) with respect to Mr. Gannon, $368,750
(250% times 50% times $295,000) with respect to Mr. Kramer,
and $292,500 (250% times 45% times $260,000) with respect to
Ms. Mastin. The actual amount paid was set at the
discretion of the Governance, Nomination & Compensation
Committee. |
|
(2) |
|
Amounts in this column include primarily dividends paid on
as-yet-unmatured performance shares, above-market interest
credited under the Companys Executive Deferred
Compensation Plan and the incremental cost of personal use of
Company aircraft for each of the years 2003, 2004 and 2005 as
follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
Above
|
|
|
Personal
|
|
|
|
|
|
Above
|
|
|
Personal
|
|
|
|
|
|
Above
|
|
|
Personal
|
|
|
|
PSP
|
|
|
Market
|
|
|
Use of
|
|
|
PSP
|
|
|
Market
|
|
|
Use of
|
|
|
PSP
|
|
|
Market
|
|
|
Use of
|
|
|
|
Dividends
|
|
|
Interest
|
|
|
Aircraft
|
|
|
Dividends
|
|
|
Interest
|
|
|
Aircraft
|
|
|
Dividends
|
|
|
Interest
|
|
|
Aircraft
|
|
|
James F. Kirsch
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,500
|
|
|
|
|
|
|
$
|
2,771
|
|
Hector R. Ortino
|
|
$
|
62,495
|
|
|
$
|
11,176
|
|
|
$
|
83,594
|
|
|
$
|
72,355
|
|
|
$
|
4,413
|
|
|
$
|
51,560
|
|
|
|
69,093
|
|
|
$
|
8,363
|
|
|
|
38,797
|
|
James C. Bays
|
|
|
8,265
|
|
|
|
|
|
|
|
|
|
|
|
12,258
|
|
|
|
559
|
|
|
|
|
|
|
|
12,122
|
|
|
|
1,397
|
|
|
|
|
|
M. Craig Benson
|
|
|
5,075
|
|
|
|
|
|
|
|
|
|
|
|
3,640
|
|
|
|
|
|
|
|
|
|
|
|
12,673
|
|
|
|
|
|
|
|
|
|
Thomas M. Gannon
|
|
|
1,740
|
|
|
|
|
|
|
|
|
|
|
|
8,932
|
|
|
|
|
|
|
|
|
|
|
|
13,862
|
|
|
|
|
|
|
|
|
|
Dale G. Kramer
|
|
|
11,383
|
|
|
|
|
|
|
|
|
|
|
|
15,631
|
|
|
|
|
|
|
|
|
|
|
|
16,632
|
|
|
|
|
|
|
|
|
|
Celeste B. Mastin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,030
|
|
|
|
|
|
|
|
|
|
|
|
6,148
|
|
|
|
|
|
|
|
|
|
In addition, the amount reported for Mr. Kirsch includes
$45,000 for a country club initiation fee. The method by which
the value of personal use of aircraft has been calculated in the
table above is different from the method used prior to
disclosure of compensation for fiscal 2004. In previous years,
the calculation was based on the standard industry fare
level. In the table above the value is based on the
incremental cost to the Company of the air travel. Incremental
cost was calculated based on variable operating cost, which
includes fuel and other supplies, travel expenses, equipment
rental, flight crew expenses, meals and miscellaneous handling
charges and expenses. Fixed costs were not included in the
calculation of incremental cost because those expenses would
have been incurred by the Company regardless of the personal use
of the aircraft by Company executives. We have recalculated the
amount previously reported for 2003 prior to the proxy relating
to fiscal 2004 so that all amounts are reported on a consistent
incremental cost basis.
|
|
|
(3) |
|
With the exception of grants made to Mr. Kirsch at the time
he joined Ferro on October 18, 2004, and Mr. Gannon at
the time he joined Ferro on May 16, 2003, these stock
options were granted on February 28, 2003, February 9,
2004 and February 7, 2005. |
|
(4) |
|
For 2005, the grant date present value of $5.10 per option share
(or 26.3% of the exercise price) was calculated using the
Black-Scholes method of option valuation in accordance with
FAS 123R. The model assumes the following: (a) an
expected option term of 6.8 years based on average life for
exercised options, (b) an interest rate of 3.78% that
represents the interest rate on a U.S. Treasury bond with a
7-year
maturity, (c) volatility of 29.93%, calculated based on a
3-year
historical volatility on the grant date, using daily
observations, and (d) the stocks annual dividend
yield based on actual yield at the grant date of 2.99%. No
adjustments were made to amounts to reflect forfeitures. The
grant date of such options was February 7, 2005, and the
exercise price is the closing market price per share on such
date. |
|
(5) |
|
The values reported in this column are based on awards made
under the Companys Long-Term Incentive Compensation Plan.
The values reported represent the number of performance shares
awarded times the market price of Ferro Common Stock on the date
of the award. With these awards, the actual number of shares on
which the payout will be based for any given three-year
performance period will depend upon the level of achievement
during such period and can equal up to twice the number of
shares awarded. Dividends are paid to recipients of the
performance shares during the three-year performance period. |
87
At December 31, 2005, the persons listed above held the
following number of performance shares applicable to performance
periods not yet completed, valued at the value of the underlying
shares at December 31, 2005: Mr. Kirsch,
25,000 shares, valued at $469,000; Mr. Ortino,
110,000 shares, valued at $2,063,600; Mr. Gannon,
23,900 shares, valued at $448,364; Mr. Bays,
19,000 shares, valued at $356,440; Mr. Kramer,
8,500 shares, valued at $159,460 and Ms. Mastin,
10,600 shares, valued at $198,856.
|
|
|
(6) |
|
As described in more detail below under Performance Share
Payouts for
2003-2005,
performance share payouts were made under the Companys
Long-Term Incentive Compensation Plan for the
2003-2005
performance period. Each performance share award under the
Companys Long-Term Incentive Compensation Plan was based
on a three-year performance cycle ending on December 31,
2005 and paid out half in cash and half in Common Stock unless
deferred by the participant, in which case amounts deferred are
credited to the participants account and are deemed
invested in either Ferro Common Stock
and/or
Treasury rate-based instrument at the election of the
participant. |
|
(7) |
|
This column includes the following amounts for 2005: Company
matching contributions under the Savings and Stock Ownership
Plan (Mr. Kirsch $5,250, Mr. Ortino $9,000,
Mr. Bays $9,013, Mr. Benson $9,071, Mr. Gannon
$9,014, Mr. Kramer $9,057, Ms. Mastin $7,017); and
Company contributions to the Supplemental Executive Defined
Contribution Plan (Mr. Kirsch $13,366, Mr. Ortino
$51,036, Mr. Bays $11,585, Mr. Benson $6,494,
Mr. Gannon $14,743, Mr. Kramer $10,447,
Ms. Mastin $9,828). |
|
(8) |
|
Total Compensation includes amounts in the following columns:
Salary, Bonus, Other, Value of Options Awarded, Value of
Shares Awarded, Payout and All Other Compensation. |
|
(9) |
|
Hector R. Ortino served as the Companys
Chairman & Chief Executive Officer until his untimely
death on November 28, 2005. Upon Mr. Ortinos
death, James F. Kirsch, who had joined the Companys
management team as its President and Chief Operating Officer on
October 18, 2004, was named President and Chief Executive
Officer. Mr. Kirschs actual bonus for 2005 equaled
50% of his base salary in 2005 ($254,167 divided by $508,333).
