FERRO CORP
10-Qs and 10-Ks
PROXIES
Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
| (Mark One) | ||
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x
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the fiscal year ended December 31, 2010 | ||
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or
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||
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o
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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.) | |
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1000 Lakeside Avenue
Cleveland, OH (Address of principal executive offices) |
44114 (Zip Code) |
Registrant’s telephone
number, including area code:
216-641-8580
Securities Registered Pursuant
to section 12(b) of the Act:
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Title of Each Class
|
Name of Each Exchange on Which Registered
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|
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Common Stock, par value $1.00
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New York Stock Exchange |
Securities Registered Pursuant
to Section 12(g) of the Act:
6.50% Convertible Senior
Notes due August 15, 2013
7.875% Senior Notes due
August 15, 2018
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
x
NO
o
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
x
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. YES
x
NO
o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). YES
o
NO
o
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
registrant’s 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.
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act. (Check one):
|
Large accelerated
filer
o
|
Accelerated filer x |
Non-accelerated
filer
o
(Do not check if a smaller reporting company) |
Smaller reporting company 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 Corporation Common Stock,
par value $1.00, held by non-affiliates and based on the closing
sale price as of June 30, 2010, was approximately
$624,595,000.
On January 31, 2011, there were 86,193,176 shares of
Ferro Corporation Common Stock, par value $1.00 outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Ferro Corporation’s
2011 Annual Meeting of Shareholders are incorporated into
Part III of this Annual Report on
Form 10-K.
TABLE OF
CONTENTS
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Table of Contents
PART I
| Item 1 — | Business |
History,
Organization and Products
Ferro Corporation was incorporated in Ohio in 1919 as an
enameling company. When we use the terms “Ferro,”
“we,” “us” or “the Company,” we
are referring to Ferro Corporation and its subsidiaries unless
we indicate otherwise. Today, we are a leading producer of
specialty materials and chemicals that are sold to a broad range
of manufacturers who, in turn, make products for many end-use
markets. In approximately 40 manufacturing sites around the
world, we produce the following types of products:
| • | Electronic, Color and Glass Materials — Conductive metal pastes and powders, polishing materials, glazes, enamels, pigments, decoration colors, and other performance materials; and | |
| • | Polymer and Ceramic Engineered Materials — Polymer additives, engineered plastic compounds, pigment dispersions, glazes, frits, porcelain enamel, pigments, and high-potency pharmaceutical active ingredients. |
We refer to our products as performance materials and chemicals
because we formulate them to perform specific functions in the
manufacturing processes and end products of our customers. The
products we develop often are delivered to our customers in
combination with customized technical service. The value of our
products stems from the benefits they deliver in actual use. We
develop and deliver innovative products to our customers through
our key strengths in:
| • | Particle Engineering — Our ability to design and produce very small particles made of a broad variety of materials, with precisely controlled characteristics of shape, size and size distribution. We understand how to disperse these particles within liquid, paste and gel formulations. | |
| • | Color and Glass Science — Our understanding of the chemistry required to develop and produce pigments that provide color characteristics ideally suited to customers’ applications. We have a demonstrated ability to provide glass-based coatings with properties that precisely meet customers’ needs in a broad variety of applications. | |
| • | Surface Chemistry and Surface Application Technology — Our understanding of chemicals and materials used to develop products and processes that involve the interface between layers and the surface properties of materials. | |
| • | Product Formulation — Our ability to develop and manufacture combinations of materials that deliver specific performance characteristics designed to work within customers’ particular manufacturing processes. |
We deliver these key technical strengths to our customers in a
way that creates additional value through our integrated
applications support. Our applications support personnel provide
assistance to our customers in their material specification and
evaluation, product design and manufacturing process
characterization in order to help them optimize the efficient
and cost-effective application of our products.
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We divide our operations into seven business units, which
comprise six reportable segments. We have grouped these units by
their product group below:
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Polymer and Ceramic Engineered
Materials
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Electronic, Color and Glass
Materials
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• Polymer Additives
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• Electronic Materials | |
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• Specialty Plastics
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• Color and Glass Performance Materials | |
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• Pharmaceuticals
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• Tile Coating Systems(1)
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• Porcelain Enamel(1)
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| (1) | Tile Coating Systems and Porcelain Enamel are combined into one reportable segment, Performance Coatings, for financial reporting purposes. |
Financial information about our segments is included herein in
Note 20 to the consolidated financial statements under
Item 8 of this Annual Report on
Form 10-K.
Markets
and Customers
Ferro’s products are used in a variety of product
applications in markets including:
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• Appliances
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• Industrial products | |
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• Automobiles
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• Packaging | |
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• Building and renovation
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• Pharmaceuticals | |
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• Electronics
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• Photovoltaic products | |
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• Household furnishings
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Many of our products are used as coatings on our customers’
products, such as glazes and decorations on tile, glass and
dinnerware. Other products are applied as pastes in products
such as solar cells and other electronic components. Still other
products are added during our customers’ manufacturing
processes to provide desirable properties to their end product.
Often, our products are a small portion of the total cost of our
customers’ products, but they can be critical to the
appearance or functionality of those products.
Our leading customers include manufacturers of ceramic tile,
major appliances, construction materials, automobile parts,
glass, bottles, vinyl flooring and wall coverings, solar cells,
and pharmaceuticals. Many of our customers, including makers of
major appliances and automobile parts, purchase materials from
more than one of our business units. Our customer base is well
diversified both geographically and by end market.
We generally sell our products directly to our customers.
However, a portion of our business uses indirect sales channels,
such as agents and distributors, to deliver products to market.
In 2010, no single customer or related group of customers
represented more than 10% of net sales. In addition, none of our
reportable segments is dependent on any single customer or
related group of customers.
Backlog
of Orders and Seasonality
Generally, there is no significant lead time between customer
orders and delivery in any of our business segments. As a
result, we do not consider that the dollar amount of backlogged
orders believed to be firm is material information for an
understanding of our business. We also do not regard any
material part of our business to be seasonal. However, customer
demand has historically been higher in the second quarter when
building and renovation markets are particularly active, and
this quarter is normally the strongest for sales and operating
profit.
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Competition
In most of our markets, we have a substantial number of
competitors, none of which is dominant. Due to the diverse
nature of our product lines, no single competitor directly
matches all of our product offerings. Our competition varies by
product and by region, and is based primarily on price, product
quality and performance, customer service and technical support,
and our ability to develop custom products to meet specific
customer requirements.
We are a worldwide leader in the production of glass enamels,
porcelain enamels, ceramic glaze coatings, and conductive metal
pastes used in solar cells. There is strong competition in our
markets, ranging from large multinational corporations to local
producers. While many of our customers purchase custom products
and formulations from us, our customers could generally buy from
other sources, if necessary.
Raw
Materials and Supplier Relations
Raw materials widely used in our operations include:
|
Metal Oxides:
(1)(2)
|
Other Inorganic Materials: | |
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• Aluminum oxide(3)
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• Boric acid(1)(2) | |
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• Cerium oxide(3)
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• Feldspar(1)(2) | |
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• Cobalt oxide
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• Fiberglass(4) | |
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• Nickel oxide
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• Lithium (1)(2) | |
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• Titanium dioxide(4)
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• Silica(1)(2) | |
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• Zinc oxide
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• Zircon(1)(2) | |
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Precious and Non-precious Metals:
(1)(3)
|
Other Organic Materials: (5) | |
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• Aluminum
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• Butanol | |
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• Bismuth
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• Phthalic anhydride | |
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• Copper
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• Soybean oil | |
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• Gold
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• Tallow | |
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• Palladium
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• Toluene | |
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• Platinum
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• Silver
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Energy: | |
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• Electricity
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Polymers:
(4)
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• Natural gas
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• Polyethylene
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• Polypropylene
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• Polystyrene
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• Unsaturated polyester
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| (1) | Primarily used by Color and Glass Performance Materials. | |
| (2) | Primarily used by Tile Coating Systems and Porcelain Enamel. | |
| (3) | Primarily used by Electronic Materials. | |
| (4) | Primarily used by Specialty Plastics. | |
| (5) | Primarily used by Polymer Additives. |
These raw materials make up a large portion of our product costs
in certain of our product lines, and fluctuations in the cost of
raw materials may have a significant impact on the financial
performance of the related
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businesses. We attempt to pass through to our customers raw
material cost increases, including those related to precious
metals.
We have a broad supplier base and, in many instances, multiple
sources of essential raw materials are available worldwide if
problems arise with a particular supplier. We maintain many
comprehensive supplier agreements for strategic and critical raw
materials. We did not encounter raw material shortages in 2010
that significantly affected our manufacturing operations, but we
are subject to volatile raw material costs that can affect our
results of operations.
Environmental
Matters
As part of the production of some of our products, we handle,
process, use and store hazardous materials. As a result, we
operate manufacturing facilities that are subject to a broad
array of environmental laws and regulations in the countries in
which we operate, particularly for plant wastes and emissions.
In addition, some of our products are subject to restrictions
under laws or regulations such as California Proposition 65 or
the European Union’s (“EU”) hazardous substances
directive. The costs to comply with complex environmental laws
and regulations are significant and will continue for the
industry and us for the foreseeable future. These routine costs
are expensed as they are incurred. While these costs may
increase in the future, they are not expected to have a material
impact on our financial position, liquidity or results of
operations. We believe we are in substantial compliance with the
environmental regulations to which our operations are subject
and, to the extent we may not be in compliance with such
regulations, non-compliance will not have a materially adverse
effect on our financial position, liquidity or results of
operations.
Our policy is to operate our plants and facilities in a manner
that protects the environment and the health and safety of our
employees and the public. We intend to continue to make
expenditures for environmental protection and improvements in a
timely manner consistent with available technology. Although we
cannot precisely predict future environmental spending, we do
not expect the costs to have a material impact on our financial
position, liquidity or results of operations. Capital
expenditures for environmental protection were $1.5 million
in 2010, $2.4 million in 2009, and $2.4 million in
2008.
We also accrue for environmental remediation costs when it is
probable that a liability has been incurred and we can
reasonably estimate the amount. We determine the timing and
amount of any liability based upon assumptions regarding future
events, and inherent uncertainties exist in such evaluations
primarily due to unknown conditions, changing governmental
regulations and legal standards regarding liability, and
evolving technologies. We adjust these liabilities periodically
as remediation efforts progress, the nature and extent of
contamination becomes more certain, or as additional technical
or legal information becomes available.
Research
and Development
We are involved worldwide in research and development activities
relating to new and existing products, services and technologies
required by our customers’ continually changing markets.
Our research and development resources are organized into
centers of excellence that support our regional and worldwide
major business units. We also conduct research and development
activities at our Posnick Center for Innovative Technology in
Independence, Ohio. These centers are augmented by local
laboratories, which provide technical service and support to
meet customer and market needs of particular geographic areas.
Total expenditures in continuing operations for product and
application technology, including research and development,
customer technical support and other related activities, were
$37.2 million in 2010, $34.9 million in 2009, and
$41.4 million in 2008. These amounts include expenditures
for company-sponsored research and development activities of
approximately $27.3 million in 2010, $28.3 million in
2009, and $33.6 million in 2008.
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Patents,
Trademarks and Licenses
We own a substantial number of patents and patent applications
relating to our various products and their uses. While these
patents are of importance to us and we exercise diligence to
ensure that they are valid, we do not believe that the
invalidity or expiration of any single patent or group of
patents would have a material adverse effect on our businesses.
Our patents will expire at various dates through the year 2030.
We also use a number of trademarks that are important to our
businesses as a whole or to a particular segment. We believe
that these trademarks are adequately protected.
Employees
At December 31, 2010, we employed 5,034 full-time
employees, including 3,390 employees in our foreign
consolidated subsidiaries and 1,644 in the United States
(“U.S.”). Total employment decreased by 290 in our
foreign subsidiaries from the prior year end primarily due to
our various restructuring and cost reduction programs.
Employment in the U.S. increased by 111 from the prior year
end, primarily to support the growth in sales revenue,
particularly in Electronic Materials.
Collective bargaining agreements cover approximately 19% of our
U.S. workforce. Approximately 6% of the U.S. employees
are affected by labor agreements that expire in 2011, and we
expect to complete renewals of these agreements without
significant disruption to the related businesses. We consider
our relations with our employees, including those covered by
collective bargaining agreements, to be good.
Our employees in Europe have protections afforded them by local
laws and regulations through unions and works councils. Some of
these laws and regulations may affect the timing, amount and
nature of restructuring and cost reduction programs in that
region.
Domestic
and Foreign Operations
We began international operations in 1927. Our products are
manufactured and / or distributed through our
consolidated subsidiaries and unconsolidated affiliates in the
following countries:
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Consolidated Subsidiaries:
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• Argentina
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• Egypt | • Mexico | • Thailand | |||
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• Australia
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• France | • Netherlands | • United Kingdom | |||
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• Austria
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• Germany | • Portugal | • United States | |||
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• Belgium
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• Indonesia | • Russia | • Venezuela | |||
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• Brazil
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• Italy | • Spain | ||||
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• China
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• Japan | • Taiwan | ||||
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Unconsolidated Affiliates:
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• Italy
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• Spain | • South Korea | • Thailand | |||
Financial information for geographic areas is included in
Note 20 to the consolidated financial statements under
Item 8 of this Annual Report on
Form 10-K.
More than 50% of our net sales are outside of the U.S. Our
customers represent more than 30 industries and operate in
approximately 100 countries.
Our U.S. parent company receives technical service fees
and/or
royalties from many of its foreign subsidiaries. As a matter of
corporate policy, the foreign subsidiaries have historically
been expected to remit a portion of their
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annual earnings to the U.S. parent company as dividends. To
the extent earnings of foreign subsidiaries are not remitted to
the U.S. parent company, those earnings are indefinitely
re-invested in those subsidiaries.
Available
Information
Our 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 our Web site, www.ferro.com, as soon as reasonably practical,
following the filing of the reports with the
U.S. Securities and Exchange Commission (“SEC”).
Our Corporate Governance Principles, Legal and Ethical Policies,
Guidelines for Determining Director Independence, and charters
for our Audit Committee, Compensation Committee, Finance
Committee, and Governance and Nomination Committee are available
free of charge on our Web site or to any shareholder who
requests them from the Ferro Corporation Investor Relations
Department located at 1000 Lakeside Avenue, Cleveland, Ohio,
44114-1147.
Forward-looking
Statements
Certain statements contained here and in future filings with the
SEC reflect our expectations with respect to future performance
and constitute “forward-looking statements” within 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 our
operations and the business environment, which are difficult to
predict and are beyond our control.
| Item 1A. | Risk Factors |
Many factors could cause our actual results to differ materially
from those suggested by statements contained in this filing and
could adversely affect our future financial performance. Such
factors include the following:
We sell our products into industries where demand has been
unpredictable, cyclical or heavily influenced by consumer
spending, and such demand and our results of operations may be
further impacted by macro-economic circumstances and uncertainty
in credit markets.
We sell our products to a wide variety of customers who supply
many different market segments. Many of these market segments,
such as building and renovation, major appliances,
transportation, and electronics, are cyclical or closely tied to
consumer demand. Consumer demand is difficult to accurately
forecast and 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.
Our results of operations are materially affected by conditions
in capital markets and economies in the U.S. and elsewhere
around the world. General economic conditions around the world
deteriorated sharply at the end of 2008, and difficult economic
conditions continue to exist. Concerns over fluctuating prices,
energy costs, geopolitical issues, government deficits and debt
loads, the availability and cost of credit, the
U.S. mortgage market and a declining real estate market
have contributed to increased volatility, diminished
expectations, and uncertainty regarding economies around the
world. These factors, combined with reduced business and
consumer confidence, increased unemployment, and volatile raw
materials costs, precipitated an economic slowdown and recession
in a number of markets around the world. As a result of these
conditions, our customers may experience cash flow problems and
may modify, delay, or cancel plans to purchase our products.