Mr. Kirschs 2005 bonus reflects a minimum 50% bonus
payout for 2005 (but not for future years) in
Mr. Kirschs employment agreement. |
|
(10) |
|
Mr. Benson ceased serving as an executive officer of the
Company on February 17, 2006 and his employment terminated
on February 28, 2006. Pursuant to the terms of his
separation agreement, Mr. Benson will not be entitled to
any payouts relating to the 2004 and 2005 performance share plan
awards. |
|
(11) |
|
Mr. Gannon joined Ferro as its Vice President and Chief
Financial Officer in May 2003. |
|
(12) |
|
Mr. Kramer ceased serving as an executive officer of the
Company in November 2005 and his employment with the Company
terminated on March 31, 2006. Pursuant to the terms of his
separation agreement, Mr. Kramer will not be entitled to
any payouts relating to the 2004 and 2005 performance share plan
awards. |
|
(13) |
|
Ms. Mastin joined the Company in July 2003. |
88
Performance
Share Awards and Payouts
The following table sets forth information relating to
performance share awards under the 2003 Long-Term Incentive
Compensation Plan during 2005 to each of the executive officers
of Ferro named in the Summary Compensation Table:
Performance
Share Awards in 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Future Payouts in Shares(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Threshold
|
|
|
Target
|
|
|
Maximum
|
|
|
|
Number of
|
|
|
|
|
|
Performance
|
|
|
Performance
|
|
|
Performance
|
|
|
Performance
|
|
Name
|
|
Shares
|
|
|
Grant Date
|
|
|
Period
|
|
|
(25%)
|
|
|
(100%)
|
|
|
(200%)
|
|
|
James F. Kirsch
|
|
|
25,000
|
|
|
|
February 7, 2005
|
|
|
|
2005-2007
|
|
|
|
6,250
|
|
|
|
25,000
|
|
|
|
50,000
|
|
Hector R. Ortino
|
|
|
30,000
|
|
|
|
February 7, 2005
|
|
|
|
2005-2007
|
|
|
|
7,500
|
|
|
|
30,000
|
|
|
|
60,000
|
|
James C. Bays
|
|
|
6,000
|
|
|
|
February 7, 2005
|
|
|
|
2005-2007
|
|
|
|
1,500
|
|
|
|
6,000
|
|
|
|
12,000
|
|
M. Craig Benson
|
|
|
7,300
|
|
|
|
February 7, 2005
|
|
|
|
2005-2007
|
|
|
|
1,825
|
|
|
|
7,300
|
|
|
|
14,600
|
|
Thomas M. Gannon
|
|
|
8,500
|
|
|
|
February 7, 2005
|
|
|
|
2005-2007
|
|
|
|
2,125
|
|
|
|
8,500
|
|
|
|
17,000
|
|
Dale G. Kramer
|
|
|
8,600
|
|
|
|
February 7, 2005
|
|
|
|
2005-2007
|
|
|
|
2,150
|
|
|
|
8,600
|
|
|
|
17,200
|
|
Celeste B. Mastin
|
|
|
7,100
|
|
|
|
February 7, 2005
|
|
|
|
2005-2007
|
|
|
|
1,775
|
|
|
|
7,100
|
|
|
|
14,200
|
|
|
|
|
(1) |
|
Messrs. Kirsch, Ortino, Bays, and Gannon and
Ms. Mastin have performance measurements based on
cumulative earnings per share and cumulative sales revenue. Any
performance shares award payout relating to Mr. Ortino will
be prorated and paid to his estate. Pursuant to the terms of the
separation agreements, Messrs. Benson and Kramer will not
receive any performance share payouts relating to the
2005-2007
performance period. |
Each of the awards listed above has a three-year performance
cycle ending on December 31, 2007. The participant must
continue to be an employee of Ferro until the end of the
performance period in order to qualify for payment. However, if
a participant dies, is disabled or retires, a pro rata payment
is made at the end of the performance period based upon the
portion of the performance period during which the participant
was employed. Also, in the case of a change in control and
termination of employment, a cash payment is paid at target
performance at the time of the change in control equal to
(1) the aggregate value of performance share awards based
on the remaining term in the executives employment or
change in control agreement and the portion of the performance
period that expired prior to the change in control minus
(2) the value of performance share payments actually made.
The following table sets forth information relating to the
performance matrix and actual performance share payouts under
the 2003 Long-Term Incentive Compensation Plan for the
2003-2005
performance period to each of the executive officers named in
the Summary Compensation Table. Each award under the Performance
Share Plan was based on a three-year performance cycle ending on
December 31, 2005.
Performance
Share Payouts for
2003-2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 Payouts(1)(2)(3)
|
|
|
|
Performance Matrix
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
Threshold
|
|
|
Target
|
|
|
Maximum
|
|
|
|
|
|
Value of
|
|
|
Total
|
|
Name
|
|
(25%)
|
|
|
(100%)
|
|
|
(200%)
|
|
|
Cash
|
|
|
Shares
|
|
|
Value
|
|
|
James F. Kirsch
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hector R. Ortino
|
|
|
10,000
|
|
|
|
40,000
|
|
|
|
80,000
|
|
|
$
|
128,926
|
|
|
$
|
128,900
|
|
|
$
|
257,826
|
|
James C. Bays
|
|
|
1,500
|
|
|
|
6,000
|
|
|
|
12,000
|
|
|
|
19,890
|
|
|
|
19,889
|
|
|
|
39,779
|
|
M. Craig Benson
|
|
|
1,250
|
|
|
|
5,000
|
|
|
|
10,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Thomas M. Gannon
|
|
|
1,500
|
|
|
|
6,000
|
|
|
|
12,000
|
|
|
|
19,890
|
|
|
|
19,889
|
|
|
|
39,779
|
|
Dale G. Kramer
|
|
|
2,125
|
|
|
|
8,500
|
|
|
|
17,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
28,426
|
|
Celeste B. Mastin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
|
|
|
(1) |
|
Messrs. Ortino, Bays and Gannon had performance
measurements based on corporate earnings per share growth, sales
revenue growth and financial leverage ratios.
Messrs. Benson and Kramer had performance measurements
based on both the corporate measures described in the preceding
sentence and measurements specific to their respective operating
groups. Mr. Kirsch and Ms. Mastin were not
participants in the
2003-2005
Performance Share Plan. |
|
(2) |
|
2005 payouts were paid one-half in cash and one-half in shares
and are rounded. The value of shares is the number of shares
times the average closing share price for the days in which the
shares traded during the first 10 calendar days of December
2005. |
|
(3) |
|
Mr. Ortino elected to defer 30% of the value of his payout;
however, due to his death the amount was paid to his designated
beneficiaries. Mr. Kramer elected to defer 100% of his
payout under the Companys Executive Deferred Compensation
Plan. Under this Plan, amounts deferred are credited to the
participants account and are deemed invested in either
Ferro Common Stock
and/or
Treasury rate-based instrument at the election of the
participant. The participants account is distributed in
cash and/or
Ferro Common Stock. |
Stock
Option Grants, Exercises and Year-End Values
The following table sets forth information with respect to each
of the executive officers of Ferro named in the Summary
Compensation Table regarding grants under the 2003 Long-Term
Incentive Compensation Plan during the fiscal year ended
December 31, 2005:
Option
Grants in 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to Employees
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
in Fiscal
|
|
|
|
|
|
|
|
|
Present Value at
|
|
Name
|
|
Granted(1)
|
|
|
2005
|
|
|
Exercise Price
|
|
|
Expiration Date
|
|
|
Date of Grant(2)
|
|
|
James F. Kirsch
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hector R. Ortino
|
|
|
162,000
|
|
|
|
21.6
|
%
|
|
$
|
19.39
|
|
|
|
February 7, 2015
|
|
|
|
826,200
|
|
James C. Bays
|
|
|
44,000
|
|
|
|
5.9
|
%
|
|
|
19.39
|
|
|
|
February 7, 2015
|
|
|
|
224,400
|
|
M. Craig Benson
|
|
|
33,000
|
|
|
|
4.4
|
%
|
|
|
19.39
|
|
|
|
February 7, 2015
|
|
|
|
168,300
|
|
Thomas M. Gannon
|
|
|
57,000
|
|
|
|
7.6
|
%
|
|
|
19.39
|
|
|
|
February 7, 2015
|
|
|
|
290,700
|
|
Dale G. Kramer