Additionally, if customers are not successful in generating
sufficient revenue or are precluded from securing financing,
they may not be able to pay, or may delay payment of, accounts
receivable that are owed to us. Any reduction in demand or
inability of our current
and/or
potential customers to pay us for our products may adversely
affect our earnings and cash flow.
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Uncertainty in the development of the solar energy market
could reduce the revenue we generate from product sales to this
market
.
Our conductive pastes are used in the manufacture of solar cells
and income attributable to the solar energy market has been
increasing. The solar energy market is at a relatively early
stage of development and the extent to which solar energy
technology will be widely adopted is uncertain. Solar industry
demand is affected by the availability and size of government
and economic incentives related to the use of solar power.
Reductions in, or eliminations or expirations of, governmental
and economic incentives could result in decreased demand for
solar cells, and, consequently, our products, which could have
an adverse impact on our results of operations.
We strive to improve operating margins through sales
growth, price increases, productivity gains, and improved
purchasing techniques, but we may not achieve the desired
improvements.
We work to improve operating profit margins through activities
such as growing sales to achieve increased economies of scale,
increasing prices, improving manufacturing processes, and
adopting purchasing techniques that lower costs or provide
increased cost predictability to realize cost savings. However,
these activities depend on a combination of improved product
design and engineering, effective manufacturing process control
initiatives, cost-effective redistribution of production, and
other efforts that may not be as successful as anticipated. The
success of sales growth and price increases depends not only on
our 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 our financial
performance.
Our implementation of new business information systems and
processes could adversely affect our results of operations and
cash flow.
We are designing and implementing a new enterprise-wide
information system and related processes to consolidate our
legacy operating systems into an integrated system. The
objective is to standardize and streamline business processes.
We may be unable to complete the implementation in accordance
with our timeline and we could incur additional costs. The
implementation could result in operating inefficiencies and
could impact our ability to perform business transactions. These
risks could adversely impact our results of operations,
financial condition, and cash flows.
We depend on reliable sources of energy and raw materials,
including petroleum-based materials, minerals and other
supplies, at a reasonable cost, but the availability of these
materials and supplies could be interrupted
and/or
their
prices could escalate and adversely affect our sales and
profitability.
We purchase energy and many raw materials, including
petroleum-based materials and other supplies, which we use to
manufacture our products. Changes in their availability or price
could affect our ability to manufacture enough products to meet
customers’ demands or to manufacture products profitably.
We try to maintain multiple sources of raw materials and
supplies where practical, but this may not prevent unanticipated
changes in their availability or cost and, for certain raw
materials, there may not be alternative sources. We may not be
able to pass cost increases through to our customers.
Significant disruptions in availability or cost increases could
adversely affect our manufacturing volume or costs, which could
negatively affect product sales or profitability of our
operations.
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The global scope of our operations exposes us to risks
related to currency conversion rates, new and different
regulatory schemes and changing economic, regulatory, social and
political conditions around the world.
More than 50% of our net sales during 2010 were outside of the
U.S. In order to support global customers, access regional
markets and compete effectively, our operations are located
around the world. We may encounter difficulties expanding into
additional growth markets around the world. Our operations have
additional complexity due to economic, regulatory, social and
political conditions in multiple locations and we are subject to
risks relating to currency conversion rates. Other risks
inherent in international operations include the following:
| • | New and different legal and regulatory requirements and enforcement mechanisms in local jurisdictions; | |
| • | U.S. and other export licenses may be difficult to obtain and we may be subject to export duties or import quotas or other trade restrictions or barriers; | |
| • | Increased costs of, and decreased availability of, transportation or shipping; | |
| • | Credit risk and financial conditions of local customers and distributors; | |
| • | Risk of nationalization of private enterprises by foreign governments or restrictions on investments; | |
| • | Potentially adverse tax consequences, including imposition or increase of withholding and other taxes on remittances and other payments by subsidiaries; and | |
| • | Local political, economic and social conditions, including the possibility of hyperinflationary conditions, deflation, and political instability in certain countries. |
In particular, we have subsidiaries in Venezuela, a country that
has established very rigid controls over the ability of foreign
companies to repatriate cash, and in Egypt, a country with
recent political instability. Such conditions could potentially
impact our ability to recover both the cost of our investments
and earnings from those investments. While we attempt to
anticipate these changes and manage our business appropriately
in each location where we do business, these changes are often
beyond our control and difficult to forecast.
The consequences of these risks may have significant adverse
effects on our results of operations or financial position, and
if we fail to comply with applicable laws and regulations, we
could be exposed to civil and criminal penalties, reputational
harm, and restrictions on our operations.
We have a growing presence in the Asia-Pacific region
where it can be difficult for a multi-national company, such as
Ferro, to compete lawfully with local competitors, which may
cause us to lose business opportunities.
Many of our most promising growth opportunities are in the
Asia-Pacific region, especially the People’s Republic of
China. Although we have been able to compete successfully in
those markets to date, local laws and customs can make it
difficult for a multi-national company such as Ferro to compete
on a “level playing field” with local competitors
without engaging in conduct that would be illegal under
U.S. or other countries’ anti-bribery laws. Our strict
policy of observing the highest standards of legal and ethical
conduct may cause us to lose some otherwise attractive business
opportunities to local competition in the region.
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Regulatory authorities in the U.S., European Union and
elsewhere are taking a much more aggressive approach to
regulating hazardous materials and other substances, and those
regulations could affect sales of our products.
Legislation and regulations concerning hazardous materials and
other substances can restrict the sale of products
and/or
increase the cost of producing them. Some of our products are
subject to restrictions under laws or regulations such as
California Proposition 65 or the European Union’s
(“EU”) hazardous substances directive. The EU
“REACH” registration system became effective
June 1, 2007, and requires us to perform toxicity studies
of the components of some of our products and to register the
information in a central database, increasing the cost of these
products. As a result of such regulations, customers may avoid
purchasing some products in favor of perceived
“greener,” less hazardous or less costly alternatives.
It may be impractical for us to continue manufacturing heavily
regulated products, and we may incur costs to shut down or
transition such operations to alternative products. These
circumstances could adversely affect our business, including our
sales and operating profits.
Our businesses depend on a continuous stream of new
products, and failure to introduce new products could affect our
sales, profitability and liquidity.
One way that we remain competitive in our markets is by
developing and introducing new and improved products on an
ongoing basis. Customers continually evaluate our products in
comparison to those offered by our competitors. A failure to
introduce new products at the right time that are price
competitive and that provide the features and performance
required by customers could adversely affect our sales, or could
require us to compensate by lowering prices. In addition, when
we invest in new product development, we face risks related to
production delays, cost over-runs and unanticipated technical
difficulties, which could impact sales, profitability
and/or
liquidity.
We have limited or no redundancy for certain of our
manufacturing facilities, and damage to those facilities could
interrupt our operations, increase our costs of doing business
and impair our ability to deliver our products on a timely
basis.
If certain of our existing production facilities become
incapable of manufacturing products for any reason, we may be
unable to meet production requirements, we may lose revenue and
we may not be able to maintain our relationships with our
customers. Without operation of certain existing production
facilities, we may be limited in our ability to deliver products
until we restore the manufacturing capability at the particular
facility, find an alternative manufacturing facility or arrange
an alternative source of supply. Although we carry business
interruption insurance to cover lost revenue and profits in an
amount we consider adequate, this insurance does not cover all
possible situations. In addition, our business interruption
insurance would not compensate us for the loss of opportunity
and potential adverse impact on relations with our existing
customers resulting from our inability to produce products for
them.
We may not be able to complete future acquisitions or
successfully integrate future acquisitions into our business,
which could adversely affect our business or results of
operations.
As part of our growth strategy, we intend to pursue
acquisitions. Our success in accomplishing this growth may be
limited by the availability and suitability of acquisition
candidates and by our financial resources, including available
cash and borrowing capacity. Acquisitions involve numerous
risks, including difficulty determining appropriate valuation,
integrating operations, technologies, services and products of
the acquired product lines or businesses, personnel turnover and
the diversion of management’s attention from other business
matters. In addition, we may be unable to achieve anticipated
benefits from these acquisitions in the time frame that we
anticipate, or at all, which could affect adversely our business
or results of operations.
11
Table of Contents
We have significant deferred tax assets, and if we are
unable to utilize these assets, our results of operations may be
adversely affected.
To fully realize the carrying value of our net deferred tax
assets, we will have to generate adequate taxable profits in
various tax jurisdictions. As of December 31, 2010, we had
$143.0 million of net deferred tax assets, after valuation
allowances. If we do not generate adequate profits within the
time periods required by applicable tax statutes, the carrying
value of the tax assets will not be realized. If it becomes
unlikely that the carrying value of our net deferred tax assets
will be realized, the valuation allowances may need to be
increased in our consolidated financial statements, adversely
affecting results of operations. Further information on our
deferred tax assets is presented in Note 8 to the
consolidated financial statements under Item 8 of this
Annual Report on
Form 10-K.
The markets for our products are highly competitive and
subject to intense price competition, which could adversely
affect our sales and earnings performance.
Our customers typically have multiple suppliers from which to
choose. If we are 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 decide not to purchase our products. If we could
not secure alternate customers for lost business, our sales and
earnings performance could be adversely affected.
If we are unable to protect our intellectual property
rights or to successfully resolve claims of infringement brought
against us, our product sales and financial performance could be
affected adversely.
Our performance may depend in part on our ability to establish,
protect and enforce intellectual property rights with respect to
our products, technologies and proprietary rights and to defend
against any claims of infringement, which involves complex
legal, scientific and factual questions and uncertainties. We
may have to rely on litigation to enforce our intellectual
property rights. In addition, we may face claims of infringement
that could interfere with our ability to use technology or other
intellectual property rights that are material to our business
operations. If litigation that we initiate is unsuccessful, we
may not be able to protect the value of some of our intellectual
property. In the event a claim of infringement against us is
successful, we may be required to pay royalties or license fees
to continue to use technology or other intellectual property
rights that we have been using or we may be unable to obtain
necessary licenses from third parties at a reasonable cost or
within a reasonable time.
Our operations are subject to operating hazards and, as a
result, to stringent environmental, health and safety
regulations, and compliance with those regulations could require
us to make significant investments.
Our production facilities are subject to hazards associated with
the manufacture, handling, storage and transportation of
chemical materials and products. These hazards can cause
personal injury and loss of life, severe damage to, or
destruction of, property and equipment and environmental
contamination and other environmental damage and could have an
adverse effect on our business, financial condition or results
of operations.
We strive to conduct our manufacturing operations in a manner
that is safe and in compliance with all applicable
environmental, health and safety regulations. Compliance with
changing regulations may require us to make significant capital
investments, incur training costs, make changes in manufacturing
processes or product formulations, or incur costs that could
adversely affect our profitability, and violations of these laws
could lead to substantial fines and penalties. These costs may
not affect competitors in the same way due to differences in
product formulations, manufacturing locations or other factors,
and we could be at a competitive disadvantage, which might
adversely affect financial performance.
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We are subject to stringent labor and employment laws in
certain jurisdictions in which we operate, we are party to
various collective bargaining arrangements, and our relationship
with our employees could deteriorate, which could adversely
impact our operations.
A majority of our full-time employees are employed outside the
U.S. In certain jurisdictions where we operate, labor and
employment laws are relatively stringent and, in many cases,
grant significant job protection to certain employees, including
rights on termination of employment. In addition, in certain
countries where we operate, our employees are members of unions
or are represented by a works council. We are often required to
consult and seek the consent or advice of these unions
and/or
works
councils. These regulations and laws, coupled with the
requirement to consult with the relevant unions or works
councils, could have a significant impact on our flexibility in
managing costs and responding to market changes.
Furthermore, with respect to our employees who are subject to
collective bargaining arrangements or similar arrangements
(approximately 19% of our U.S. workforce as of
December 31, 2010), there can be no assurance that we will
be able to negotiate labor agreements on satisfactory terms or
that actions by our employees will not disrupt our business. If
these workers were to engage in a strike, work stoppage or other
slowdown or if other employees were to become unionized, we
could experience a significant disruption of our operations
and/or
higher ongoing labor costs, which could adversely affect our
business, financial condition and results of operations.
Employee benefit costs, especially postretirement costs,
constitute a significant element of our annual expenses, and
funding these costs could adversely affect our financial
condition.
Employee benefit costs are a significant element of our cost
structure. Certain expenses, particularly postretirement costs
under defined benefit pension plans and healthcare costs for
employees and retirees, may increase significantly at a rate
that is difficult to forecast and may adversely affect our
financial results, financial condition or cash flows. Declines
in global capital markets may cause reductions in the value of
our pension plan assets. Such circumstances could have an
adverse effect on future pension expense and funding
requirements. Further information regarding our retirement
benefits is presented in Note 10 to the consolidated
financial statements under Item 8 of this Annual Report on
Form 10-K.
We depend on external financial resources, and the
economic environment and credit market uncertainty could
interrupt our access to capital markets, borrowings, or
financial transactions to hedge certain risks, which could
adversely affect our financial condition.
As of December 31, 2010, we had approximately
$294.6 million of short-term and long-term debt with
varying maturities and approximately $221.3 million of off
balance sheet arrangements, including consignment arrangements
for precious metals, international receivables sales programs,
bank guarantees, and standby letters of credit. These
arrangements have allowed us to make investments in growth
opportunities and fund working capital requirements. In
addition, we may enter into financial transactions to hedge
certain risks, including foreign exchange, commodity pricing,
and sourcing of certain raw materials. Our continued access to
capital markets, the stability of our lenders, customers and
financial partners and their willingness to support our needs
are essential to our liquidity and our ability to meet our
current obligations and to fund operations and our strategic
initiatives. An interruption in our access to external financing
or financial transactions to hedge risk could adversely affect
our business prospects and financial condition. See further
information regarding our liquidity in “Capital Resources
and Liquidity” under Item 7 and in Note 6 to the
consolidated financial statements under Item 8 of this
Annual Report on
Form 10-K.
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We have undertaken several restructuring programs to
improve our operating performance and achieve cost savings, but
we may not be able to implement
and/or
administer these programs in the manner contemplated and these
restructuring programs may not produce the desired
results.
We have undertaken several restructuring programs in the last
two years, and we may initiate new restructuring programs in the
future. These programs involve, among other things, plant
closures and staff reductions. Although we expect these programs
to help us achieve operational improvements, including
incremental cost savings, we may not be able to implement
and/or
administer these programs, including the implementation of plant
closures and staff reductions, in the manner contemplated, which
could cause the restructuring programs to fail to achieve the
desired results. Additionally, the implementation of
restructuring programs may result in impairment charges, some of
which could be material. Even if we do implement and administer
these restructuring programs in the manner contemplated, they
may not produce the desired results. Accordingly, the
restructuring programs that we have implemented and those that
we may initiate in the future may not improve our operating
performance and may not help us achieve cost savings. Failure to
successfully implement
and/or
administer these restructuring programs could have an adverse
effect on our financial performance.
We are exposed to lawsuits in the normal course of
business, which could harm our business.
We are from time to time exposed to certain legal proceedings,
which may include claims involving product liability,
infringement of intellectual property rights of third parties
and other claims. Due to the uncertainties of litigation, we can
give no assurance that we will prevail on claims made against us
in the lawsuits that we currently face or that additional claims
will not be made against us in the future. We do not believe
that lawsuits we currently face are likely to have a material
adverse effect on our business, operating results or financial
condition. Future claims or lawsuits, if they were to result in
an adverse ruling to us, could give rise to substantial
liability, which could have a material adverse effect on our
business, operating results or financial condition.
We are exposed to intangible asset risk, and a write down
of our intangible assets could have an adverse impact to our
operating results and financial position.
We have recorded intangible assets, including goodwill, in
connection with business acquisitions. We are required to
perform goodwill impairment tests on at least an annual basis
and whenever events or circumstances indicate that the carrying
value may not be recoverable from estimated future cash flows.
As a result of our annual and other periodic evaluations, we may
determine that the intangible asset values need to be written
down to their fair values, which could result in material
charges that could be adverse to our operating results and
financial position.
Interest rates on some of our borrowings are variable, and
our borrowing costs could be adversely affected by interest rate
increases.
Portions of our debt obligations have variable interest rates.
Generally, when interest rates rise, our cost of borrowings
increases. We estimate, based on the debt obligations
outstanding at December 31, 2010, that a one percent
increase in interest rates would cause interest expense to
increase by less than $0.1 million annually. Continued
interest rate increases could raise the cost of borrowings and
adversely affect our financial performance. See further
information regarding our interest rates on our debt obligations
in “Quantitative and Qualitative Disclosures about Market
Risk” and in Note 6 to the consolidated financial
statements under Item 8 of this
Form 10-K.
14
Table of Contents
Many of our assets are encumbered by liens that have been
granted to lenders, and those liens affect our flexibility to
dispose of property and businesses.
Certain of our debt obligations are secured by substantially all
of our assets. These liens could reduce our ability
and/or
extend the time to dispose of property and businesses, as these
liens must be cleared or waived by the lenders prior to any
disposition. These security interests are described in more
detail in Note 6 to the consolidated financial statements
under Item 8 of this Annual Report on
Form 10-K.
We are subject to a number of restrictive covenants under
our credit facilities and the indenture governing our senior
notes, which could affect our flexibility to fund ongoing
operations and strategic initiatives, and, if we are unable to
maintain compliance with such covenants, could lead to
significant challenges in meeting our liquidity
requirements.
Our credit facilities and the indenture governing our senior
notes contain a number of restrictive covenants, including those
described in more detail in Note 6 to the consolidated
financial statements under Item 8 of this Annual Report on
Form 10-K.
These covenants include customary operating restrictions that
limit our ability to engage in certain activities, including
additional loans and investments; prepayments, redemptions and
repurchases of debt; and mergers, acquisitions and asset sales.
We are also subject to customary financial covenants under our
credit facilities, including a leverage ratio and a fixed charge
coverage ratio. These covenants under our credit facilities
restrict the amount of our borrowings, reducing our flexibility
to fund ongoing operations and strategic initiatives. These
facilities and our senior notes are described in more detail in
“Capital Resources and Liquidity” under Item 7
and in Note 6 to the consolidated financial statements
under Item 8 of this Annual Report on
Form 10-K.
Breaches of these covenants could become defaults under our
credit facilities and the indenture governing our senior notes
and cause the acceleration of debt payments beyond our ability
to pay. Compliance with some of these covenants is based on
financial measures derived from our operating results. If
economic conditions in key markets deteriorate, we may
experience material adverse impacts to our business and
operating results, such as through reduced customer demand and
inflation. A significant decline in our business could make us
unable to maintain compliance with these financial covenants, in
which case, our lenders could demand immediate payment of
outstanding amounts and we would need to seek alternate
financing sources to pay off such debts and to fund our ongoing
operations. Such financing may not be available on favorable
terms, if at all.
We may not pay dividends on our common stock at any time
in the foreseeable future.
Holders of our common stock are entitled to receive such
dividends as our board of directors from time to time may
declare out of funds legally available for such purposes. Our
board of directors has no obligation to declare dividends under
Ohio law or our amended Articles of Incorporation. We may not
pay dividends on our common stock at any time in the foreseeable
future. Any determination by our board of directors to pay
dividends in the future will be based on various factors,
including our financial condition, results of operations and
current, anticipated cash needs and any limits our then-existing
credit facility and other debt instruments place on our ability
to pay dividends.
We are exposed to risks associated with acts of God,
terrorists and others, as well as fires, explosions, wars,
riots, accidents, embargoes, natural disasters, strikes and
other work stoppages, quarantines and other governmental
actions, and other events or circumstances that are beyond our
control.
Ferro is exposed to risks from various events that are beyond
our control, which may have significant effects on our results
of operations. While we attempt to mitigate these risks through
appropriate insurance, contingency planning and other means, we
may not be able to anticipate all risks or to reasonably or
cost-effectively manage
15
Table of Contents
those risks that we do anticipate. As a result, our results of
operations could be adversely affected by circumstances or
events in ways that are significant
and/or
long
lasting.
The risks and uncertainties identified above are not the only
risks that we face. Additional risks and uncertainties not
presently known to us or that we currently believe to be
immaterial also may adversely affect us. If any known or unknown
risks and uncertainties develop into actual events, these
developments could have material adverse effects on our
financial position, results of operations, and cash flows.
| Item 1B — | Unresolved Staff Comments |
None.
| Item 2 — | Properties |
Our corporate headquarters offices are located at 1000 Lakeside
Avenue, Cleveland, Ohio. The Company also owns other corporate
facilities, including a centralized research and development
facility, which are located in Independence, Ohio. We own
principal manufacturing plants that range in size from
29,000 sq. ft. to over 800,000 sq. ft.
Plants we own with more than 250,000 sq. ft. are
located in: Spain; Germany; Cleveland, Ohio; and Penn Yan, New
York. The locations of these principal manufacturing plants by
reportable segment are as follows:
Performance Coatings — U.S.: Cleveland, Ohio. Outside
the U.S.: Argentina, Brazil, China, Egypt, France, Indonesia,
Italy, Mexico, Spain, Thailand and Venezuela.
Electronic Materials — U.S.: Penn Yan, New York; and
South Plainfield, New Jersey. Outside the U.S.: China.
Color and Glass Performance Materials — U.S.:
Washington, Pennsylvania, and Orville, Ohio. Outside the U.S.:
Brazil, China, France, Germany, Mexico, Spain, the United
Kingdom and Venezuela.
Polymer Additives — U.S.: Bridgeport, New Jersey;
Cleveland, Ohio; Walton Hills, Ohio; and Fort Worth, Texas.
Outside the U.S.: Belgium and the United Kingdom.
Specialty Plastics — U.S.: Evansville, Indiana;
Plymouth, Indiana; Edison, New Jersey; and Stryker, Ohio.
Outside the U.S.: Spain.
Pharmaceuticals— U.S.: Waukegan, Illinois.
Ferro’s revolving credit facility has a security interest
in the real estate of the parent company and its domestic
material subsidiaries.
In addition, we lease manufacturing facilities for the
Electronic Materials segment in Germany, Japan, and Vista,
California; for the Color and Glass Performance Materials
segment in Austria, Japan and Italy; and for the Specialty
Plastics segment in Carpentersville, Illinois. In some
instances, the manufacturing facilities are used for two or more
segments. Leased facilities range in size from
18,000 sq. ft. to over 100,000 sq. ft. at
the plant located in Carpentersville, Illinois.
16
Table of Contents
| Item 3 — | Legal Proceedings |
As previously disclosed, for the year ended December 31,
2007, the Company submitted deviation reports required by the
Title V air emission permit issued under the New Jersey Air
Pollution Control Act (the “Title V Air Permit”),
which contained numerous deviations from the standards required
by the Title V Air Permit at our South Plainfield, New
Jersey, facility. In November 2009, the Company entered a
settlement agreement with the New Jersey Department of
Environmental Protection, pursuant to which the Company
performed $100,000 worth of supplemental environmental projects
in the community during 2009 and made cash payments totaling
$300,000 in 2010.
There are various other lawsuits and claims pending against the
Company and its consolidated subsidiaries. We do not expect the
ultimate liabilities, if any, to materially affect the
consolidated financial position, results of operations, or cash
flows of the Company.
On January 4, 2011, the Company received an administrative
subpoena from the U.S. Department of the Treasury’s
Office of Foreign Assets Control (“OFAC”). OFAC has
requested that the Company provide documents and information
related to the possibility of direct or indirect transactions
with or to a prohibited country. The Company is cooperating with
OFAC in connection with the administrative subpoena. The Company
cannot predict the length, scope or results of the inquiry from
OFAC, or the impact, if any, on its business activities or
results of operations.
Executive
Officers of the Registrant
The executive officers of the Company as of February 28,
2011, are listed below, along with their ages and positions held
during the past five years. The year indicates when the
individual was named to the indicated position. No family
relationship exists between any of Ferro’s executive
officers.
|
James F. Kirsch — 53
|
|
Chairman, President and Chief Executive Officer, 2006
|
|
Mark H. Duesenberg — 49
|
|
Vice President, General Counsel and Secretary, 2008
|
|
Executive Director, Legal and Government Affairs, Lenovo Group
Ltd., a global manufacturer of personal computers and electronic
devices, 2008
|
|
Legal Director — Europe, Middle East and Africa,
Lenovo Group Ltd., 2005
|
|
Ann E. Killian — 56
|
|
Vice President, Human Resources, 2005
|
|
Thomas R. Miklich — 63
|
|
Vice President and Chief Financial Officer, 2010
|
|
Independent Consultant, 2007
|
|
Chief Financial Officer, Titan Technology Partners, an
information technology consulting firm, 2005
|
|
Michael J. Murry — 59
|
|
Vice President, Electronic, Color and Glass Materials, 2009
|
|
Vice President, Inorganic Specialties, 2006
|
|
Peter T. Thomas — 55
|
|
Vice President, Polymer and Ceramic Engineered Materials, 2009
|
|
Vice President, Organic Specialties, 2006
|
17
Table of Contents
PART II
| Item 5 — | Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities |
Our common stock is listed on the New York Stock Exchange under
the ticker symbol FOE. At January 31, 2011, we had
1,441 shareholders of record for our common stock. The
closing price of the common stock on January 31, 2011, was
$15.42 per share.
The chart below compares Ferro’s cumulative total
shareholder return for the five years ended December 31,
2010, to that of the Standard & Poor’s 500 Index
and the Standard & Poor’s MidCap Specialty
Chemicals Index. In all cases, the information is presented on a
dividend-reinvested basis and assumes investment of $100.00 on
December 31, 2005.
COMPARISON
OF FIVE-YEAR
CUMULATIVE TOTAL RETURNS
CUMULATIVE TOTAL RETURNS
The quarterly high and low
intra-day
sales prices and dividends declared per share for our common
stock during 2010 and 2009 were as follows:
| 2010 | 2009 | |||||||||||||||||||||||
| High | Low | Dividends | High | Low | Dividends | |||||||||||||||||||
|
First Quarter
|
$ | 9.16 | $ | 6.93 | $ | — | $ | 7.77 | $ | 0.81 | $ | 0.01 | ||||||||||||
|
Second Quarter
|
11.62 | 6.91 | — | 6.00 | 1.33 | — | ||||||||||||||||||
|
Third Quarter
|
13.77 | 6.68 | — | 10.46 | 1.95 | — | ||||||||||||||||||
|
Fourth Quarter
|
15.53 | 12.44 | — | 8.98 | 5.40 | — | ||||||||||||||||||
If we pay cash dividends in excess of a base dividend amount in
any single quarterly period, the conversion rate on our
6.50% Convertible Senior Notes will be increased by
formula. The base dividend amount is $0.145 per share, subject
to adjustment in certain events.
18
Table of Contents
The restrictive covenants contained in our credit facility limit
the amount of dividends we can pay on our common stock. For
further discussion, see Management’s Discussion and
Analysis of Financial Condition and Results of Operations under
Item 7 of this Annual Report on
Form 10-K.
We did not repurchase any of our common stock during the fourth
quarter of 2010.
| Item 6 — | Selected Financial Data |
The following table presents selected financial data for the
last five years ended December 31st:
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (Dollars in thousands, except per share data) | ||||||||||||||||||||
|
Net sales
|
$ | 2,101,865 | $ | 1,657,569 | $ | 2,245,152 | $ | 2,147,904 | $ | 1,987,606 | ||||||||||
|
Income (loss) from continuing operations
|
7,273 | (40,040 | ) | (52,882 | ) | (97,502 | ) | 17,181 | ||||||||||||
| Basic earnings (loss) per share from continuing operations attributable to Ferro Corporation common shareholders | 0.06 | (0.85 | ) | (1.28 | ) | (2.34 | ) | 0.33 | ||||||||||||
| Diluted earnings (loss) per share from continuing operations attributable to Ferro Corporation common shareholders | 0.06 | (0.85 | ) | (1.28 | ) | (2.34 | ) | 0.33 | ||||||||||||
|
Cash dividends declared per common share
|
— | 0.01 | 0.58 | 0.58 | 0.58 | |||||||||||||||
|
Total assets
|
1,434,355 | 1,526,355 | 1,544,117 | 1,638,260 | 1,741,602 | |||||||||||||||
| Long-term debt, including current portion, and redeemable preferred stock | 303,269 | 409,231 | 577,290 | 538,758 | 601,765 | |||||||||||||||
In 2008, we sold our Fine Chemicals business. For all periods
presented, we report that business as discontinued operations.
That divestiture is further discussed in Note 17 to the
consolidated financial statements under Item 8 of this
Annual Report on
Form 10-K.
| Item 7 — | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Overview
Market conditions improved during 2010 as customer demand
continued to recover from the sharp decline in late 2008 and
early 2009. As a result, sales volumes increased across our
business. Customer demand was particularly strong within our
Electronic Materials segment where demand for our products
resulted in significantly higher sales volume, especially for
conductive pastes used to produce solar cells.
Net sales increased by 27% compared with 2009. Sales increased
in all reporting segments during the year with the highest
growth rates in Electronic Materials, Polymer Additives and
Color and Glass Performance Materials. Higher precious metal
costs, which are passed through to customers, contributed to the
sales growth in Electronic Materials.
Manufacturing rationalization activities and other cost
reduction actions continued during 2010, resulting in a number
of plant closures and reduced worldwide employment. The major
operational activities related to the restructuring programs
that were initiated in 2006 were completed during 2010. The
planned plant closings and associated transfer of manufacturing
assets between locations have largely been completed, although
we expect some activities to continue in 2011 related to product
production transfers, customer product re-qualifications and
site cleanup. The restructuring activities completed in 2010 and
prior years contributed to higher gross margins and income from
continuing operations during 2010.
19
Table of Contents
Gross profit increased in 2010 compared with 2009, driven by
higher sales, improved product mix and improved manufacturing
efficiency. Gross margin percentage increased compared to 2009
and was higher than was recorded prior to the global recession
in 2008 and 2009. For the year, raw material cost increases were
offset by product price increases, in aggregate, so the cost
increases had little effect on gross profit.
Selling, general and administrative (“SG&A”)
expenses increased during 2010. Drivers of the increased
SG&A expenses included higher incentive compensation
accruals and the resumption of normal wage adjustments. In
addition, higher special charges, primarily related to
manufacturing rationalization projects, contributed to the
higher SG&A expenses during the year.
Restructuring and impairment charges were higher in 2010
compared with 2009. The majority of the charges related to our
manufacturing rationalization activities in Europe, which
resulted in ending manufacturing activities at selected sites in
France, the United Kingdom, Portugal and the Netherlands.
Interest expense declined in 2010, primarily as a result of
lower average borrowing levels. Interest expense also declined
as a result of debt refinancing actions taken during the year
which reduced amortization expenses that are included in
interest expense. We recorded losses on extinguishment of debt
in 2010 that resulted primarily from our purchase of a portion
of the Company’s outstanding 6.5% Convertible Senior
Notes in connection with our refinancing actions.
We recorded income from continuing operations during 2010
compared with a loss in 2009. The increased income was the
result of higher gross profit and lower interest expense. These
benefits were partially offset by higher restructuring and
impairment charges, losses on extinguishment of debt, increased
SG&A expenses, and higher income tax expense.
Outlook
We expect demand for our products to improve during 2011
compared with 2010. The growth rate of sales is likely to be
less in 2011 than in 2010, as growth in 2010 was enhanced by a
rebound in customer demand after the global economic downturn.
Raw material input costs have increased in the past several
quarters as global economic activity has increased, and these
costs are expected to continue to rise. We will attempt to raise
product prices to maintain our gross margin percentage, but our
ability to do so will be dependent on market conditions and our
competitors’ pricing actions.