|
|
|
44,000
|
|
|
|
5.9
|
%
|
|
|
19.39
|
|
|
|
February 7, 2015
|
|
|
|
224,400
|
|
Celeste B. Mastin
|
|
|
33,000
|
|
|
|
4.4
|
%
|
|
|
19.39
|
|
|
|
February 7, 2015
|
|
|
|
168,300
|
|
|
|
|
(1) |
|
Stock options have a maximum term of ten years and vest evenly
over four years on the anniversary of the grant date. In the
case of death, retirement, disability or change in control, the
options become 100% vested and exercisable. |
|
(2) |
|
For 2005, the grant date present value of $5.10 per option share
(or 26.3% of the exercise price) was calculated using the
Black-Scholes method of option valuation in accordance with
FAS 123R. The model assumes the following: (a) an
expected option term of 6.8 years based on average life for
exercised options, (b) an interest rate of 3.78% that
represents the interest rate on a U.S. Treasury bond with a
7-year
maturity, (c) volatility of 29.93%, calculated based on a
3-year
historical volatility on the grant date, using daily
observations, and (d) the stocks annual dividend
yield based on actual yield at the grant date of 2.99%. No
adjustments were made to amounts to reflect forfeitures. The
grant date of such options was February 7, 2005, and the
exercise price is the closing market price per share on such
date. |
90
The following table sets forth for each of the executive
officers of Ferro named in the Summary Compensation Table the
exercises of stock options under Ferro stock option plans during
the year ended December 31, 2005:
Option
Exercises and Vesting in 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of Unexercised
|
|
|
|
|
|
|
Shares
|
|
|
Value
|
|
|
Number of Unexercised
|
|
|
In-the-Money
Options
|
|
|
|
|
|
|
Acquired
|
|
|
Realized
|
|
|
Options at December 31, 2005
|
|
|
at December 31, 2005(1)
|
|
|
|
|
Name
|
|
on Exercise
|
|
|
on Exercise
|
|
|
Exercisable
|
|
|
Not Exercisable
|
|
|
Exercisable
|
|
|
Not Exercisable
|
|
|
|
|
|
James F. Kirsch
|
|
|
0
|
|
|
|
0
|
|
|
|
31,250
|
|
|
|
233,750
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
Hector R. Ortino(2)
|
|
|
0
|
|
|
|
0
|
|
|
|
1,031,000
|
|
|
|
0
|
|
|
|
18,200
|
|
|
|
0
|
|
|
|
|
|
James C. Bays
|
|
|
0
|
|
|
|
0
|
|
|
|
61,000
|
|
|
|
121,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
M. Craig Benson
|
|
|
0
|
|
|
|
0
|
|
|
|
29,000
|
|
|
|
54,000
|
|
|
|
1,430
|
|
|
|
0
|
|
|
|
|
|
Thomas M. Gannon
|
|
|
0
|
|
|
|
0
|
|
|
|
38,000
|
|
|
|
159,500
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
Dale G. Kramer
|
|
|
0
|
|
|
|
0
|
|
|
|
92,896
|
|
|
|
0
|
|
|
|
1,430
|
|
|
|
0
|
|
|
|
|
|
Celeste B. Mastin
|
|
|
0
|
|
|
|
0
|
|
|
|
2,875
|
|
|
|
57,125
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
(1) |
|
Value of unexercised
in-the-money
options is based on Ferros NYSE closing Common Stock price
on December 30, 2005 of $18.76. |
|
(2) |
|
All of Mr. Ortinos options became immediately vested
and exercisable as a result of his death on November 28,
2005, pursuant to the terms of the Plan covering such options.
The options are currently held by the estate of Mr. Ortino. |
Pension
Benefits
The following table indicates the amount of annual pension
benefits that would be payable at age 65 under the Ferro
Corporation Retirement Plan (the Qualified Plan) and
the Ferro Corporation Supplemental Executive Defined Benefit
Plan (formerly known as the Ferro Corporation Nonqualified
Retirement Plan) (the Nonqualified Plan)
(collectively, the Retirement Program) to officers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regular
|
|
Years of Service at Age 65 With Retirement in 2005
|
|
Compensation
|
|
15
|
|
|
20
|
|
|
25
|
|
|
30
|
|
|
35
|
|
|
$200,000
|
|
$
|
44,378
|
|
|
$
|
59,171
|
|
|
$
|
73,963
|
|
|
$
|
88,756
|
|
|
$
|
88,756
|
|
400,000
|
|
|
94,378
|
|
|
|
125,837
|
|
|
|
157,297
|
|
|
|
188,756
|
|
|
|
188,756
|
|
600,000
|
|
|
144,378
|
|
|
|
192,504
|
|
|
|
240,630
|
|
|
|
288,756
|
|
|
|
288,756
|
|
800,000
|
|
|
194,378
|
|
|
|
259,171
|
|
|
|
323,963
|
|
|
|
388,756
|
|
|
|
388,756
|
|
1,000,000
|
|
|
244,378
|
|
|
|
325,837
|
|
|
|
407,297
|
|
|
|
488,756
|
|
|
|
488,756
|
|
1,200,000
|
|
|
294,378
|
|
|
|
392,504
|
|
|
|
490,630
|
|
|
|
588,756
|
|
|
|
588,756
|
|
1,400,000
|
|
|
344,378
|
|
|
|
459,171
|
|
|
|
573,963
|
|
|
|
688,756
|
|
|
|
688,756
|
|
1,600,000
|
|
|
394,378
|
|
|
|
525,837
|
|
|
|
657,297
|
|
|
|
788,756
|
|
|
|
788,756
|
|
1,800,000
|
|
|
444,378
|
|
|
|
592,504
|
|
|
|
740,630
|
|
|
|
888,756
|
|
|
|
888,756
|
|
2,000,000
|
|
|
494,378
|
|
|
|
659,171
|
|
|
|
823,963
|
|
|
|
988,756
|
|
|
|
988,756
|
|
2,200,000
|
|
|
544,378
|
|
|
|
725,837
|
|
|
|
907,297
|
|
|
|
1,088,756
|
|
|
|
1,088,756
|
|
2,400,000
|
|
|
594,378
|
|
|
|
792,504
|
|
|
|
990,630
|
|
|
|
1,188,756
|
|
|
|
1,188,756
|
|
2,600,000
|
|
|
644,378
|
|
|
|
859,171
|
|
|
|
1,073,963
|
|
|
|
1,288,756
|
|
|
|
1,288,756
|
|
Under the Retirement Program,* an eligible participant who
retires at age 65 with at least 30 years of service
will receive a monthly benefit equal to 50% of the monthly
average of the participants highest five consecutive
calendar years of compensation (includes base salary, bonuses
and incentive compensation substantially equivalent to salary,
bonus and performance shares as reflected in the Summary
Compensation Table), reduced for 50% of the monthly primary
social security benefits. Benefits are subject to reduction for
service of less than 30 years and for commencement prior to
age 60 for elected officers. Service in excess of
30 years is not taken into account for
91
accrual of retirement benefits. Benefits are payable in a life
annuity form with 120 monthly payments guaranteed unless
the benefits under the Nonqualified Plan are commuted and paid
in a single sum. Furthermore, the benefits payable under the
Nonqualified Plan to an eligible participant are conditioned
upon the execution of, and compliance with, a non-competition,
non-solicitation, non-disparagement and confidentiality
agreement.
The five-year average covered compensation for the individuals
listed in the Summary Compensation Table was: Mr. Ortino
($1,897,068), Mr. Bays ($392,306), Mr. Benson
($308,169), Mr. Gannon ($402,705) and Mr. Kramer
($354,957). As of December 31, 2005, Messrs. Ortino,
Bays, Benson, Gannon and Kramer had 34, 4, 18, 2 and 6
whole years of service, respectively. Mr. Kirsch and
Ms. Mastin were hired after June 30, 2003 and
therefore they are not eligible for participation in the
Retirement Program.
The employment of Messrs. Ortino, Benson and Kramer has
terminated. Retirement Program benefits relating to
Mr. Ortino have been paid partially in a lump sum payment
and partially in the form of monthly payments to his
beneficiary. Retirement Program benefits of Mr. Benson have
been paid partially in a lump sum payment, with the other part
to be paid in the form of monthly payments to commence later.
Retirement Program benefits of Mr. Kramer have been paid
partially in two lump sum payments during 2006 and the balance
will be paid in monthly payments in the future.
|
|
|
* |
|
Effective April 1, 2006, the Companys
U.S. defined benefit pension program for salaried and
certain hourly employees has been changed. Under the program
changes announced February 15, 2006, benefits accrued for
active employees who were participating in the defined benefit
program have been frozen as of March 31, 2006. (This freeze
will not affect the benefits of current retirees, former
employees or employees hired on or after July 1, 2003.)
From April 1, 2006, the affected employees will join
salaried and certain hourly employees in the United States who
were hired on or after July 1, 2003 in receiving an
additional contribution each year from the Company to an
existing defined contribution plan. |
Non-Qualified
Deferred Compensation Plans
The following table sets forth information regarding
non-qualified deferred compensation plans with respect to each
of the executive officers named in the Summary Compensation
Table for 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
Balance at
|
|
|
|
Executive
|
|
|
Company
|
|
|
Aggregate
|
|
|
Withdrawals /
|
|
|
December 31,
|
|
Name
|
|
Contributions(1)
|
|
|
Contributions(2)
|
|
|
Earnings(3)
|
|
|
Distributions
|
|
|
2005
|
|
|
James F. Kirsch
|
|
$
|
0
|
|
|
$
|
13,366
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
13,366
|
|
Hector R. Ortino
|
|
|
417,417
|
|
|
|
51,036
|
|
|
|
2,581
|
|
|
|
226,400
|
|
|
|
1,348,312
|
|
James C. Bays
|
|
|
0
|
|
|
|
11,585
|
|
|
|
1,205
|
|
|
|
0
|
|
|
|
91,301
|
|
M. Craig Benson
|
|
|
0
|
|
|
|
6,494
|
|
|
|
(5,208
|
)
|
|
|
0
|
|
|
|
32,422
|
|
Thomas M. Gannon
|
|
|
0
|
|
|
|
14,743
|
|
|
|
(2,080
|
)
|
|
|
0
|
|
|
|
25,099
|
|
Dale G. Kramer
|
|
|
0
|
|
|
|
10,447
|
|
|
|
(21,613
|
)
|
|
|
0
|
|
|
|
118,045
|
|
Celeste B. Mastin
|
|
|
0
|
|
|
|
9,828
|
|
|
|
(551
|
)
|
|
|
0
|
|
|
|
12,570
|
|
|
|
|
(1) |
|
Mr. Ortinos contribution represents the deferral of
his performance share payout for the 2002 2004
performance period, which would have been paid during 2005. This
amount appears in Mr. Ortinos 2004 compensation in
the Payout column of the Summary Compensation Table
on page 78. |
|
(2) |
|
Such amounts also appear as part of such officers 2005
compensation in the All Other Compensation of the
Summary Compensation Table on page 78. |
|
(3) |
|
Aggregate Earnings in 2005 consist of interest, dividends, gains
and/or
losses. |
The non-qualified deferred compensation plans in this table
consist of the Ferro Corporation Executive Employee Deferred
Compensation Plan (Executive Deferred Compensation
Plan) and the Ferro Corporation Supplemental Executive
Defined Contribution Plan (Supplemental Plan).
Under the Executive Deferred Compensation Plan, participants may
elect to defer a percentage of their annual salary, as well as
their annual bonus
and/or
performance share payout, to be paid at a certain time specified
by the
92
participant consistent with the terms of the Executive Deferred
Compensation Plan. The amounts that were deferred in 2005 are
listed under Executive Contributions in the table. There are no
Company Contributions under the Executive Deferred Compensation
Plan.
Under the Supplemental Plan, participants may receive a
supplemental matching contribution
and/or a
supplemental basic pension contribution. These are contributions
that would have been made to the account of a participant in the
Ferro Corporation Savings and Stock Ownership Plan (a 401(k) and
employee stock ownership plan, the SSOP) but for the
application of IRS limits. The supplemental basic pension
contribution in 2005 applied to participants who were hired on
or after July 1, 2003, the date as of which new
participation in Ferros Retirement Program ceased
(Mr. Kirsch and Ms. Mastin in the table). There are no
employee contributions under the Supplemental Plan.
Executive
Employment Agreement and Change in Control Agreements
The Company is party to an employment agreement with
Mr. Kirsch, which was entered into on October 18, 2004
in connection with his appointment as President and Chief
Operating Officer. On November 30, 2005, Mr. Kirsch
was named President and Chief Executive Officer following
Mr. Ortinos untimely death. The employment agreement
has an initial term ending December 31, 2007 and is
renewable for one-year periods thereafter.
Mr. Kirschs initial base salary for 2004 was $500,000
and he was eligible for an annual bonus payment of up to 60% of
his base salary. He was guaranteed a bonus of at least 50% of
his base salary actually paid in 2004 and 2005. When
Mr. Kirsch was named President and Chief Executive Officer
on November 30, 2005, the Board increased his base salary
to $600,000 and his target bonus to 75% of his base salary.
Mr. Kirsch is also eligible for awards under the
Companys 2003 Long-Term Incentive Compensation Plan,
including awards of stock options and performance shares, as and
to the extent determined by the Governance,
Nomination & Compensation Committee of the Board, and
to participate in other benefit plans generally available to
senior management.
The agreement is terminable upon death, disability, for
cause or upon voluntary termination. If
Mr. Kirschs employment were to end on account of a
Termination Without Cause (as such term is defined
in his employment agreement), the Company would be obligated
(1) to pay Mr. Kirsch a lump sum severance payment
equal to two times his full years compensation (base
salary plus targeted annual bonus), (2) to provide him
continued participation in Ferros employee benefit
programs for up to 24 months, (3) to provide him
outplacement services, and (4) to reimburse him for legal
fees he incurs as a result of his termination of employment. The
Companys payment and benefit continuation obligations will
cease if Mr. Kirsch breaches any of his agreements
contained in the Companys standard employee
confidentiality agreement or if Mr. Kirsch declines to sign
and return, or revokes, a release agreement containing the
Companys standard noncompetition, nonsolicitation,
nondisparagement and confidentiality provisions the Company
ordinarily requires of executives who receive additional
benefits or payments on termination of employment.
If Mr. Kirschs employment is terminated under the
Change of Control Agreement (defined below), then the terms of
the Change of Control Agreement, and not the employment
agreement, will govern.
Ferro is also a party to change in control agreements (the
Change in Control Agreements) with
Messrs. Bays, Gannon and Ms. Mastin. The purpose of
these agreements is to reinforce and encourage each
officers continued attention and dedication to his
assigned duties without distraction in the face of solicitations
by other employers and the potentially disturbing circumstances
arising from the possibility of a change in control of Ferro.
Under the respective Change in Control Agreements, if there were
a change in control of the Company and the executives
employment were terminated, the Company would be obligated
(1) to pay Messrs. Kirsch, Bays, Gannon and
Ms. Mastin a lump sum severance payment equal to two times
the executives full years compensation (base salary
plus targeted annual bonus) and (2) to provide the
executives with continued participation in Ferros employee
benefit programs for up to 24 months. These agreements
limit the executives right to compete against Ferro after
the termination of employment. The Change in Control Agreements
are not employment agreements. (Mr. Kramers Change in
Control Agreement terminated when his employment with the
Company terminated on March 31, 2006.)
93
Director
Compensation
Each Director (other than Directors who are Company employees)
is paid an annual fee of $30,000 and an attendance fee of
$1,500 per day for meetings of the Board and $1,000 for
committee meetings. The Chairs of the Audit Committee and the
Governance, Nomination & Compensation Committee are
paid an additional annual fee of $20,000 each, and the Chairs of
the Finance and Technology Strategy Committees are paid an
additional fee of $4,000 each. In addition, in each of 2004 and
2005, Ferro granted each Director (other than Mr. Kirsch
and the Companys former Chairman & Chief
Executive Officer, Hector R. Ortino) an option to purchase
7,000 shares of Common Stock under the 2003 Long-Term
Incentive Compensation Plan.
Directors may defer their fees into a Ferro Common Stock
account. Amounts so deferred are invested in shares of Ferro
Common Stock and dividends on those shares are reinvested in
additional shares of Ferro Common Stock. Ferro distributes the
shares credited to a Directors deferred account after he
or she ceases to be a Director.
During 2005, the Board of Directors met 11 times, the Audit
Committee met 26 times, the Finance Committee met five times,
the Governance, Nominating & Compensation Committee met
twice, and the Technology Strategy Committee met once.