During 2010, we ended production of several products, including
certain metal oxides, commodity dielectric materials and
precious metal preparations, as a result of restructuring
activities and business transactions with third parties.
We have been engaged in significant manufacturing
rationalization activities and expense reduction projects for
several years. The major operational changes related to these
projects have been largely completed, but we expect some
continuing restructuring-related activities during 2011,
including product production transfers, product
re-qualifications and site
clean-up.
As
a result, we expect to incur restructuring charges at a
significantly reduced level in 2011 as we complete the final
tasks related to these projects.
Factors that could adversely affect our future financial
performance are described under the heading “Risk
Factors” in Item 1A.
20
Table of Contents
Results
of Operations
Comparison
of the years ended December 31, 2010 and 2009
| 2010 | 2009 | $ Change | % Change | |||||||||||||
| (Dollars in thousands, except per share data) | ||||||||||||||||
|
Net sales
|
$ | 2,101,865 | $ | 1,657,569 | $ | 444,296 | 26.8% | |||||||||
|
Cost of sales
|
1,643,200 | 1,343,297 | 299,903 | 22.3% | ||||||||||||
|
Gross profit
|
458,665 | 314,272 | 144,393 | 45.9% | ||||||||||||
|
Gross margin percentage
|
21.8 | % | 19.0 | % | ||||||||||||
|
Selling, general and administrative expenses
|
293,736 | 272,259 | 21,477 | 7.9% | ||||||||||||
|
Restructuring and impairment charges
|
63,732 | 19,337 | 44,395 | |||||||||||||
|
Other expense (income):
|
||||||||||||||||
|
Interest expense
|
44,568 | 63,918 | (19,350 | ) | ||||||||||||
|
Interest earned
|
(651 | ) | (896 | ) | 245 | |||||||||||
|
Losses on extinguishment of debt
|
23,001 | — | 23,001 | |||||||||||||
|
Foreign currency losses, net
|
4,724 | 3,827 | 897 | |||||||||||||
|
Miscellaneous expense (income), net
|
5,814 | (618 | ) | 6,432 | ||||||||||||
|
Income (loss) before income taxes
|
23,741 | (43,555 | ) | 67,296 | ||||||||||||
| Income tax expense (benefit) | 16,468 | (3,515 | ) | 19,983 | ||||||||||||
|
Income (loss) from continuing operations
|
7,273 | (40,040 | ) | 47,313 | ||||||||||||
| Loss on disposal of discontinued operations, net of income taxes | — | (325 | ) | 325 | ||||||||||||
|
Net income (loss)
|
$ | 7,273 | $ | (40,365 | ) | $ | 47,638 | |||||||||
| Diluted earnings (loss) per share attributable to Ferro Corporation common shareholders | $ | 0.06 | $ | (0.86 | ) | $ | 0.92 | |||||||||
Net sales increased by 27% in the year ended December 31,
2010. The increased sales reflected recovering customer demand
from the economic downturn in 2009. Increased sales volume in
2010 compared with 2009 accounted for approximately
20 percentage points of the sales increase. Changes in
product mix and prices accounted for an additional
8 percentage points of the sales growth. Changes in foreign
currency exchange rates reduced the growth in sales by
approximately 1 percentage point. The changes in sales
volume, product mix and prices included the effects of increased
sales of precious metals. Higher precious metal sales
contributed approximately 9 percentage points to the
overall sales increase during the year. Sales increased in all
segments during 2010. Sales in the U.S. and international
sales both increased compared to 2009.
Gross profit increased during 2010 as a result of the growth in
sales volume. Cost reduction initiatives that were completed
during 2010, including staffing reductions, plant consolidations
and restructuring actions, also contributed to the gross profit
improvement. Gross margin percentage increased approximately
280 basis points in 2010 compared with 2009. In aggregate,
increases in raw material costs of approximately
$47 million were offset by increased product prices.
Special charges, primarily related to manufacturing
rationalization activities, reduced gross profit by
approximately $9.0 million during 2010. Gross profit was
reduced by charges of $5.0 million in 2009, also primarily
due to manufacturing rationalization activities.
Selling, general and administrative (“SG&A”)
expenses increased by $21.5 million in 2010 compared with
the prior-year period. SG&A expenses declined to 14.0% of
net sales in 2010 compared with 16.4% of net sales in 2009.
Higher incentive compensation accruals and higher special
charges were the primary drivers of the increased SG&A
expenses. The 2010 SG&A expenses included
$18.1 million in charges, primarily related to
manufacturing
21
Table of Contents
rationalization projects, employee severance and corporate
development activities. In 2009, SG&A expenses included
$12.2 million in charges, primarily driven by expense
reduction activities.
Restructuring and impairment charges were $63.7 million in
2010, an increase of $44.4 million compared with the
prior-year period. The largest contributors to the charges in
2010 were restructuring initiatives involving the closure of a
manufacturing plant in France, two manufacturing sites in the
Netherlands and certain manufacturing operations in Portugal.
Approximately $35.0 million of the restructuring and
impairment charges were related to employee severance costs
associated with manufacturing rationalization projects. Asset
impairments of $12.6 million and pension settlements and
curtailments of $7.4 million contributed to the total
restructuring and impairment charges for 2010. Also included in
the restructuring and impairment charges for 2010 were costs of
$3.1 million related to lease termination at sites in
Germany and Portugal. The remaining charges were primarily
related to site cleanup and dismantling costs at various sites.
Interest expense declined by $19.4 million during 2010
compared with 2009. The reduction was driven primarily by a
decline in our average borrowing levels. Interest expense was
also lower as a result of lower average interest rates and the
effects of refinancing activities during the year, including the
write-off of unamortized debt issuance costs related to our
previous credit facility. The refinancing activities reduced
interest expense beginning in August 2010. Our average borrowing
levels declined as a result of reduced requirements to provide
cash collateral for our precious metal consignment programs,
debt reduction in late 2009 subsequent to our equity offering,
and debt reduction as cash generated from operations during 2010
was used to repay borrowings. As of December 31, 2010, we
had $28.1 million of cash on deposit as collateral for
precious metals, a decline from $112.4 million on
December 31, 2009. Our 2010 interest expense included a
$2.3 million noncash write-off of debt issuance costs
related to repayments of our term loans prior to their scheduled
repayment. Interest expense in 2009 included a $3.2 million
write-off of unamortized credit facility issuance costs that was
triggered by debt repayments.
We recorded losses from extinguishment of debt of
$23.0 million during 2010 related to our debt refinancing
activities. The charge included a write-off of unamortized debt
issuance costs and the difference between the carrying value and
the fair value of the portion of our 6.5% convertible notes
purchased during 2010. The purchases were made pursuant to a
tender offer and subsequently on the open market. The losses on
extinguishment charge also included a write-off of unamortized
debt issuance costs associated with our previous credit facility.
We manage currency risks in a wide variety of foreign currencies
principally by entering into forward contracts to mitigate the
impact of currency fluctuations on transactions arising from
international trade. The carrying values of these contracts are
adjusted to market value and the resulting gains or losses are
charged to income or expense during the period. Foreign currency
translation losses in 2010 included a write-down of
approximately $2.6 million related to receivables affected
by a devaluation of the Venezuelan currency.
As part of our miscellaneous expense in 2010, we recorded a net
pre-tax gain of $8.3 million as a result of a business
combination in which Ferro Corporation and Heraeus of Hanau,
Germany, acquired from each other certain business lines related
to decoration materials for ceramic and glass products. In
addition, we recorded a charge of $6.8 million to settle
our interest rate swaps in connection with the extinguishment of
term loans that were part of our previous credit facility and a
charge of $9.2 million for an increased reserve for
environmental remediation costs related to a non-operating
facility in Brazil.
In 2010, income tax expense was $16.5 million, or 69.3% of
income before taxes. In the prior-year period, we recorded an
income tax benefit of $3.5 million, or 8.1% of the loss
before income taxes. The tax expense in 2010 was affected by a
number of items including a $9.8 million net increase to
valuation allowances due to a determination that it is not more
likely than not that certain deferred tax assets will be
realized; a $1.5 million increase in tax expense related to
a change in U.S. laws; and a $2.1 million decrease due
to a tax benefit related to U.S. manufacturing income. The
tax benefit in 2009 was affected by a number of items including
a reduction of $4.2 million due to rate differences between
non-U.S. and
U.S. jurisdictions; a reduction of $2.9 million
resulting
22
Table of Contents
from goodwill impairment not recognized for tax purposes; a
$2.9 million reduction due to a decrease in reserves for
uncertain tax positions; and a $4.4 million increase
resulting from U.S. credits for increasing research
activities.
We recorded income from continuing operations of
$7.3 million in 2010. The income was a $47.3 million
improvement from a loss on continuing operations recorded in
2009. The improvement was primarily the result of higher gross
profit and reduced interest expense, partially offset by higher
restructuring and impairment charges, increased SG&A
expenses, losses on extinguishment of debt and higher income tax
expense.
| 2010 | 2009 | $ Change | % Change | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
Segment Sales
|
||||||||||||||||
|
Electronic Materials
|
$ | 675,401 | $ | 426,896 | $ | 248,505 | 58.2% | |||||||||
|
Performance Coatings
|
555,023 | 487,891 | 67,132 | 13.8% | ||||||||||||
|
Color and Glass Performance Materials
|
382,155 | 321,750 | 60,405 | 18.8% | ||||||||||||
|
Polymer Additives
|
302,352 | 249,510 | 52,842 | 21.2% | ||||||||||||
|
Specialty Plastics
|
163,058 | 149,524 | 13,534 | 9.1% | ||||||||||||
|
Pharmaceuticals
|
23,876 | 21,998 | 1,878 | 8.5% | ||||||||||||
|
Total segment sales
|
$ | 2,101,865 | $ | 1,657,569 | $ | 444,296 | 26.8% | |||||||||
|
Segment Operating Income
|
||||||||||||||||
|
Electronic Materials
|
$ | 132,585 | $ | 45,344 | $ | 87,241 | 192.4% | |||||||||
|
Performance Coatings
|
39,416 | 29,551 | 9,865 | 33.4% | ||||||||||||
|
Color and Glass Performance Materials
|
31,514 | 13,123 | 18,391 | 140.1% | ||||||||||||
|
Polymer Additives
|
18,387 | 6,708 | 11,679 | 174.1% | ||||||||||||
|
Specialty Plastics
|
11,348 | 10,164 | 1,184 | 11.6% | ||||||||||||
|
Pharmaceuticals
|
814 | 438 | 376 | 85.8% | ||||||||||||
|
Total segment operating income
|
$ | 234,064 | $ | 105,328 | $ | 128,736 | 122.2% | |||||||||
Electronic Materials Segment Results.
Sales
increased in Electronic Materials in all product areas, led by
higher sales of conductive pastes and powders. Increased sales
volume accounted for approximately $159 million of the
sales increase during 2010. Changes in product pricing and mix
contributed an additional $85 million to sales growth, and
changes in foreign currency exchange rates accounted for
$5 million of the higher sales. An increase in precious
metal sales of $141 million, reflecting changes in both
sales volume and pricing, contributed to the overall change in
sales for the year. The costs of precious metals are passed
through to our customers as an element of our product prices.
Sales from our U.S. manufacturing sites grew the most in
2010. Sales of products manufactured in the U.S. are
recorded as U.S. sales, although many of the products are
exported to international customers. Sales also grew in
Asia-Pacific, as we increased production at a conductive paste
manufacturing facility in China, and in the Europe-Middle
East-Africa region. Operating income increased due to a
$90 million increase in gross profit, driven primarily by
increased sales volume. Partially offsetting the improved gross
profit was a $3 million increase in SG&A expenses.
Performance Coatings Segment Results.
Sales
increased in Performance Coatings primarily as a result of
increased sales volume. Higher sales volume accounted for
approximately $80 million in higher sales. This increase
was partially offset by a $14 million reduction in sales
due to changes in foreign currency exchange rates. Changes in
product mix and pricing increased sales by $1 million.
Sales were higher in all regions, with the largest increase in
Europe-Middle East-Africa. Operating income increased due to a
$20 million increase in gross profit, primarily driven by
improved sales volume and changes in product pricing and mix.
Partially offsetting the improved gross profit was a
$10 million increase in SG&A expenses including higher
incentive compensation accruals, salaries and benefits,
increased commissions and higher information technology expenses.
23
Table of Contents
Color and Glass Performance Materials Segment
Results.
Sales increased in Color and Glass Performance
Materials primarily due to higher sales volume. Increased sales
volume contributed approximately $56 million to the sales
growth during 2010. Changes in product pricing and mix
contributed an additional $10 million to the sales growth
while changes in foreign currency exchange rates reduced sales
by $6 million. Sales growth was recorded in Europe-Middle
East-Africa, the United States and Asia-Pacific. Operating
income increased due to a $24 million increase in gross
profit that was primarily driven by increased sales volume. The
increase in gross profit was partially offset by a
$6 million increase in SG&A expenses.
Polymer Additives Segment Results.
Sales increased
in Polymer Additives as a result of higher sales volume and
changes in product pricing and mix. Increased sales volume
accounted for approximately $36 million of the sales growth
for the year. Changes in product pricing and mix contributed an
additional $21 million to the growth in sales. Changes in
foreign currency exchange rates reduced sales by
$4 million. Sales growth was primarily in the United States
and Europe-Middle East-Africa. Operating profit increased due to
a $12 million increase in gross profit that was primarily
due to increased sales volume and improved manufacturing
effectiveness.
Specialty Plastics Segment Results.
Sales increased
in Specialty Plastics due to a combination of changes in product
pricing and mix, and higher sales volumes. Changes in product
pricing and mix contributed approximately $10 million to
the higher sales in 2010. Increased sales volumes accounted for
an additional $6 million of the sales growth, while changes
in foreign currency exchange rates reduced sales growth by
$3 million. Sales growth was primarily in the United
States. Operating income increased due to a reduction of
$2 million in SG&A expenses, partially offset by a
$1 million decline in gross profit.
Pharmaceutical Segment Results.
Sales increased in
Pharmaceuticals as a result of changes in product mix. Operating
income increased as a result of a $2 million increase in
gross profit that was partially offset by a $1.6 million
increase in SG&A expenses.
| 2010 | 2009 | $ Change | % Change | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
Geographic Revenues
|
||||||||||||||||
|
United States
|
$ | 1,039,457 | $ | 758,048 | $ | 281,409 | 37.1% | |||||||||
|
International
|
1,062,408 | 899,521 | 162,887 | 18.1% | ||||||||||||
|
Total geographic revenues
|
$ | 2,101,865 | $ | 1,657,569 | $ | 444,296 | 26.8% | |||||||||
During 2010, sales increased in the United States and
internationally. Sales of products manufactured in the United
States were 49% of total net sales for the year, compared with
46% of total sales in 2009. Sales grew more rapidly in the
United States than internationally in 2010 primarily as a result
of strong sales of electronic materials products. Many of our
electronic materials products are manufactured in the United
States and exported to other regions. Sales recorded in each
region include products that are exported to customers located
in other regions. The increase in international sales was driven
by higher sales in Europe-Middle East-Africa and Asia-Pacific.
24
Table of Contents
Comparison
of the years ended December 31, 2009 and 2008
| 2009 | 2008 | $ Change | % Change | ||||||||||||
| (Dollars in thousands, except per share data) | |||||||||||||||
|
Net sales
|
$ | 1,657,569 | $ | 2,245,152 | $ | (587,583 | ) | (26.2)% | |||||||
|
Cost of sales
|
1,343,297 | 1,841,485 | (498,188 | ) | (27.1)% | ||||||||||
|
Gross profit
|
314,272 | 403,667 | (89,395 | ) | (22.1)% | ||||||||||
|
Gross margin percentage
|
19.0 | % | 18.0 | % | |||||||||||
|
Selling, general and administrative expenses
|
272,259 | 297,119 | (24,860 | ) | (8.4)% | ||||||||||
|
Restructuring and impairment charges
|
19,337 | 106,142 | (86,805 | ) | |||||||||||
|
Other expense (income):
|
|||||||||||||||
|
Interest expense
|
63,918 | 51,290 | 12,628 | ||||||||||||
|
Interest earned
|
(896 | ) | (714 | ) | (182 | ) | |||||||||
|
Losses on extinguishment of debt
|
— | 5,531 | (5,531 | ) | |||||||||||
|
Foreign currency losses, net
|
3,827 | 742 | 3,085 | ||||||||||||
|
Miscellaneous income, net
|
(618 | ) | (357 | ) | (261 | ) | |||||||||
|
Loss before income taxes
|
(43,555 | ) | (56,086 | ) | 12,531 | ||||||||||
|
Income tax benefit
|
(3,515 | ) | (3,204 | ) | (311 | ) | |||||||||
|
Loss from continuing operations
|
(40,040 | ) | (52,882 | ) | 12,842 | ||||||||||
| Income from discontinued operations, net of income taxes | — | 5,014 | (5,014 | ) | |||||||||||
| (Loss) gain on disposal of discontinued operations, net of income taxes | (325 | ) | 9,034 | (9,359 | ) | ||||||||||
|
Net loss
|
$ | (40,365 | ) | $ | (38,834 | ) | $ | (1,531 | ) | ||||||
|
Diluted loss per share attributable to
Ferro Corporation common shareholders |
$ | (0.86 | ) | $ | (0.95 | ) | $ | 0.09 | |||||||
Net sales declined by 26% in 2009, primarily due to reduced
sales volume resulting from the worldwide economic downturn.
Lower sales volume accounted for approximately
22 percentage points of the overall sales decline. Changes
in product mix and prices accounted for approximately
2.6 percentage points of the sales decline. Changes in
foreign currency exchange rates also contributed to the lower
net sales, accounting for approximately 1.5 percentage
points of the sales decline. The changes in sales volume,
product mix and prices include the effects of lower sales of
precious metals. Lower precious metal sales contributed
approximately 3.1 percentage points to the lower sales for
the year. Sales declined in all segments and in all regions
compared with the prior-year period.
Gross profit declined in 2009 as a result of the decline in net
sales. Cost reduction initiatives, including staffing
reductions, plant closures and restructuring actions, partially
offset the decline in gross profit. As a result, despite the
decline in sales, gross profit percentage increased
approximately 100 basis points in 2009 compared with 2008.
Raw material prices declined, in aggregate, by approximately
$98 million during 2009 compared with the prior-year
period. The benefit from lower raw material costs was largely
offset by lower product prices. Charges, primarily related to
manufacturing rationalization activities, reduced gross profit
by approximately $5.0 million during 2009. Gross profit was
reduced by approximately $3.1 million in 2008 as a result
of charges for asset write-offs and costs associated with our
manufacturing rationalization initiatives. In 2008, gross profit
was also reduced by approximately $3.3 million spent to
clean up an accidental discharge of product into the wastewater
treatment facility at our Bridgeport, New Jersey, manufacturing
location.
Selling, general and administrative (“SG&A”)
expenses declined by $24.9 million in 2009 compared with
2008. SG&A expenses were 16.4 percent of sales in 2009
compared with 13.2 percent of sales in 2008 due to lower
25
Table of Contents
sales. SG&A expenses declined as a result of expense
reduction efforts we made in response to weak customer demand.
The expense reductions included reduced staffing and reduced
discretionary spending. In 2009, these actions contributed to a
reduction of approximately $17.8 million in salary and wage
expense and a $10.8 million reduction in travel and
entertainment expense compared with 2008. Partially offsetting
these declines was an increase of approximately
$20.1 million in pension expense. SG&A expenses in
2009 included charges of approximately $12.2 million
primarily related to expense reduction initiatives. The 2008
SG&A expenses included charges of approximately
$3.9 million related to corporate development activities,
asset write-offs and employee severance expenses, partially
offset by benefits from litigation settlements and insurance
proceeds.
We recorded restructuring and impairment charges of
$19.3 million during 2009 consisting of $11.1 million
related to manufacturing rationalization activities in our
European manufacturing operations and other cost-reduction
actions, and $8.2 million for a reduction in goodwill
associated with our Pharmaceuticals business. The impairment in
goodwill was triggered by changes made to the assumptions used
to determine valuation under the market approach. In 2008,
restructuring and impairment charges were $106.1 million.
The 2008 charges included a $58.4 million reduction in
goodwill and a $21.8 million charge related to long-lived
assets in the Tile Coating Systems business within the
Performance Coatings segment, the Specialty Plastics segment,
and the Electronic Materials segment. In addition, we recorded
restructuring charges of $25.9 million in 2008, primarily
associated with the rationalization of our manufacturing
operations in the Performance Coatings and Color and Glass
Performance Materials segments, and other activities to reduce
costs and expenses throughout all of our businesses.
Interest expense increased during 2009 compared with the
prior-year period. Interest expense increased approximately
$7.0 million due to higher interest rates, primarily
resulting from an amendment to our credit facilities that we
signed in March 2009 and approximately $2.4 million due to
increased borrowings. Additional changes in interest expense
resulted from differences in the amortization of debt issuance
costs and discounts. Interest expense in 2009 included a
required $3.2 million write-off of unamortized credit
facility debt issuance costs triggered by debt repayments. A
primary driver of the increased borrowing levels in 2009 was a
requirement to provide cash collateral for precious metal
consignment programs. As of December 31, 2009, we had
$112.4 million of cash on deposit as collateral for
precious metals.
During 2008, we refinanced our
9
1
/
8
%
coupon senior notes using the proceeds of a new convertible bond
offering and additional borrowing from our revolving credit
facility. The repayment of the senior notes resulted in a loss
on extinguishment of debt of $5.5 million. This loss did
not recur in 2009.
Net foreign currency transaction losses were $3.8 million
in 2009 compared with losses of $0.7 million in 2008. We
manage currency translation risks in a wide variety of foreign
currencies principally by entering into forward contracts to
mitigate the impact of currency fluctuations on transactions
arising from international trade. The carrying values of these
contracts are adjusted to fair value and the resulting gains and
losses are charged to income or expense in the period.
During 2009, we recognized a tax benefit of $3.5 million,
or 8.1% of the loss before income taxes, compared to a benefit
of $3.2 million, or 5.7% of the loss before income taxes in
2008. The tax benefit in 2009 was affected by a number of items
including a reduction of $4.2 million due to rate
differences between
non-U.S. and
U.S. jurisdictions; a reduction of $2.9 million
resulting from goodwill impairment not recognized for tax
purposes; a $2.9 million reduction due to a decrease in our
reserves for uncertain tax positions; and a $4.4 million
increase resulting from U.S. credits for increasing
research activities. The tax benefit in 2008 was impacted by
items including a $15.4 million reduction due to goodwill
impairment with only a partial tax benefit; a $9.8 million
decrease resulting from an increase to valuation allowances due
to a determination that it is not more likely than not that
certain deferred tax assets will be realized; a
$6.5 million decrease from rate differences between
non-U.S. and
U.S. jurisdictions; a $6.1 million increase due to a
favorable tax impact on foreign dividends; and, a
$5.7 million increase resulting from a decrease in the
reserves for uncertain tax positions.
The 2009 loss from continuing operations was reduced from the
loss recorded in 2008 as a result of lower impairment charges,
reduced SG&A expenses and lower restructuring charges.
Partially offsetting these reduced charges and expenses were
lower gross profit and higher interest expense.
26
Table of Contents
| 2009 | 2008 | $ Change | % Change | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
|
Segment Sales
|
|||||||||||||||
|
Electronic Materials
|
$ | 426,896 | $ | 558,313 | $ | (131,417 | ) | (23.5)% | |||||||
|
Performance Coatings
|
487,891 | 627,918 | (140,027 | ) | (22.3)% | ||||||||||
|
Color and Glass Performance Materials
|
321,750 | 456,644 | (134,894 | ) | (29.5)% | ||||||||||
|
Polymer Additives
|
249,510 | 349,902 | (100,392 | ) | (28.7)% | ||||||||||
|
Specialty Plastics
|
149,524 | 225,856 | (76,332 | ) | (33.8)% | ||||||||||
|
Pharmaceuticals
|
21,998 | 26,519 | (4,521 | ) | (17.0)% | ||||||||||
|
Total segment sales
|
$ | 1,657,569 | $ | 2,245,152 | $ | (587,583 | ) | (26.2)% | |||||||
|
Segment Operating Income
|
|||||||||||||||
|
Electronic Materials
|
$ | 45,344 | $ | 52,868 | $ | (7,524 | ) | (14.2)% | |||||||
|
Performance Coatings
|
29,551 | 36,935 | (7,384 | ) | (20.0)% | ||||||||||
|
Color and Glass Performance Materials
|
13,123 | 39,112 | (25,989 | ) | (66.4)% | ||||||||||
|
Polymer Additives
|
6,708 | 6,086 | 622 | 10.2% | |||||||||||
|
Specialty Plastics
|
10,164 | 5,385 | 4,779 | 88.7% | |||||||||||
|
Pharmaceuticals
|
438 | 3,524 | (3,086 | ) | (87.6)% | ||||||||||
|
Total segment operating income
|
$ | 105,328 | $ | 143,910 | $ | (38,582 | ) | (26.8)% | |||||||
Electronic Materials Segment Results.
Sales declined
in Electronic Materials primarily as a result of lower sales
volume of dielectric materials and metals pastes and powders,
partially offset by improvements in product pricing. The decline
in sales volume was responsible for an approximately
$176 million reduction in sales in 2009. This reduction was
partially offset by approximately $40 million due to
changes in product pricing and $4 million due to changes in
foreign currency exchange rates. A decline in sales of precious
metals of $59 million contributed to the sales decline,
reflecting both price and volume changes in precious metals. The
costs of precious metals included in our products are passed
through to customers as an element of our product prices. Sales
declined in all three principal regional markets for our
electronic materials products: Asia-Pacific, the United States
and Europe. Operating income declined due to a $22 million
decline in gross profit partially offset by a reduction of
$14 million in SG&A expenses. The decline in gross
profit was primarily due to the negative effects of lower sales
volumes. The decline in SG&A expenses was due to expense
reduction initiatives, including staffing reductions and control
of discretionary spending.
Performance Coatings Segment Results.
Sales declined
in Performance Coatings primarily due to reduced sales volumes
of tile coatings. The decline in total sales volume was
responsible for approximately $85 million of the reduction
in sales, while changes in product prices and mix reduced sales
by approximately $23 million and changes in foreign
currency exchange rates contributed approximately
$32 million to the sales decline. The sales decline was the
largest in Europe, our largest market for these products. Sales
also declined in the United States and Asia-Pacific. Operating
income declined primarily due to reduced sales. Gross profit
declined by $25 million, driven by the lower sales volume.
Partially offsetting the decline in gross profit was a reduction
in SG&A expenses of $18 million as a result of
staffing reductions and expense reduction initiatives.
Color and Glass Performance Materials Segment
Results.
Sales declined in Color and Glass Performance
Materials as a result of lower sales volume. Lower sales volume
reduced sales by approximately $93 million. Changes in
product prices and mix contributed an additional
$31 million to the sales decline, and changes in foreign
currency exchange rates accounted for approximately
$10 million of the lower net sales for the segment. Sales
for the year were lower in all regions. Operating income
declined due to a $38 million decline in gross profit,
partially offset by a $12 million reduction in SG&A
expenses. The decline in gross profit was primarily due to the
negative
27
Table of Contents
effects of lower sales volumes. The reduction in SG&A
expenses was primarily due to staffing reductions and control of
discretionary spending.
Polymer Additives Segment Results.
Sales declined in
Polymer Additives primarily as a result of lower sales volume
and changes in product pricing and mix. The reduction in volume
accounted for approximately $67 million of the sales
decline, while changes in product pricing and mix contributed an
additional $29 million to the reduced sales. Changes in
foreign currency exchange rates were responsible for
$4 million of the reduction in sales from the prior year.
The sales declines occurred primarily in the United States and
Europe. Operating income increased, despite the decline in
sales, due to a $7.5 million reduction in SG&A
expenses that more than offset a $6.9 million decline in
gross profit. The decline in gross profit was due primarily to
the negative effects of lower sales volume. The decline in
SG&A expenses was due to staffing reductions and control of
discretionary spending. In addition, during 2008 the operating
income in Polymer Additives was reduced by approximately
$3.3 million in costs to clean up an accidental discharge
of product into the wastewater treatment facility at our
Bridgeport, New Jersey, manufacturing plant.
Specialty Plastics Segment Results.
Sales declined
in Specialty Plastics primarily due to lower sales volume.
Approximately $65 million of the sales decline was the
result of lower sales volume. Changes in product pricing and mix
contributed $8 million to the lower sales and changes in
foreign currency exchange rates reduced sales by an additional
$3 million. The sales decline occurred mainly in the United
States and Europe, the primary markets for our plastics
products. Operating income increased compared with the
prior-year period as a result of a $7.3 million decrease in
SG&A expenses that more than offset a $2.5 million
decrease in gross profit. The decline in gross profit was due to
the negative effects of lower sales volumes partially offset by
improved manufacturing cost performance. The reduction in
SG&A expenses was due to staffing reductions and control of
discretionary spending.
Pharmaceuticals Segment Results.
Sales declined in
Pharmaceuticals primarily as a result of reduced demand for
high-value products that caused a change in product mix.
Operating income declined primarily due to a $5.0 million
reduction in gross profit driven by the change in product mix.
The reduction in gross profit was partially offset by a
$1.9 million reduction in SG&A expenses. Results
related to our Fine Chemicals business, which had previously
been combined with the results from our Pharmaceuticals business
and reported as “Other Businesses,” are now reported
as discontinued operations following the sale of that business
in 2008.
| 2009 | 2008 | $ Change | % Change | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
Geographic Revenues
|
||||||||||||||||
|
United States
|
$ | 758,048 | $ | 973,717 | $ | (215,669 | ) | (22.1)% | ||||||||
|
International
|
899,521 | 1,271,435 | (371,914 | ) | (29.3)% | |||||||||||
|
Total geographic revenues
|
$ | 1,657,569 | $ | 2,245,152 | $ | (587,583 | ) | (26.2)% | ||||||||
Sales of products shipped from all regions declined as a result
of the worldwide economic downturn in 2009. In 2009, sales of
products manufactured in the United States were 46% of total net
sales compared with 43% of net sales in 2008. The decline in
international sales was driven primarily by sales in Europe and
Asia-Pacific. Sales in Latin America declined slightly compared
with the prior year. Sales recorded in each region include
products exported to customers that are located in other regions.
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Summary
of Cash Flows for the years ended December 31, 2010, 2009
and 2008
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Net cash provided by (used for) operating activities
|
$ | 198,865 | $ | 2,151 | $ | (9,096 | ) | |||||
|
Net cash used for investing activities
|
(33,322 | ) | (42,654 | ) | (17,050 | ) | ||||||
|
Net cash (used for) provided by financing activities
|
(157,264 | ) | 46,625 | 23,854 | ||||||||
|
Effect of exchange rate changes on cash
|
2,249 | 2,194 | 458 | |||||||||
|
Increase (decrease) in cash and cash equivalents
|
$ | 10,528 | $ | 8,316 | $ | (1,834 | ) | |||||
Operating activities.
Cash flows from operating
activities increased $196.7 million from 2009 to 2010. Cash
flows improved $196.8 million from decreases in deposit
requirements related to our precious metal consignment program,
$54.1 million from increases in accrued expenses and other
current liabilities, $47.6 million as a result of a lower
net loss in 2010, and $41.8 million from increases in
accounts payable. These benefits were partially offset by
increases in cash used for inventories of $98.9 million,
accounts receivable of $37.0 million and other receivables
and current assets of $32.5 million.