Director fees for 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Stock
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
Fees Paid in
|
|
|
Stock Option
|
|
|
Incentive
|
|
|
All Other
|
|
Name
|
|
Fees
|
|
|
Fees Deferred
|
|
|
Cash
|
|
|
Awards
|
|
|
Compensation
|
|
|
Compensation
|
|
|
Michael H. Bulkin
|
|
$
|
68,500
|
|
|
$
|
68,500
|
|
|
$
|
0
|
|
|
|
7,000
|
|
|
|
0
|
|
|
|
0
|
|
Sandra Austin Crayton
|
|
|
53,000
|
|
|
|
0
|
|
|
|
53,000
|
|
|
|
7,000
|
|
|
|
0
|
|
|
|
0
|
|
Jennie S. Hwang
|
|
|
75,000
|
|
|
|
75,000
|
|
|
|
0
|
|
|
|
7,000
|
|
|
|
0
|
|
|
|
0
|
|
James F. Kirsch(1)(2)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
William B. Lawrence
|
|
|
93,500
|
|
|
|
0
|
|
|
|
93,500
|
|
|
|
7,000
|
|
|
|
0
|
|
|
|
0
|
|
Michael F. Mee
|
|
|
57,500
|
|
|
|
57,500
|
|
|
|
0
|
|
|
|
7,000
|
|
|
|
0
|
|
|
|
0
|
|
Hector R. Ortino(1)(2)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
William J. Sharp
|
|
|
77,000
|
|
|
|
77,000
|
|
|
|
0
|
|
|
|
7,000
|
|
|
|
0
|
|
|
|
0
|
|
Dennis W. Sullivan
|
|
|
74,000
|
|
|
|
74,000
|
|
|
|
0
|
|
|
|
7,000
|
|
|
|
0
|
|
|
|
0
|
|
Padmasree Warrior(3)
|
|
|
21,500
|
|
|
|
0
|
|
|
|
21,500
|
|
|
|
7,000
|
|
|
|
0
|
|
|
|
0
|
|
Alberto Weisser
|
|
|
64,000
|
|
|
|
64,000
|
|
|
|
0
|
|
|
|
7,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
(1) |
|
Neither Mr. Ortino nor Mr. Kirsch were paid any fees
for their service as Directors because they were employees of
the Company. |
|
(2) |
|
Mr. Ortino died on November 28, 2005, and was
succeeded on the Board by Mr. Kirsch. |
|
(3) |
|
Ms. Warrior resigned as a Director on June 23, 2005,
due to the time commitment required by her other professional
responsibilities. |
Governance,
Nomination & Compensation Committee Interlocks and
Insider Participation
During 2005, no officer or employee of Ferro served as a member
of the Governance, Nomination & Compensation Committee.
Also, during 2005, there were no interlocking relationships (as
described in Item 402(j) of SEC
Regulation S-K)
between members of the Governance, Nomination &
Compensation Committee and Ferro.
|
|
Item 12
|
Security
Ownership of Certain Beneficial Owners and Management, and
Related Shareholder Matters
|
Stock
Ownership by Directors, Executive Officers and
Employees
Ferro encourages share ownership by its Directors and executive
officers and has ownership guidelines based on base compensation
or fees and position within the Company. The information below
shows beneficial ownership of Ferro Common Stock by
(i) each Director, (ii) each executive officer named
in the Summary Compensation Table
94
under Item 11 above, and (iii) all Directors and
executive officers as a group. Except as otherwise noted, each
person has sole voting and investment power as to his or her
shares and such persons address is c/o Ferro
Corporation, 1000 Lakeside Avenue, Cleveland, Ohio 44114.
(The information set forth below is as of September 14,
2006.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Underlying
|
|
|
|
|
|
|
|
|
|
Shares of Common
|
|
|
Options Exercisable
|
|
|
|
|
|
Series A ESOP
|
|
|
|
Stock Owned Directly
|
|
|
Within 60 Days of
|
|
|
|
|
|
Convertible
|
|
|
|
or Indirectly
|
|
|
Record Date
|
|
|
Total Common Stock
|
|
|
Preferred
|
|
|
Michael H. Bulkin
|
|
|
26,626
|
|
|
|
23,000
|
|
|
|
49,626
|
|
|
|
0
|
|
Sandra Austin Crayton
|
|
|
12,533
|
|
|
|
26,750
|
|
|
|
39,283
|
|
|
|
0
|
|
Jennie S. Hwang
|
|
|
11,670
|
|
|
|
13,000
|
|
|
|
24,670
|
|
|
|
0
|
|
James F. Kirsch(1)
|
|
|
108,500
|
|
|
|
62,500
|
|
|
|
171,000
|
|
|
|
0
|
|
William B. Lawrence
|
|
|
8,131
|
|
|
|
18,000
|
|
|
|
26,131
|
|
|
|
0
|
|
Michael F. Mee
|
|
|
13,605
|
|
|
|
15,500
|
|
|
|
29,105
|
|
|
|
0
|
|
William J. Sharp
|
|
|
20,808
|
|
|
|
23,000
|
|
|
|
43,808
|
|
|
|
0
|
|
Dennis W. Sullivan
|
|
|
29,916
|
|
|
|
26,750
|
|
|
|
56,666
|
|
|
|
0
|
|
Alberto Weisser
|
|
|
13,836
|
|
|
|
15,500
|
|
|
|
29,336
|
|
|
|
0
|
|
Officers Named in Summary
Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James C. Bays(1)
|
|
|
46,228
|
|
|
|
98,000
|
|
|
|
144,228
|
|
|
|
0
|
|
M. Craig Benson
|
|
|
6,125
|
|
|
|
46,500
|
|
|
|
52,625
|
|
|
|
0
|
|
Thomas M. Gannon(1)
|
|
|
42,523
|
|
|
|
77,750
|
|
|
|
120,273
|
|
|
|
0
|
|
Dale G. Kramer
|
|
|
9,836
|
|
|
|
92,896
|
|
|
|
102,732
|
|
|
|
0
|
|
Celeste B. Mastin(1)
|
|
|
31,100
|
|
|
|
14,000
|
|
|
|
45,100
|
|
|
|
0
|
|
Hector R. Ortino(1)
|
|
|
156,302
|
|
|
|
1,031,000
|
|
|
|
1,187,302
|
|
|
|
0
|
|
16 Directors and Executive
Officers as a Group(2)
|
|
|
462,491
|
|
|
|
452,525
|
|
|
|
915,016
|
|
|
|
0
|
|
|
|
|
(1) |
|
Shares reported above include 108,500, 36,000, 31,300, 70,000
and 31,100 shares awarded to Messrs. Kirsch, Bays,
Gannon, Ortino and Ms. Mastin, respectively, with regard to
the
2004-2006,
2005-2007
and
2006-2008
(all of which shares are subject to forfeiture under the former
Performance Share Plan
and/or the
2003 Long-Term Incentive Compensation Plan), but do not include
730, 1,505, 1,371 and 687 phantom shares held for
the accounts of Messrs. Kirsch, Bays and Gannon, and
Ms. Mastin respectively, in the Supplemental Executive
Defined Contribution Plan. |
|
(2) |
|
Shares of former executive officers (Messrs. Ortino, Benson
and Kramer) are not included in these totals. |
As a group, current Directors and officers have beneficial
ownership of 2.12% of our outstanding Common Stock. (This
percentage includes shares that would be issued if the Directors
and officers exercised all stock options vested within
60 days after the record date for the Annual Meeting.)
Mr. Ortino, who owned 2.71% of the outstanding Common
Stock, was the only Director or executive officer who owned more
than 1.0% of the outstanding shares. (None of our current
Directors or executive officers own any of the outstanding
shares of Series A ESOP Convertible Preferred Stock.)
95
Stock
Ownership by Other Major Shareholders
The following table sets forth information about each person
known by us to be the beneficial owner of more than 5% of
Ferros outstanding Common Stock or stock convertible into
Common Stock.
|
|
|
|
|
|
|
|
|
Nature and Amount of
|
|
Percentage of Outstanding
|
|
Name and Address of Beneficial Owner
|
|
Beneficial Ownership
|
|
Common Stock
|
|
|
Mario J. Gabelli and related
entities(1)
|
|
5,404,448 Shares
|
|
|
12.9
|
%
|
One Corporate Center
|
|
of Common Stock
|
|
|
|
|
Rye, New York 10017
|
|
|
|
|
|
|
Mac-Per-Wolf
Company(2)
|
|
2,493,800 Shares
|
|
|
6.0
|
%
|
311 S. Wacker
Dr. Suite 6000
|
|
of Common Stock
|
|
|
|
|
Chicago, Illinois 60606
|
|
|
|
|
|
|
T. Rowe Price Associates, Inc. and
related entities(3)
|
|
2,476,180 Shares
|
|
|
5.9
|
%
|
100 E. Pratt Street
|
|
of Common Stock
|
|
|
|
|
Baltimore, Maryland 02109
|
|
|
|
|
|
|
DePrince, Race & Zollo,
Inc.(4)
|
|
2,334,800 Shares
|
|
|
5.5
|
%
|
250 Park Ave. South, Suite 250
|
|
of Common Stock
|
|
|
|
|
Winter Park, Florida 32789
|
|
|
|
|
|
|
Wellington Management Company, LLP
and related entities(5)
|
|
2,255,900 Shares
|
|
|
5.4
|
%
|
75 State Street
|
|
of Common Stock
|
|
|
|
|
Boston, Massachusetts 02109
|
|
|
|
|
|
|
JPMorgan Chase Bank N.A.,
Trustee(6)
|
|
591,462 Shares
|
|
|
1.4
|
%
|
Under the Ferro Corporation
|
|
of Common Stock
|
|
|
|
|
Defined Contribution Master Trust
|
|
380,159 Shares
|
|
|
|
|
|
|
of Convertible
|
|
|
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
|
(1) |
|
We obtained the information regarding share ownership from
Schedule 13D/A filed May 24, 2005, by Mario J. Gabelli
and related entities. Such reporting persons reported sole
voting power as to 5,127,948 shares and sole dispositive
power as to 5,404,448 shares as of May 19, 2005. |
|
(2) |
|
We obtained the information regarding share ownership from the
Schedule 13G filed on February 15, 2006 by
Mac-Per-Wolf
Company (MPW), which reported shared voting and
dispositive power as to 2,431,000 shares and sole voting
and dispositive power as to 62,800 shares as of
December 31, 2005, and the Schedule 13G filed on
February 14, 2006 by Janus Capital Management LLC
(Janus), which reported shared voting and
dispositive power as to 2,431,000 shares as of
December 31, 2005. |
|
|
|
The MPW filing also indicates that (a) MPW is the parent
holding company of Perkins, Wolf, McDonnell and Company, LLC
(Perkins Wolf) and PWMCO, LLC, and is filing on
their behalf, and (b) its holdings may also be aggregated
within Schedule 13G filings submitted by Janus. The Janus
filing also indicates that (x) the holdings of Enhanced
Investment Technologies LLC, Perkins Wolf and Janus have been
aggregated for purposes of the filing due to Janus
indirect ownership interest in such entities; (y) as an
investment advisor or sub-advisor, Perkins Wolf may be deemed to
be the beneficial owner of such 2,431,000 shares; however,
Perkins Wolf does not have the right to receive any dividends
from, or the proceeds from the sale of, the securities held in
its clients portfolios and disclaims any ownership
associated with such rights; and (z) its holdings may also
be aggregated within Schedule 13G filings submitted by MPW. |
|
(3) |
|
We obtained the information regarding share ownership from the
Schedule 13G filed on February 14, 2006, by T. Rowe Price
Associates, Inc., which reported sole voting power as to
420,320 shares and sole dispositive power as to
2,476,180 shares as of December 31, 2005. |
|
(4) |
|
We obtained the information regarding share ownership from the
Schedule 13G filed on September 7, 2006, by DePrince,
Race & Zollo, Inc., which reported sole voting and
dispositive power as to such shares as of August 31, 2006. |
|
(5) |
|
We obtained the information regarding share ownership from the
Schedule 13G/A filed on February 14, 2006, by Wellington
Management Company, LLP, which reported shared voting power as
to 2,255,900 shares and shared dispositive power as to
1,253,800 shares as of December 31, 2005. |
96
|
|
|
(6) |
|
The beneficial owners of the Defined Contribution Master Trust
are those of our employees and former employees who participate
in the Ferro Corporation Savings and Stock Ownership Plan and
the Ferro Corporation Bargaining Unit 401(k) Plan. The Trustee
votes the shares in the Plan in accordance with the
participants instructions. The Convertible Preferred Stock
is a convertible class of stock that is held in the Plan trust
and is non-transferable. When a participant receives a
distribution of his or her account balance, the participant
receives either Common Stock or cash. Each share of the
Convertible Preferred Stock carries one vote and votes together
with the Common Stock on most matters. At September 14,
2006, the 380,159 shares of Convertible Preferred Stock
were convertible into 987,958 shares of Common Stock,
representing approximately 2.26% of the combined number of
shares of Common Stock and Convertible Preferred Stock
outstanding. |
Equity
Compensation Plan Information
The following table sets forth information as of
December 31, 2005 regarding the number of shares issued and
available for issuance under Ferros equity compensation
plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares to
|
|
|
|
|
|
Number of Shares
|
|
|
|
be Issued on
|
|
|
Weighted Average
|
|
|
Remaining Available
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
for Future Issuance
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
under Equity
|
|
Equity Compensation Plan
|
|
and Other Awards
|
|
|
and Other Awards
|
|
|
Compensation Plans(1)
|
|
|
Approved by Ferro Shareholders(2)
|
|
|
4,752,900 Shares
|
|
|
$
|
22.19
|
|
|
|
914,225 Shares(4
|
)
|
Not Approved by Ferro
Shareholders(3)
|
|
|
134,830 Shares
|
|
|
$
|
24.96
|
|
|
|
0 Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,887,730 Shares
|
|
|
$
|
22.23
|
(5)
|
|
|
914,225 Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes shares listed in the second column. |
|
(2) |
|
Includes options issued under the Companys 2003 Long-Term
Incentive Compensation Plan. |
|
(3) |
|
Includes options granted in excess of 100,000 shares to the
Chief Executive Officer and phantom units issued under the
Companys Executive Employee Deferred Compensation Plan and
Supplemental Executive Defined Contribution Plan. |
|
(4) |
|
As indicated in the summary of the 2006 Long-Term Incentive
Plan, no further grants of these shares will be offered if the
Plan is approved. |
|
(5) |
|
Weighted-average exercise price of outstanding options; excludes
phantom units. |
Set forth below is a description of the material features of
each plan that were not approved by Ferro shareholders:
|
|
|
|
|
Stock Options. On February 11, 2002 and
February 9, 2001, respectively, the Board granted
Mr. Ortino 155,000 and 122,000 options to purchase shares.
Of this amount, options for 100,000 shares each year were
granted under the 1985 Employee Stock Option Plan approved by
shareholders and the remaining options were approved and granted
by the Board from available treasury shares. The options granted
in 2002 have an exercise price of $25.50 and the options granted
in 2001 have an exercise price of $23.60. Both grants have a
maximum term of ten years and vest evenly over four years on the
anniversary of the grant date.
|
|
|
|
Executive Employee Deferred Compensation
Plan. The Executive Employee Deferred
Compensation Plan allows participants to defer up to 75% of
annual base salary and up to 100% of incentive cash bonus awards
and cash performance share payouts. Participants may elect to
have all or a portion of their deferred compensation accounts
deemed to be invested in shares of Ferro Common Stock, and
credited with hypothetical appreciation, depreciation, and
dividends. When distributions are made from this Plan in respect
of such shares, the distributions are made in actual shares of
Ferro Common Stock.
|
|
|
|
Supplemental Executive Defined Contribution
Plan. The Supplemental Executive Defined
Contribution Plan allows participants to be credited annually
with matching and basic pension contributions that they would
have received under the Companys 401(k) plan except for
the applicable IRS limitations on compensation and
contributions. Contributions vest at 20% for each year of
service, are deemed invested in Ferro Common Stock and earn
dividends. Distributions are made in Ferro Common Stock or in
cash.
|
97
Item 13
Certain Relationships and Related Transactions
There are no relationships or transactions that are required to
be reported.
Item 14
Principal Accountant Fees and Services
The Audit Committee has sole responsibility for appointing the
Companys independent registered public accounting firm. On
May 12, 2006, Audit Committee dismissed KPMG LLP, which had
served as Ferros auditors for the fiscal year ended
December 31, 2004 and prior years, as the Companys
independent registered public accounting firm and appointed
Deloitte & Touche LLP to serve in that capacity for the
fiscal year ended December 31, 2005.
Fees
The Audit Committee has sole responsibility, in consultation
with management, for approving the terms and fees for the
engagement of the independent registered public accounting firm
for audits of Ferros financial statements. In addition,
the Audit Committee has sole responsibility for determining
whether and under what circumstances Ferros independent
registered public accounting firm may be engaged to perform
audit-related services and must pre-approve any non-audit
related service performed by the independent registered public
accounting firm. Under no circumstances is our independent
registered public accounting firm permitted to perform services
of the nature described in Section 201 of the
Sarbanes-Oxley Act.