Cash flows from operating activities increased
$11.2 million from 2008 to 2009. Changes in inventory
levels provided $82.7 million of additional cash flows, and
changes in other receivables and other current assets provided
another $54.7 million. Cash outflows of $46.3 million
in 2008 related to a note receivable from Ferro Finance
Corporation (“FFC”) did not recur in 2009. Partially
offsetting these benefits was $112.4 million used for
deposits related to our precious metals consignment program.
Investing activities.
Capital expenditures decreased
$1.5 million from 2009 to 2010 and decreased
$29.8 million from 2008 to 2009. In 2008, capital spending
included the construction of a new plant in Spain that produces
colors for the European tile market, increased investment in the
Company’s manufacturing facilities in the Asia-Pacific
region to produce electronic materials, and projects related to
our manufacturing rationalization programs in the United States
and Europe. In 2009 and 2010, we continued capital spending on
manufacturing rationalization programs, but the other projects
from 2008 had been substantially completed, and we made a
concerted effort to defer or scale back new projects in order to
conserve cash during a period of reduced customer demand
associated with the global economic downturn. In 2010, we
received proceeds of $11.4 million from the sale of assets
and businesses, primarily property, plant and equipment in the
Netherlands and our business operations in precious metal
preparations in Asia. In 2008, we sold our Fine Chemicals
business and received proceeds, net of transactional costs, of
$56.5 million.
Financing activities.
At December 31, 2010, our
primary credit agreement consisted of a new $350.0 million
multi-currency senior revolving credit facility, maturing in
2015. In 2010, we issued $250.0 million of
7.875% Senior Notes in a high yield bond offering,
repurchased $136.7 million of our 6.50% Convertible
Senior Notes through a tender offer and subsequent market
purchases, and repaid all outstanding term loans totaling
$231.4 million and our revolving credit line of a net
$1.7 million associated with the 2009 Amended and Restated
Credit Facility. In 2009, we issued 41.1 million shares of
common stock and received net proceeds of $215.7 million.
In connection with this equity offering, we converted
$100.0 million of revolving loans into new term loans and
then used $158.1 million of the equity offering proceeds to
pay down new and existing term loans. In 2008, Ferro issued
$172.5 million of 6.50% Convertible Senior Notes due
2013. The proceeds from this note offering, along with available
cash, including borrowings under our revolving credit facility,
were used to purchase all of Ferro’s outstanding
9
1
/
8
% Senior
Notes that would have matured in 2009.
We had net repayment to all credit facilities of
$144.3 million in 2010 and $155.8 million in 2009, for
a net increase in 2010 of $11.5 million in our rate of
borrowing. In 2008, we had net borrowings of $64.7 million,
for a net decrease in 2009 of $220.5 million in our rate of
borrowing. In 2010, we paid $5.7 million to issue the
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7.875% Senior Notes and $4.1 million to enter into our
2010 Credit Facility. In 2009, we paid $16.9 million to
amend and enter into credit facilities. In 2008, we paid
$5.3 million to extinguish the
9
1
/
8
Senior
Notes and $5.6 million to issue the 6.50% Convertible
Senior Notes.
We have paid no dividends on our common stock since the first
quarter of 2009, when Ferro’s Board of Directors declared a
quarterly dividend of $0.01 per common share. In 2008, we paid
dividends on our common stock at the quarterly rate of $0.145
per share. Dividends paid, including dividends on our preferred
stock, totaled $0.7 million in 2010, $1.1 million in
2009, and $26.1 million in 2008.
Capital
Resources and Liquidity
2010 Debt
Refinancing
During August 2010, we refinanced the majority of our debt
structure. The refinancing allowed us to extend debt maturities,
negotiate less restrictive debt covenants and reduce debt costs.
We used the proceeds from a high yield debt offering, as well as
proceeds from a new credit facility, to repurchase some of our
convertible senior notes, repay the term loans and revolver
under our prior credit facility, terminate and settle our
interest rate swap agreements, and pay fees and expenses
associated with the refinancing. The refinancing included the
following activities:
| • | Issued $250 million of 7.875% Senior Notes in a high yield bond offering, | |
| • | Entered into a new $350 million revolving credit agreement, the 2010 Credit Facility, | |
| • | Repurchased $100.5 million of our 6.50% Convertible Senior Notes, which were tendered pursuant to a tender offer initiated in conjunction with the debt refinancing, | |
| • | Repaid all outstanding term loans associated with the 2009 Amended and Restated Credit Facility, | |
| • | Repaid all amounts outstanding under the revolving credit line associated with the 2009 Amended and Restated Credit Facility, and | |
| • | Terminated the interest rate swap agreements that effectively fixed the interest rate on a portion of the term loans then outstanding under the 2009 Amended and Restated Credit Facility. |
As a result of these refinancing activities, we recognized
losses on extinguishment of debt of $19.3 million. In
addition, we incurred $6.8 million in miscellaneous
expense, which was associated with the settlement of the
interest rate swap agreements. We also recognized
$2.3 million in interest expense related to the write-off
of unamortized debt issuance costs. Debt issuance costs of
$9.9 million related to the new debt instruments were
deferred and will be recognized as interest expense over the
life of the debt obligations.
Major debt instruments that were outstanding during 2010 are
described in additional detail below.
7.875% Senior
Notes
In 2010, we issued $250 million of 7.875% Senior Notes
due 2018 (the “Senior Notes”). We used portions of the
proceeds from the offering to repay all of the remaining term
loans and revolving borrowings outstanding under a credit
facility originally entered into in 2006 and as amended and
restated through November 2009 (the “2009
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Amended and Restated Credit Facility”). We also used
portions of the proceeds from the offering to repurchase the
6.50% Convertible Senior Notes (the “Convertible
Notes”) that were tendered pursuant to a related tender
offer. The Senior Notes were issued at par and bear interest at
a rate of 7.875% per year, payable semi-annually in arrears on
February 15 and August 15 of each year, beginning
February 15, 2011. The Senior Notes mature on
August 15, 2018, and are unsecured. At December 31,
2010, we were in compliance with the covenants under the Senior
Notes’ indenture.
6.50% Convertible
Senior Notes
In 2008, Ferro issued $172.5 million of
6.50% Convertible Senior Notes due 2013 (the
“Convertible Notes”). The Convertible Notes bear
interest at a rate of 6.5% per year, payable semi-annually in
arrears on February 15 and August 15 of each year. The
Convertible Notes mature on August 15, 2013. In 2010, we
commenced a cash tender offer to purchase all of our Convertible
Notes, and we purchased $100.5 million of the Convertible
Notes, which were tendered pursuant to the offer. Later in 2010,
we purchased an additional $36.2 million of the Convertible
Notes on the open market. In connection with these transactions,
we recognized losses on extinguishment of debt of
$13.1 million, consisting of unamortized debt issuance
costs and the difference between the carrying value and the fair
value of these notes. The principal amount outstanding was
$35.8 million at December 31, 2010. We separately
account for the liability and equity components of the
Convertible Notes in a manner that will reflect our
nonconvertible debt borrowing rate when interest cost is
recognized in subsequent periods. The effective interest rate on
the liability component is 9.5%. At December 31, 2010, we
were in compliance with the covenants under the Convertible
Notes’ indenture.
2009
Amended and Restated Credit Facility
Our 2009 Amended and Restated Credit Facility included a senior
term loan facility and a senior revolving credit facility. In
2010, we made early principal payments of $83.6 million on
our outstanding term loans and wrote off $2.3 million of
related unamortized debt issuance costs to interest expense.
Subsequently in 2010, we amended the 2009 Amended and Restated
Credit Facility and paid the remaining $147.8 million on
our outstanding term loans and the remaining $75.5 million
on our outstanding revolving borrowings. As a result of changes
in the creditors, we treated the amendment as an extinguishment
of the 2009 Amended and Restated Credit Facility and recognized
losses on extinguishment of debt of $9.9 million,
consisting of unamortized debt issuance costs related to this
facility.
2010
Credit Facility
In 2010, we entered into the Third Amended and Restated Credit
Agreement with a group of lenders for a five-year,
$350 million multi-currency senior revolving credit
facility (the “2010 Credit Facility”). At
December 31, 2010, there were no borrowings under this
facility. At December 31, 2010, we had $342.8 million
available, after reductions for standby letters of credit
secured by this facility. The interest rate under the 2010
Credit Facility is the sum of (A) either (1) LIBOR or
(2) the higher of the Federal Funds Rate plus 0.5%, the
Prime Rate, or LIBOR plus 1.0% and (B) a variable margin
based on the Company’s leverage.
The 2010 Credit Facility matures on August 24, 2015, and is
secured by substantially all of Ferro’s assets, generally
including 100% of the shares of the parent company’s
domestic subsidiaries and 65% of the shares of the foreign
subsidiaries directly owned by the parent company, but excluding
trade receivables legally sold pursuant to our accounts
receivable sales programs.
We are subject to a number of covenants under our 2010 Credit
Facility. The covenants include requirements for a fixed charge
coverage ratio greater than 1.35 to 1.00 and a leverage ratio
less than 3.50 to 1.00 on the last day of any fiscal quarter and
calculated using the last four fiscal quarters. In the fixed
charge ratio, the numerator consists
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of earnings before interest, tax, depreciation and amortization,
and special charges, less capital expenditures, and the
denominator is the sum of interest expense paid in cash,
scheduled principal payments, and restricted payments consisting
of dividends and any stock buy backs. In the leverage ratio, the
numerator is total debt, which consists of borrowing and letters
of credit outstanding on the 2010 Credit Facility and our
international facilities, the principal amount outstanding on
our senior notes and convertible notes, capital lease
obligations, and amounts outstanding on our U.S. and
international receivables sales programs, and the denominator is
the sum of earnings before interest, tax, depreciation and
amortization, and special charges. Our ability to meet these
covenants is primarily driven by our net income before interest,
income taxes, depreciation and amortization; our total debt; and
our interest payments. Our total debt is primarily driven by
cash flow items, including net income before amortization,
depreciation, and other noncash charges; our capital
expenditures; requirements for deposits from participants in our
precious metals consignment program; our customers’ ability
to make payments for purchases and the timing of such payments;
and our ability to manage inventory and other working capital
items. Our interest payments are driven by our debt level,
external fees, and interest rates, primarily the Prime Rate and
LIBOR. At December 31, 2010, we were in compliance with the
covenants of the 2010 Credit Facility.
Our ability to pay common stock dividends is limited by certain
covenants in our 2010 Credit Facility and the bond indenture
governing the Senior Notes. The covenant in our 2010 Credit
Facility is the more limiting of the two covenants and limits
our ability to make restricted payments, which include, but are
not limited to, common stock dividends and the repurchase of
equity interests. We are not permitted to make restricted
payments in excess of $30 million dollars in any calendar
year. However, if we make less than $30 million of
restricted payments in any calendar year, the unused amount can
be carried over for restricted payments in future years,
provided that the maximum amount of restricted payments in any
calendar year cannot exceed $60 million.
Domestic
Receivable Sales Program
We have an asset securitization program for substantially all of
Ferro’s U.S. trade accounts receivable. This program
accelerates cash collections at favorable financing costs and
helps us manage the Company’s liquidity requirements. In
June 2010, we extended the maturity of our $50 million
facility through May 2011.
We legally sell these trade accounts receivable to Ferro Finance
Corporation (“FFC”), which finances its acquisition of
trade receivable assets by selling undivided variable percentage
interests in the receivables to certain purchasers under the
program. Advances by purchasers are secured by, and repaid
through collections on, the receivables owned by FFC. FFC and
the purchasers have no recourse to Ferro’s other assets for
failure of payment of the receivables as a result of the lack of
creditworthiness or financial inability to pay of the related
obligor.
FFC is a wholly-owned, consolidated subsidiary. At
December 31, 2010, Ferro’s consolidated balance sheet
included outstanding trade accounts receivable legally
transferred to FFC of $85.3 million. While there were no
advances by purchasers for interests in those receivables at
December 31, 2010, the average advances during 2010 were
$23.9 million. The need for advances under the asset
securitization program varies throughout the year as liquidity
needs change. After reductions for non-qualifying receivables,
we had $50.0 million of additional borrowings available
under the program at December 31, 2010.
Off
Balance Sheet Arrangements
International Receivable Sales Programs.
We maintain
several international programs to sell trade accounts
receivable. At December 31, 2010, the commitments
supporting these programs, which can be withdrawn at any time,
totaled $30.1 million, the amount of outstanding
receivables sold under these programs was $6.8 million, and
Ferro had received net proceeds under these programs of
$3.4 million for outstanding receivables. Based on
available and qualifying receivables, there was no additional
availability under these programs at December 31, 2010.
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Table of Contents
Consignment and Customer Arrangements for Precious
Metals.
We use precious metals, primarily silver, in
the production of some of our products. We obtain most precious
metals from financial institutions under consignment agreements
(generally referred to as our precious metals consignment
program). The financial institutions retain ownership of the
precious metals and charge us fees based on the amounts we
consign. These fees were $5.3 million for 2010. At
December 31, 2010, we had on hand $205.7 million of
precious metals, measured at fair value, owned by participants
in our precious metals consignment program. We also process
precious metals owned by our customers.
The consignment agreements under our precious metals program
involve short-term commitments that typically mature within 30
to 90 days of each transaction and are typically renewed on
an ongoing basis. As a result, the Company relies on the
continued willingness of financial institutions to participate
in these arrangements to maintain this source of liquidity.
Beginning in 2009, several participants in our precious metals
consignment program renewed their requirement for us to deliver
cash collateral to secure our obligations arising under the
consignment agreements. At December 31, 2010, Ferro had
delivered $28.1 million in cash collateral to induce those
financial institutions to participate in Ferro’s precious
metals consignment program at the amounts requested. We may be
required to furnish additional cash collateral in the future
based on our financial partners’ requirements or our
amounts of consigned precious metals.
Bank Guarantees and Standby Letters of Credit.
At
December 31, 2010, the Company and its subsidiaries had
bank guarantees and standby letters of credit issued by
financial institutions that totaled $12.2 million. These
agreements primarily relate to Ferro’s insurance programs,
foreign energy purchase contracts and foreign tax payments.
Other
Financing Arrangements
We maintain other lines of credit to provide global flexibility
for Ferro’s short-term liquidity requirements. These
facilities are uncommitted lines for our international
operations and totaled $12.9 million at December 31,
2010. We had $9.3 million of additional borrowings
available under these lines at December 31, 2010.
Liquidity
Requirements
Our liquidity requirements primarily include debt service,
purchase commitments, labor costs, working capital requirements,
restructuring expenditures, capital investments, precious metals
cash collateral requirements, and postretirement obligations. We
expect to meet these requirements in the long term through cash
provided by operating activities and availability under existing
credit facilities or other financing arrangements. Cash flows
from operating activities are primarily driven by earnings
before noncash charges and changes in working capital needs. In
2010, cash flows from operating activities were sufficient to
fund our investing activities, primarily capital expenditures
for property, plant and equipment. We had additional borrowing
capacity of $402.1 million at December 31, 2010, and
$202.4 million at December 31, 2009, available under
various credit facilities, primarily our revolving credit
facility. We have taken a variety of actions to enhance
liquidity, including restructuring activities and suspension of
dividend payments on our common stock.
Our level of debt, debt service requirements, and ability to
access credit markets could have important consequences to our
business operations and uses of cash flows. Uncertainties in the
global capital markets have not prohibited us from accessing the
capital markets. In 2010, we extended our asset securitization
facility, issued 7.875% Senior Notes, which mature in 2018,
and entered into the 2010 Credit Facility, which matures in 2015.
We may from time to time seek to retire or repurchase our
outstanding debt through open market purchases, privately
negotiated transactions or otherwise. Such repurchases, if any,
will depend on prevailing market
33
Table of Contents
conditions, our liquidity requirements, contractual
restrictions, and other factors. The amounts involved may be
material.
Difficulties experienced in global capital markets could affect
the ability or willingness of counterparties to perform under
our various lines of credit, receivable sales programs, forward
contracts, and precious metal program. These counterparties are
major, reputable, multinational institutions, all having
investment-grade credit ratings, except for one, which is not
rated. Accordingly, we do not anticipate counterparty default.
However, an interruption in access to external financing could
adversely affect our business prospects and financial condition.
We assess on an ongoing basis our portfolio of businesses, as
well as our financial and capital structure, to ensure that we
have sufficient capital and liquidity to meet our strategic
objectives. As part of this process, from time to time we
evaluate the possible divestiture of businesses that are not
critical to our core strategic objectives and, where
appropriate, pursue the sale of such businesses. We also
evaluate and pursue acquisition opportunities that we believe
will enhance our strategic position. Generally, we publicly
announce divestiture and acquisition transactions only when we
have entered into definitive agreements relating to those
transactions.
The Company’s aggregate amount of contractual obligations
for the next five years and thereafter is set forth below:
| 2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | Totals | ||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||
|
Loans payable
|
$ | 709 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 709 | ||||||||||||||
|
Long-term debt(1)
|
3,349 | 2,111 | 36,968 | 1,092 | 1,101 | 254,514 | 299,135 | |||||||||||||||||||||
|
Interest(2)
|
22,017 | 22,017 | 22,017 | 19,688 | 19,688 | 59,062 | 164,489 | |||||||||||||||||||||
|
Operating lease obligations
|
13,345 | 8,990 | 6,080 | 5,205 | 4,967 | 13,087 | 51,674 | |||||||||||||||||||||
|
Purchase commitments(3)
|
19,136 | 3,008 | 1,920 | 1,788 | 1,341 | — | 27,193 | |||||||||||||||||||||
|
Taxes(4)
|
8,823 | — | — | — | — | — | 8,823 | |||||||||||||||||||||
| Retirement and other postemployment benefits(5) | 40,800 | 46,300 | — | — | — | — | 87,100 | |||||||||||||||||||||
| $ | 108,179 | $ | 82,426 | $ | 66,985 | $ | 27,773 | $ | 27,097 | $ | 326,663 | $ | 639,123 | |||||||||||||||
| (1) | Long-term debt excludes unamortized discounts on the Convertible Notes and imputed interest and executory costs on capitalized lease obligations. | |
| (2) | Interest represents only contractual payments for fixed-rate debt. | |
| (3) | Purchased commitments are non-cancelable contractual obligations for raw materials and energy. | |
| (4) | We have not projected payments past 2011 due to uncertainties in estimating the amount and period of any payments. | |
| (5) | The funding amounts are based on the minimum contributions required under our various plans and applicable regulations in each respective country plus a planned one-time payment of $4.9 million in 2011 to improve the funding of a non-U.S. pension plan. We have not projected contributions past 2012 due to uncertainties regarding the assumptions involved in estimating future required contributions. |
Critical
Accounting Policies
When we prepare our consolidated financial statements we are
required to make estimates and assumptions that affect the
amounts we report in the consolidated financial statements and
footnotes. We consider the policies discussed below to be more
critical than other policies because their application requires
our most subjective or complex judgments. These estimates and
judgments arise because of the inherent uncertainty in
predicting future events. Management has discussed the
development, selection and disclosure of these policies with the
Audit Committee of the Board of Directors.
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Revenue
Recognition
We recognize sales typically when we ship goods to our customers
and when all of the following criteria are met:
| • | Persuasive evidence of an arrangement exists; | |
| • | The selling price is fixed and determinable; | |
| • | Collection is reasonably assured; and | |
| • | Title and risk of loss has passed to our customers. |
In order to ensure the revenue recognition in the proper period,
we review material sales contracts for proper cut-off based upon
the business practices and legal requirements of each country.
For sales of products containing precious metals, we report
revenues gross along with their corresponding cost of sales to
arrive at gross profit. We record revenues this way because we
act as the principal in the transactions we enter into and take
title and the risks and rewards of ownership of the inventory we
process, although the timing of when we take title to the
inventory during the production process may vary.
Restructuring
and Cost Reduction Programs
Between 2006 and 2010, we developed and initiated several
restructuring programs across a number of our business segments
with the objectives of leveraging our global scale, realigning
and lowering our cost structure, and optimizing capacity
utilization. The programs are primarily associated with North
America, Europe and Asia-Pacific. Management continues to
evaluate our businesses, and therefore, there may be
supplemental provisions for new plan initiatives, as well as
changes in estimates to amounts previously recorded, as payments
are made or actions are completed.
Restructuring charges include both termination benefits and
asset writedowns. We estimate accruals for termination benefits
based on various factors including length of service, contract
provisions, local legal requirements, projected final service
dates, and salary levels. We also analyze the carrying value of
long-lived assets and record estimated accelerated depreciation
through the anticipated end of the useful life of the assets
affected by the restructuring or record an asset impairment. In
all likelihood, this accelerated depreciation will result in
reducing the net book value of those assets to zero at the date
operations cease. While we believe that changes to our estimates
are unlikely, the accuracy of our estimates depends on the
successful completion of numerous actions. Delays in moving
continuing operations to other facilities or increased cash
outlays will increase our restructuring costs to such an extent
that it could have a material impact on the Company’s
results of operations, financial position, or cash flows. Other
events, such as a delay in completion of construction of new
facilities, may also delay the resulting cost savings.
Goodwill
While goodwill recorded on our balance sheet is no longer
amortized, we review it for impairment each year using a
measurement date of October 31st or more frequently in
the event of an impairment indicator. We estimate the fair value
of the reporting unit associated with these assets using the
average of both the income approach and the market approach,
which we believe provides a reasonable estimate of the reporting
unit’s fair value, unless facts and circumstances exist
that indicate a more representative fair value. The income
approach uses projected cash flows attributable to the reporting
unit over its useful life and allocates certain corporate
expenses to the reporting
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unit in the process. We use historical results and trends and
our projections of market growth, internal sales efforts, input
cost movements, and cost reduction opportunities to estimate
future cash flows. Using a risk-adjusted, weighted-average cost
of capital, we discount the cash flow projections to the
measurement date. The market approach estimates a price
reasonably expected to be realized from the sale of similar
businesses, including offers from potential acquirers. If the
fair value of any of the units were determined to be less than
its carrying value, we would proceed to the second step and
obtain comparable market values or independent appraisals of its
assets to determine the amount of any impairment.
The significant assumptions and ranges of assumptions we used in
our impairment analysis of goodwill were as follows:
|
Significant Assumptions
|
2010 | 2009 | ||
|
Weighted-average cost of capital
|
12.0% - 13.0% | 13.5% - 14.0% | ||
|
Residual growth rate
|
3.0% - 5.0% | 3.0% - 5.0% |
Our estimates of fair value can be affected by a variety of
factors. Reductions in actual or projected growth or
profitability at our business units due to unfavorable market
conditions or significant increases in previous levels of
capital spending could lead to the impairment of any related
goodwill. Additionally, an increase in inflation, interest rates
or the risk-adjusted, weighted-average cost of capital could
also lead to a reduction in the value of one or more of our
business units and therefore lead to the impairment of goodwill.
We had three reporting units with goodwill balances as of our
most recent measurement date. The fair values exceeded the
carrying values of the respective reporting units by amounts
ranging from 47% to 233% at the 2010 measurement date. There
were no known material uncertainties that would have led to an
indicator of impairment for 2010. While no impairment was
indicated as a result of our 2010 annual test for any reporting
unit that had a goodwill balance, a future potential impairment
is possible for any of these reporting units if actual results
should differ materially from forecasted results. Some of the
factors that could negatively affect our cash flows and as a
result not support the carrying values of our assets are: new
environmental regulations or legal restrictions on the use of
our products that would either reduce our product revenues or
add substantial costs to the manufacturing process reducing
operating margins; new technologies that could make our products
less competitive or require substantial capital investment in
new equipment; and substantial downturns in economic conditions
such as those experienced in late 2008 and for most of 2009.
Income
Taxes
The breadth of our operations and complexity of income tax
regulations require us to assess uncertainties and make
judgments in estimating the ultimate amount of income taxes we
will pay. Our income tax expense, deferred tax assets and
liabilities and reserves for unrecognized tax benefits reflect
management’s best assessment of estimated future taxes to
be paid. The final income taxes we pay are based upon many
factors, including existing income tax laws and regulations,
negotiations with taxing authorities in various jurisdictions,
outcomes of tax litigation, and resolution of disputes arising
from federal, state, and international income tax audits. The
resolution of these uncertainties may result in adjustments to
our income tax assets and liabilities in the future.
Deferred income taxes result from differences between the
financial and tax basis of our assets and liabilities and we
adjust our deferred income tax assets and liabilities for
changes in income tax rates and income tax laws when changes are
enacted. We record valuation allowances to reduce deferred
income tax assets when it is more likely than not that a tax
benefit will not be realized. Significant judgment is required
in evaluating the need for and the magnitude of appropriate
valuation allowances against deferred income tax assets. The
realization of these assets is dependent on generating future
taxable income, our ability to carry back or carry forward net
operating losses and credits to offset taxable income in a prior
year, as well as successful implementation of various tax
strategies to generate taxable income where net operating losses
or credit carryforwards exist. In evaluating our
36
Table of Contents
ability to realize the deferred income tax assets, we rely
principally on the reversal of existing temporary differences,
the availability of tax planning strategies, and forecasted
taxable income using historical and projected future operating
results.
We have significant operations outside the U.S. Many of
these
non-U.S. tax
jurisdictions have statutory income tax rates that are lower
than the rates in the U.S. Because we carry a majority of
our debt in the U.S., we also have significant cash needs in the
U.S. to service this debt. As a result, it is necessary for
us to perform significant tax and treasury planning and analysis
to determine the best actions to achieve the goals of meeting
our U.S. cash needs, while also reducing our worldwide
taxable income. In this tax and treasury planning, we consider
future taxable income in the U.S. and
non-U.S. jurisdictions,
future cash needs in the U.S., and the timing and amount of
dividend repatriations. Our ability to balance future taxable
income and cash flows between the U.S. and foreign
locations depends on various strategies, such as the charging of
management fees for intercompany services, transfer pricing,
intercompany royalties, intercompany sales of technologies and
intellectual property, and choosing between allowable tax
methods.
The amount of income taxes we pay is subject to ongoing audits
by federal, state and foreign tax authorities. The calculation
of our tax liabilities involves dealing with uncertainties in
the application of complex tax laws and regulations in a
multitude of jurisdictions across our global operations. Changes
in tax laws and rates could also affect recorded deferred tax
assets and liabilities in the future.
We recognize a tax benefit from an uncertain tax position when
it is more likely than not that the position will be sustained
upon examination, including resolutions of any related appeals
or litigation processes, based on the technical merits. Our
estimate of the potential outcome of any uncertain tax issue is
subject to management’s assessment of relevant risks,
facts, and circumstances existing at that time. We record a
liability for the difference between the benefit recognized and
measured based on a more-likely than-not threshold and the tax
position taken or expected to be taken on the tax return. To the
extent that our assessment of such tax positions changes, the
change in estimate is recorded in the period in which the
determination is made. We report tax-related interest and
penalties as a component of income tax expense.
Derivative
Financial Instruments
We use derivative financial instruments in the normal course of
business to manage our exposure to fluctuations in interest
rates, foreign currency exchange rates, commodity prices, and
precious metal prices. The accounting for derivative financial
instruments can be complex and can require significant judgment.
Generally, the derivative financial instruments that we use are
not complex, and observable market-based inputs are available to
measure their fair value. We do not engage in speculative
transactions for trading purposes. Financial instruments,
including derivative financial instruments, expose us to
counterparty credit risk for non-performance. We manage our
exposure to counterparty credit risk through minimum credit
standards and procedures to monitor concentrations of credit
risk. We enter into these derivative financial instruments with
major, reputable, multinational financial institutions.
Accordingly, we do not anticipate counter-party default. We
continuously evaluate the effectiveness of derivative financial
instruments designated as hedges to ensure that they are highly
effective. In the event the hedge becomes ineffective, we
discontinue hedge treatment. Except as noted below, we do not
expect any changes in our risk policies or in the nature of the
transactions we enter into to mitigate those risks.
Our exposure to interest rate changes arises from our debt
agreements with variable market interest rates. To reduce our
exposure to interest rate changes on variable-rate debt, we had
entered into interest rate swap agreements. These swaps
effectively converted a portion of our variable-rate debt to a
fixed rate. In the third quarter of 2010, in conjunction with
repayment of our remaining outstanding term loans, we settled
these swaps.
37
Table of Contents
We manage foreign currency risks in a wide variety of foreign
currencies principally by entering into forward contracts to
mitigate the impact of currency fluctuations on transactions
arising from international trade. Our objective in entering into
these forward contracts is to preserve the economic value of
non-functional currency cash flows. Our principal foreign
currency exposures relate to the Euro, the British Pound
Sterling, the Japanese Yen, and the Chinese Yuan. We mark these
forward contracts to fair value based on market prices for
comparable contracts and recognize the resulting gains or losses
as other income or expense from foreign currency transactions.
Precious metals (primarily silver, gold, platinum and palladium)
represent a significant portion of raw material costs in our
Electronic Materials products. We also use precious metals in
our Color and Glass Performance Materials products. When we
enter into a fixed price sales contract at the customer’s
request to establish the price for the precious metals content
of the order, we also enter into a forward purchase arrangement
with a precious metals supplier to completely cover the value of
the precious metals content. Our current precious metal
contracts are designated as normal purchase contracts, which are
not marked to market.
We also purchase portions of our energy requirements, including
natural gas and electricity, under fixed price contracts to
reduce the volatility of cost changes. Our current energy
contracts are designated as normal purchase contracts, which are
not marked to market.
Pension
and Other Postretirement Benefits
We sponsor defined benefit plans in the U.S. and many
countries outside the U.S., and we also sponsor retiree medical
benefits for a segment of our salaried and hourly work force
within the U.S. The U.S. pension plans represent
approximately 82% of pension plan assets, 78% of benefit
obligations and 53% of net periodic pension cost.
The assumptions we use in actuarial calculations for these plans
have a significant impact on benefit obligations and annual net
periodic benefit costs. We meet with our actuaries annually to
discuss key economic assumptions used to develop these benefit
obligations and net periodic costs. In accordance with
U.S. GAAP, actual results that differ from the assumptions
are accumulated and amortized over future periods and,
therefore, affect expense recognized and obligations recorded in
future periods.
We determine the discount rate for the U.S. pension and
retiree medical plans based on a bond model. Using the pension
plans’ projected cash flows, the bond model considers all
possible bond portfolios that produce matching cash flows and
selects the portfolio with the highest possible yield. These
portfolios are based on bonds with a quality rating of AA or
better under either Moody’s Investor Services, Inc. or
Standard & Poor’s Rating Group, but exclude
certain bonds, such as callable bonds, bonds with small amounts
outstanding, and bonds with unusually high or low yields. The
discount rates for the
non-U.S. plans
are based on a yield curve method, using AA-rated bonds
applicable in respective capital markets. The duration of each
plan’s liabilities is used to select the rate from the
yield curve corresponding to the same duration.
For the market-related value of plan assets, we use fair value,
rather than a calculated value that recognizes changes in fair
value in a systematic and rational manner over several years. We
calculate the expected return on assets at the beginning of the
year for defined benefit plans 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, we consider 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. Our target asset allocation
percentages are 30% fixed income and 70% equity investments for
U.S. plans and 73% fixed income, 24% equity, and 3% other
investments for
non-U.S. plans.
In 2010, investment returns on average plan assets were
approximately 12% within U.S. plans and 10% within
non-U.S. plans.
Future actual pension expense will depend on future investment
allocation and performance, changes in future discount rates and
various other factors related to the population of participants
in the Company’s pension plans.
38
Table of Contents
All other assumptions are reviewed periodically by our actuaries
and us and may be adjusted based on current trends and
expectations as well as past experience in the plans.