Since May 6, 2003, all of the services provided by the
Companys independent registered public accounting firm
have been approved in accordance with the pre-approval
procedures described above.
For the years ended December 31, 2005 and December 31,
2004, Deloitte & Touche LLP and KPMG LLP billed the
Company fees as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
Firm
|
|
Audit Fees
|
|
|
Audit-Related Fees
|
|
|
Tax Fees
|
|
|
All Other Services
|
|
|
2005
|
|
Deloitte & Touche LLP
|
|
$
|
6,717,000
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
2004
|
|
KPMG LLP
|
|
$
|
15,188,211
|
|
|
$
|
2,345,000
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Audit Fees with respect to 2004 were higher than usual due to
the extensive work done by KPMG LLP in connection with the
restatement of the Companys financial statements for
fiscal year ended December 31, 2003 and the fiscal quarter
ended March 31, 2004 that resulted from the Companys
independent investigations of accounting irregularities and
related matters and an increased scope of work for the 2004
audit.*( The 2004 Audit Fees also included, for the first time,
an audit of our internal controls over financial reporting and
managements assessment of the effectiveness of those
controls pursuant to Section 404 of the Sarbanes-Oxley Act
of 2002. In addition, after the date that the 2004 Audit Fees
were reported in the Companys last proxy statement, the
Company was billed an additional $2,685,211 by KPMG LLP with
respect to audit services provided in respect of 2004. Taken
together, these factors, which are detailed in the table below,
led to the significant increase in Audit Fees from 2003 to 2004:
|
|
|
|
|
|
|
|
|
|
|
Restatement of Financial
|
|
|
Audit of 2004 Financial
|
|
|
Sarbanes-Oxley
|
|
Statements
|
|
|
Statements
|
|
|
Section 404 Audits
|
|
|
$
|
2,302,000
|
|
|
$
|
6,154,513
|
|
|
$
|
6,643,698
|
|
The Audit-Related Fees for 2004 related principally
to work performed by KPMG LLP with respect to support of the
Companys independent investigation of accounting
irregularities and related matters, which amounted to $2,216,000.
The Audit Committee has reviewed all non-audit services
described above and has concluded that the provision of these
non-audit services is compatible with maintaining the
independent registered accounting firms independence.
(* For a more complete description of the internal
investigation and the ensuing audit and restatement process,
please see the discussion under the heading
Restatement on pages 3 to 8 of the
Companys Annual Report on
Form 10-K
for its fiscal year ended December 31, 2004.
98
PART IV
Item 15
Exhibits, Financial Statement Schedules and Reports on
Form 8-K
1. DOCUMENTS FILED AS PART OF THIS ANNUAL REPORT ON
FORM 10-K:
(a) The following consolidated financial statements of
Ferro Corporation and its subsidiaries, are submitted herewith:
Consolidated Statements of Income for the years ended
December 31, 2005, 2004 and 2003
Consolidated Balance Sheets at December 31, 2005 and 2004
Consolidated Statements of Shareholders Equity and
Comprehensive Income for the years ended December 31, 2005,
2004 and 2003
Consolidated Statements of Cash Flows for the years ended
December 31, 2005, 2004 and 2003
Notes to Consolidated Financial Statements
(b) Exhibits:
The exhibits listed in the attached Exhibit Index are filed
pursuant to Item 15 (c) of
Form 10-K.
(c) The following additional information for the years
2005, 2004 and 2003, is submitted herewith:
Schedule II Valuation and Qualifying Accounts
and Reserves. All other schedules have been omitted because the
material is not applicable or is not required as permitted by
the rules and regulations of the Securities and Exchange
Commission, or the required information is included in notes to
consolidated financial statements. Financial Statement
Schedule II, together with the Reports of Independent
Registered Public Accounting Firms, are contained on
pages 91, 95 and 96 of this Annual Report on
Form 10-K.
99
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Annual Report on
Form 10-K
to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: September 29, 2006
FERRO CORPORATION
James F. Kirsch
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this Annual Report on
Form 10-K
has been signed below by the following persons on behalf of the
Registrant and in their indicated capacities as of the
29th day
of September 2006.
|
|
|
|
|
/s/ James
F. Kirsch
James F. Kirsch
|
|
President and Chief Executive
Officer
(Principal Executive Officer)
|
|
|
|
/s/ Thomas
M. Gannon
Thomas
M. Gannon
|
|
Vice President and Chief Financial
Officer
(Principal Financial Officer and Principal Accounting Officer)
|
|
|
|
/s/ Michael
H. Bulkin
Michael
H. Bulkin
|
|
Director
|
|
|
|
/s/ Sandra
Austin Crayton
Sandra
Austin Crayton
|
|
Director
|
|
|
|
/s/ Jennie
S. Hwang
Jennie
S. Hwang
|
|
Director
|
|
|
|
/s/ William
B. Lawrence
William
B. Lawrence
|
|
Director
|
|
|
|
/s/ Michael
F. Mee
Michael
F. Mee
|
|
Director
|
|
|
|
/s/ William
J. Sharp
William
J. Sharp
|
|
Director
|
|
|
|
/s/ Dennis
W. Sullivan
Dennis
W. Sullivan
|
|
Director
|
|
|
|
/s/ Alberto
Weisser
Alberto
Weisser
|
|
Director
|
100
FERRO
CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years
Ended December 31, 2005, 2004, and 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
Charged
|
|
|
|
|
|
Balance
|
|
|
|
Beginning
|
|
|
Costs and
|
|
|
to Other
|
|
|
|
|
|
at End of
|
|
|
|
of Period
|
|
|
Expenses
|
|
|
Accounts
|
|
|
Deductions
|
|
|
Period
|
|
|
|
(Thousands of dollars)
|
|
|
Allowance for Doubtful
Accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
747
|
(b)
|
|
|
|
|
Year ended December 31, 2005
|
|
$
|
9,244
|
|
|
|
1,799
|
|
|
|
|
|
|
|
2,777
|
(a)
|
|
$
|
7,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(560
|
)(b)
|
|
|
|
|
Year ended December 31, 2004
|
|
$
|
9,020
|
|
|
|
3,650
|
|
|
|
(314
|
)(c)
|
|
|
3,672
|
(a)
|
|
$
|
9,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(646
|
)(b)
|
|
|
|
|
Year ended December 31, 2003
|
|
$
|
11,614
|
|
|
|
1,218
|
|
|
|
(385
|
)(c)
|
|
|
4,073
|
(a)
|
|
$
|
9,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Repairs and
Maintenance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
226
|
(b)
|
|
|
|
|
Year ended December 31, 2005
|
|
$
|
2,461
|
|
|
|
4,453
|
|
|
|
|
|
|
|
3,794
|
|
|
$
|
2,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(149
|
)(b)
|
|
|
|
|
Year ended December 31, 2004
|
|
$
|
3,091
|
|
|
|
3,341
|
|
|
|
|
|
|
|
4,120
|
|
|
$
|
2,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(390
|
)(b)
|
|
|
|
|
Year ended December 31, 2003
|
|
$
|
2,270
|
|
|
|
4,007
|
|
|
|
|
|
|
|
3,576
|
|
|
$
|
3,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes: |
|
(a) Accounts written off, less recoveries |
|
|
|
(b) |
|
Adjustment with respect to differences in rates of exchange |
|
(c) |
|
Acquisitions and divestitures |
101
EXHIBIT INDEX
The following exhibits are filed with this report or are
incorporated here by reference to a prior filing in accordance
with
Rule 12b-32
under the Securities and Exchange Act of 1934.
Exhibit:
(3) Articles of Incorporation and by-laws
(a) Eleventh Amended Articles of Incorporation. (Reference
is made to Exhibit 3(a) to Ferro Corporations Annual
Report on Form
10-K for the
year ended December 31, 2003, 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 Corporations Annual Report on
Form 10-K
for the year ended December 31, 2003, which Exhibit is
incorporated here by reference.)
(c) Certificate of Amendment to the Eleventh Amended
Articles of Incorporation of Ferro filed June 19, 1998.
(Reference is made to Exhibit 3(c) to Ferro
Corporations Annual Report on
Form 10-K
for the year ended December 31, 2003, which Exhibit is
incorporated here by reference.)
(d) Amended Code of Regulations. (Reference is made to
Exhibit 3(d) to Ferro Corporations Annual Report on
Form 10-K
for the year ended December 31, 2003, which Exhibit is
incorporated here by reference.)
(4) Instruments defining rights of security holders,
including indentures
(a) The rights of the holders of Ferros 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(b) to
Ferro Corporations Annual Report on
Form 10-K
for the year ended December 31, 2003, which Exhibit is
incorporated here by reference.)
(b) Officers 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 Corporations Current Report on
Form 8-K
filed December 21, 2001, which Exhibit is incorporated here
by reference.)
(c) Form of Global Note
(91/8% Senior
Notes due 2009). (Reference is made to Exhibit 4.2 to Ferro
Corporations Current Report on
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.
(10) Material Contracts
(a) Ferro Corporation Acquisition Performance Reward Plan.
(Reference is made to Exhibit 10(b) to Ferro
Corporations Annual Report on
Form 10-K
for the year ended December 31, 2001, which Exhibit is
incorporated here by reference.)
(b) Ferro Corporation Savings and Stock Ownership Plan.
(Reference is made to Exhibit 10(c) to Ferro
Corporations Annual Report on
Form 10-K
for the year ended December 31, 2001, which Exhibit is
incorporated here by reference.)
(c) Ferro Corporation Employee Stock Option Plan.
(Reference is made to Exhibit 10(d) to Ferro
Corporations Annual Report on
Form 10-K
for the year ended December 31, 2001, which Exhibit is
incorporated here by reference.)
(d) Schedule I containing a written description of
stock option granted to Hector R. Ortino.*
102
(e) Form of Indemnification Agreement. (Reference is made
to Exhibit 10(f) to Ferro Corporations Annual Report
on
Form 10-K
for the year ended December 31, 2003, which Exhibit is
incorporated here by reference.)*
(f) Employment Agreement between Ferro Corporation and
James F. Kirsch. (Reference is made to Exhibit 10.1 to
Ferro Corporations Current Report on
Form 8-K,
filed October 19, 2004, which Exhibit is incorporated here
by reference.)*
(g) Form of Executive Employment Contract. (Reference is
made to Exhibit 10(g) to Ferro Corporations Annual
Report on
Form 10-K
for the year ended December 31, 2003, which Exhibit is
incorporated here by reference.)*
(h) Form of Change in Control Agreement. (Reference is made
to Exhibit 10(h) to Ferro Corporations Annual Report
on
Form 10-K
for the year ended December 31, 2004, which Exhibit is
incorporated here by reference.)*
(i) Schedule II listing the officers with whom Ferro
had entered into executive employment agreements and change in
control agreements which were effective during
and/or
subsequent to 2004.*
(j) Ferro Corporation Supplemental Executive Defined
Contribution Plan. (Reference is made to Exhibit 10(j) to
Ferro Corporations Annual Report on
Form 10-K
for the year ended December 31, 2004, which Exhibit is
incorporated here by reference.)*
(k) Ferro Corporation Executive Employee Deferred
Compensation Plan. (Reference is made to Exhibit 10(k) to
Ferro Corporations Annual Report on
Form 10-K
for the year ended December 31, 2004, which Exhibit is
incorporated here by reference.) *
(l) Ferro Corporation Supplemental Executive Defined
Benefit Plan. (Reference is made to Exhibit 10(l) to Ferro
Corporations Annual Report on
Form 10-K
for the year ended December 31, 2004, which Exhibit is
incorporated here by reference.)*
(m) Ferro Corporation Deferred Compensation Plan for
Non-Employee Directors, Ferro Corporation Deferred Compensation
Plan for Non-Employee Directors Trust Agreement, and a
First Amendment to Ferro Corporation Deferred Compensation Plan
for Non-Employee Directors. (Reference is made to
Exhibit 10(l) to Ferro Corporations Annual Report on
Form 10-K
for the year ended December 31, 2001, which Exhibit is
incorporated here by reference.)*
(n) Separation Agreement and Release between Ferro
Corporation and Dale G. Kramer. (Reference is made to
Exhibit 10(n) to Ferro Corporations Annual Report on
Form 10-K
for the year ended December 31, 2004, which Exhibit is
incorporated here by reference.)*
(o) Separation Agreement and Release between Ferro
Corporation and M. Craig Benson. (Reference is made to
Exhibit 10(o) to Ferro Corporations Annual Report on
Form 10-K
for the year ended December 31, 2004, which Exhibit is
incorporated here by reference.)*
(p) Receivables Purchase Agreement, dated as of
September 28, 2000, among Ferro Finance Corporation, Ciesco
L. P. as the Investor, Citicorp North America, Inc. as the
Agent, Ferro Electronic Materials as an Originator and Ferro
Corporation as Collection Agent and Originator. (Reference is
made to Exhibit 10(m) to Ferro Corporations Annual Report
on
Form 10-K
for the year ended December 31, 2001, which Exhibit is
incorporated here by reference.) 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. (Reference is made to Exhibit 10(m)(1) to
Ferro Corporations Quarterly Report on
Form 10-Q
for the three months ended March 31, 2002, which Exhibit is
incorporated here by reference.)
(q) Purchase and Contribution Agreement, dated as of
September 28, 2000, between Ferro Corporation and Ferro
Electronic Materials, Inc. as Sellers and Ferro Finance
Corporation as Purchaser. (Reference is made to
Exhibit 10(n) to Ferro Corporations Annual Report on
Form 10-K
for the year ended December 31, 2001,
103
which Exhibit is incorporated here by reference.) 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. (Reference is made to
Exhibit 10(n)(1) to Ferro Corporations Quarterly
Report on
Form 10-Q
for the three months ended March 31, 2002, which Exhibit is
incorporated here by reference.)
(r) Credit Agreement, dated as of August 31, 2001,
among Ferro Corporation, as Borrower, Various Financial
Institutions, as Lenders, Credit Suisse First Boston, as the
Syndication Agent and a Joint Lead Arranger, Citicorp U.S.A.,
Inc. and Key Bank National Association, as the Co-Documentation
Agents. (Reference is made to Exhibit 10(b) to Ferro
Corporations Quarterly Report on
Form 10-Q
for the three months ended September 30, 2001, which
Exhibit is incorporated here by reference.) First Amendment to
Credit Agreement, dated as of December 27, 2002. (Reference
is made to Exhibit 99.1 to Ferro Corporations Current
Report on
Form 8-K,
filed January 13, 2003, which Exhibit is incorporated here
by reference.) Second Amendment to Credit Agreement, dated as of
September 30, 2003. (Reference is made to Exhibit 10
to Ferro Corporations Current Report on
Form 10-Q
for the nine months ended September 30, 2003, which Exhibit
is incorporated here by reference.) Third Amendment and Waiver
to Credit Agreement, dated as of March 28, 2005. (Reference
is made to Exhibit 10.1 to Ferro Corporations Current
Report on
Form 8-K,
filed March 30, 2005, which Exhibit is incorporated here by
reference.) Fourth Amendment and Waiver to Credit Agreement,
dated as of June 29, 2005. (Reference is made to
Exhibit 10.1 to Ferro Corporations Current Report on
Form 8-K,
filed July 1, 2005, which Exhibit is incorporated here by
reference.)
(s) Ferro Corporation 2003 Long-Term Incentive Compensation
Plan. (Reference is made to Exhibit A of Ferro
Corporations Proxy Statement dated March 26, 2003,
which Exhibit is incorporated here by reference.)
(12) Ratio of Earnings to Fixed Charges and Ratio of
Earnings to Combined Fixed Charges and Preferred Stock Dividends.
(21) List of Subsidiaries.
(23.1) Consent of Independent Registered Public Accounting Firm.
(23.2) Consent of Independent Registered Public Accounting Firm.
(31.1) Certification of Principal Executive Officer Pursuant to
Rule 13a-14(a)/15d-14(a).
(31.2) Certification of Principal Financial Officer Pursuant to
Rule 13a-14(a)/15d-14(a).
(32.1) Certification of Principal Executive Officer Pursuant to
18 U.S.C. 1350.
(32.2) Certification of Principal Financial Officer Pursuant to
18 U.S.C.1350.
|
|
|
* |
|
Indicates management contract or compensatory plan, contract or
arrangement in which one or more Directors
and/or
executives of Ferro Corporation may be participants. |
104