The following table provides the sensitivity of net annual
periodic benefit costs for our 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 in
|
25-Basis-Point Decrease in
|
|||||||
| Discount Rate | Asset Return Assumption | |||||||
| (Dollars in thousands) | ||||||||
|
U.S. pension plans
|
$ 1,241 | $ 645 | ||||||
|
U.S. retiree medical plan
|
4 | — | ||||||
|
Non-U.S.
pension plans
|
252 | 141 | ||||||
|
Total
|
$ 1,497 | $ 786 | ||||||
The following table provides the rates used in the assumptions
and the changes between 2010 and 2009:
| 2010 | 2009 | Change | |||||||
|
Discount rate used to measure benefit cost:
|
|||||||||
|
U.S. pension plans
|
6.20% | 6.74% | (0.54)% | ||||||
|
U.S. retiree medical plan
|
5.85% | 6.45% | (0.60)% | ||||||
|
Non-U.S.
pension plans
|
5.88% | 5.85% | 0.03% | ||||||
|
Discount rate used to measure benefit obligations:
|
|||||||||
|
U.S. pension plans
|
5.85% | 6.20% | (0.35)% | ||||||
|
U.S. retiree medical plan
|
5.45% | 5.85% | (0.40)% | ||||||
|
Non-U.S.
pension plans
|
5.51% | 5.88% | (0.37)% | ||||||
|
Expected return on plan assets:
|
|||||||||
|
U.S. pension plans
|
8.50% | 8.50% | —% | ||||||
|
Non-U.S.
pension plans
|
5.28% | 5.24% | 0.04% | ||||||
Our overall net periodic benefit cost for all defined benefit
plans decreased $0.6 million to $29.4 million in 2010
from $30.0 million in 2009. In 2010, amortization of
unrecognized net actuarial losses decreased by
$3.6 million, primarily because the beginning of the year
unrecognized net actuarial losses decreased by
$28.1 million from the prior year. These unrecognized
losses arise from differences between actual and assumed results
and from changes in actuarial assumptions and are recognized in
future periods. In addition, our expected return on plan asset
increased by $2.5 million due to higher asset balances
largely resulting from market gains in 2009, the interest
component of net periodic benefit cost decreased
$1.5 million primarily due to lower discount rates, and
service costs decreased $1.0 million as a result of various
restructuring activities. These favorable effects were mostly
offset by an increase of $7.6 million in net settlement and
curtailment losses, led by a settlement loss of
$12.2 million related to establishing a fully insured
arrangement for benefit obligations at Rotterdam, Netherlands.
For 2011, we expect our overall net periodic benefit cost to
decrease to approximately $19 million, a decrease of
$10 million. In 2010, we recorded $6.4 million of
one-time net curtailment and settlement losses. In addition,
these curtailments and settlements were the primary drivers of a
$93.0 million decrease during 2010 in our
non-U.S. plans’
benefit obligation. This decrease in the benefit obligation will
reduce 2011 interest cost in our
non-U.S. plans
by $4.5 million.
39
Table of Contents
Inventories
We value inventory at the lower of cost or market, with cost
determined utilizing the
first-in,
first-out (FIFO) method. We periodically evaluate the net
realizable value of inventories based primarily upon their age,
but also upon assumptions of future usage in production,
customer demand and market conditions. Inventories have been
reduced to the lower of cost or realizable value by allowances
for slow moving or obsolete goods. If actual circumstances are
less favorable than those projected by management in its
evaluation of the net realizable value of inventories,
additional write-downs may be required. Slow moving, excess or
obsolete materials are specifically identified and may be
physically separated from other materials, and we rework or
dispose of these materials as time and manpower permit.
Environmental
Liabilities
Our manufacturing facilities are subject to a broad array of
environmental laws and regulations in the countries in which
they operate. The costs to comply with complex environmental
laws and regulations are significant and will continue for the
foreseeable future. We expense these recurring costs as they are
incurred. While these costs may increase in the future, they are
not expected to have a material impact on our financial
position, liquidity or results of operations.
We also accrue for environmental remediation costs when it is
probable that a liability has been incurred and we can
reasonably estimate the amount. We determine the timing and
amount of any liability based upon assumptions regarding future
events. Inherent uncertainties exist in such evaluations
primarily due to unknown conditions, changing governmental
regulations and legal standards regarding liability, and
evolving technologies. We adjust these liabilities periodically
as remediation efforts progress or as additional technical or
legal information becomes available.
Impact
of Newly Issued Accounting Pronouncements
Refer to Note 2 to the consolidated financial statements
under Item 8 of this Annual Report on
Form 10-K
for a discussion of accounting standards we recently adopted or
will be required to adopt.
| Item 7A — | Quantitative and Qualitative Disclosures about Market Risk |
The primary objective of the following information is to provide
forward-looking quantitative and qualitative information about
our exposure to instruments that are sensitive to fluctuations
in interest rates, foreign currency exchange rates, and costs of
raw materials and energy.
Our exposure to interest rate risk arises from our debt
portfolio. We manage this risk by controlling the mix of fixed
versus variable-rate debt after considering the interest rate
environment and expected future cash flows. Our objective is to
limit variability in earnings, cash flows and overall borrowing
costs caused by changes in interest rates, while preserving
operating flexibility. To reduce our exposure to interest rate
changes on variable-rate debt, we had entered into interest rate
swap agreements. These swaps effectively converted a portion of
our variable-rate debt to a fixed rate. In August 2010, in
conjunction with repayment of our remaining outstanding term
loans, we settled these swaps.
We operate internationally and enter into transactions
denominated in foreign currencies. These transactions expose us
to gains and losses arising from exchange rate movements between
the dates foreign currencies are recorded and the dates they are
settled. We manage this risk by entering into forward currency
contracts that offset these gains and losses.
We are subject to cost changes with respect to our raw materials
and energy purchases. We attempt to mitigate raw materials cost
increases through product reformulations, price increases, and
other productivity improvements. We enter into forward purchase
arrangements with precious metals suppliers to completely cover
the value of the
40
Table of Contents
precious metals content of fixed price sales contracts. These
agreements are designated as normal purchase contracts, which
are not marked to market, and had purchase commitments totaling
$22.7 million at December 31, 2010. In addition, we
purchase portions of our natural gas and electricity
requirements under fixed price contracts to reduce the
volatility of these costs. These energy contracts are designated
as normal purchase contracts, which are not marked to market,
and had purchase commitments totaling $25.1 million at
December 31, 2010.
The notional amounts, carrying amounts of assets (liabilities),
and fair values associated with our exposure to these market
risks and sensitivity analyses about potential gains (losses)
resulting from hypothetical changes in market rates are
presented below:
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
|
Variable-rate debt and utilization of asset securitization
program:
|
||||||||
|
Change in annual interest expense from 1% change in interest
rates
|
$ | 41 | $ | 1,170 | ||||
|
Fixed-rate debt:
|
||||||||
|
Carrying amount
|
283,368 | 161,050 | ||||||
|
Fair value
|
302,942 | 160,275 | ||||||
|
Change in fair value from 1% increase in interest rate
|
(15,635 | ) | (4,814 | ) | ||||
|
Change in fair value from 1% decrease in interest rate
|
16,759 | 5,000 | ||||||
|
Foreign currency forward contracts:
|
||||||||
|
Notional amount
|
187,291 | 178,922 | ||||||
|
Carrying amount and fair value
|
(240 | ) | 723 | |||||
|
Change in fair value from 10% appreciation of U.S. dollar
|
7,735 | 5,571 | ||||||
|
Change in fair value from 10% depreciation of U.S. dollar
|
(9,454 | ) | (6,809 | ) | ||||
|
Interest rate swaps:
|
||||||||
|
Notional amount
|
— | 150,000 | ||||||
|
Carrying amount and fair value
|
— | (9,516 | ) | |||||
|
Change in fair value from 1% increase in interest rate
|
— | 2,226 | ||||||
|
Change in fair value from 1% decrease in interest rate
|
— | (2,263 | ) | |||||
41
Table of Contents
| 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, 2010 and 2009, and the related consolidated
statements of operations, equity, and cash flows for each of the
three years in the period ended December 31, 2010. Our
audits also included the financial statement schedule listed in
the index at Item 15. These financial statements and
financial statement schedule are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on the 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, such consolidated financial statements present
fairly, in all material respects, the financial position of
Ferro Corporation and subsidiaries as of December 31, 2010
and 2009, and the results of their operations and their cash
flows for each of the three years in the period ended
December 31, 2010, in conformity with accounting principles
generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as
a whole, presents fairly, in all material respects, the
information set forth therein.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of
December 31, 2010, based on criteria established in
Internal Control - Integrated Framework
issued by the
Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated February 28, 2011,
expressed an unqualified opinion on the Company’s internal
control over financial reporting.
/s/ Deloitte & Touche LLP
Cleveland, Ohio
February 28, 2011
42
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands, except per share amounts) | ||||||||||||
|
Net sales
|
$ | 2,101,865 | $ | 1,657,569 | $ | 2,245,152 | ||||||
|
Cost of sales
|
1,643,200 | 1,343,297 | 1,841,485 | |||||||||
|
Gross profit
|
458,665 | 314,272 | 403,667 | |||||||||
|
Selling, general and administrative expenses
|
293,736 | 272,259 | 297,119 | |||||||||
|
Restructuring and impairment charges
|
63,732 | 19,337 | 106,142 | |||||||||
|
Other expense (income):
|
||||||||||||
|
Interest expense
|
44,568 | 63,918 | 51,290 | |||||||||
|
Interest earned
|
(651 | ) | (896 | ) | (714 | ) | ||||||
|
Losses on extinguishment of debt
|
23,001 | — | 5,531 | |||||||||
|
Foreign currency losses, net
|
4,724 | 3,827 | 742 | |||||||||
|
Miscellaneous expense (income), net
|
5,814 | (618 | ) | (357 | ) | |||||||
|
Income (loss) before income taxes
|
23,741 | (43,555 | ) | (56,086 | ) | |||||||
|
Income tax expense (benefit)
|
16,468 | (3,515 | ) | (3,204 | ) | |||||||
|
Income (loss) from continuing operations
|
7,273 | (40,040 | ) | (52,882 | ) | |||||||
|
Income from discontinued operations, net of income taxes
|
— | — | 5,014 | |||||||||
| (Loss) gain on disposal of discontinued operations, net of income taxes | — | (325 | ) | 9,034 | ||||||||
|
Net income (loss)
|
7,273 | (40,365 | ) | (38,834 | ) | |||||||
|
Less: Net income attributable to noncontrolling interests
|
1,577 | 2,551 | 1,596 | |||||||||
|
Net income (loss) attributable to Ferro Corporation
|
5,696 | (42,916 | ) | (40,430 | ) | |||||||
|
Dividends on preferred stock
|
(660 | ) | (705 | ) | (877 | ) | ||||||
| Net income (loss) attributable to Ferro Corporation common shareholders | $ | 5,036 | $ | (43,621 | ) | $ | (41,307 | ) | ||||
|
Amounts attributable to Ferro Corporation:
|
||||||||||||
|
Income (loss) from continuing operations, net of income tax
|
$ | 5,696 | $ | (42,591 | ) | $ | (54,478 | ) | ||||
|
(Loss) income from discontinued operations, net of income tax
|
— | (325 | ) | 14,048 | ||||||||
|
Net income (loss) attributable to Ferro Corporation
|
$ | 5,696 | $ | (42,916 | ) | $ | (40,430 | ) | ||||
|
Weighted-average common shares outstanding
|
85,823 | 50,935 | 43,261 | |||||||||
| Incremental common shares attributable to convertible preferred stock, performance shares, deferred stock units, and stock options | 716 | — | — | |||||||||
|
Weighted-average diluted shares outstanding
|
86,539 | 50,935 | 43,261 | |||||||||
|
Per common share data
|
||||||||||||
|
Basic earnings (loss) attributable to Ferro Corporation common
shareholders:
|
||||||||||||
|
From continuing operations
|
$ | 0.06 | $ | (0.85 | ) | $ | (1.28 | ) | ||||
|
From discontinued operations
|
— | (0.01 | ) | 0.33 | ||||||||
| $ | 0.06 | $ | (0.86 | ) | $ | (0.95 | ) | |||||
|
Diluted earnings (loss) attributable to Ferro Corporation common
shareholders:
|
||||||||||||
|
From continuing operations
|
$ | 0.06 | $ | (0.85 | ) | $ | (1.28 | ) | ||||
|
From discontinued operations
|
— | (0.01 | ) | 0.33 | ||||||||
| $ | 0.06 | $ | (0.86 | ) | $ | (0.95 | ) | |||||
See accompanying notes to consolidated financial statements.
43
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
|
ASSETS
|
||||||||
|
Current assets
|
||||||||
|
Cash and cash equivalents
|
$ | 29,035 | $ | 18,507 | ||||
|
Accounts receivable, net
|
302,448 | 285,638 | ||||||
|
Inventories
|
202,067 | 180,700 | ||||||
|
Deposits for precious metals
|
28,086 | 112,434 | ||||||
|
Deferred income taxes
|
24,924 | 19,618 | ||||||
|
Other receivables
|
27,762 | 27,795 | ||||||
|
Other current assets
|
7,432 | 7,180 | ||||||
|
Total current assets
|
621,754 | 651,872 | ||||||
|
Other assets
|
||||||||
|
Property, plant and equipment, net
|
391,496 | 432,405 | ||||||
|
Goodwill
|
219,716 | 221,044 | ||||||
|
Amortizable intangible assets, net
|
11,869 | 10,610 | ||||||
|
Deferred income taxes
|
121,640 | 133,705 | ||||||
|
Other non-current assets
|
67,880 | 76,719 | ||||||
|
Total assets
|
$ | 1,434,355 | $ | 1,526,355 | ||||
| LIABILITIES and EQUITY | ||||||||
|
Current liabilities
|
||||||||
|
Loans payable and current portion of long-term debt
|
$ | 3,580 | $ | 24,737 | ||||
|
Accounts payable
|
207,770 | 196,038 | ||||||
|
Income taxes
|
8,823 | 7,241 | ||||||
|
Accrued payrolls
|
49,590 | 33,346 | ||||||
|
Accrued expenses and other current liabilities
|
75,912 | 59,587 | ||||||
|
Total current liabilities
|
345,675 | 320,949 | ||||||
|
Other liabilities
|
||||||||
|
Long-term debt, less current portion
|
290,971 | 398,720 | ||||||
|
Postretirement and pension liabilities
|
189,058 | 203,743 | ||||||
|
Deferred income taxes
|
2,211 | 1,124 | ||||||
|
Other non-current liabilities
|
22,833 | 31,897 | ||||||
|
Total liabilities
|
850,748 | 956,433 | ||||||
|
Series A convertible preferred stock (approximates
redemption value)
|
9,427 | 9,427 | ||||||
|
Equity
|
||||||||
|
Ferro Corporation shareholders’ equity:
|
||||||||
|
Common stock
|
93,436 | 93,436 | ||||||
|
Paid-in capital
|
323,015 | 331,376 | ||||||
|
Retained earnings
|
362,164 | 357,128 | ||||||
|
Accumulated other comprehensive loss
|
(50,949 | ) | (60,147 | ) | ||||
|
Common shares in treasury, at cost
|
(164,257 | ) | (171,567 | ) | ||||
|
Total Ferro Corporation shareholders’ equity
|
563,409 | 550,226 | ||||||
|
Noncontrolling interests
|
10,771 | 10,269 | ||||||
|
Total equity
|
574,180 | 560,495 | ||||||
|
Total liabilities and equity
|
$ | 1,434,355 | $ | 1,526,355 | ||||
See accompanying notes to consolidated financial statements.
44
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF EQUITY
| Ferro Corporation Shareholders | ||||||||||||||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||||||||||||||
|
Common Shares In
|
Other
|
Non-
|
||||||||||||||||||||||||||||||
| Treasury |
Common
|
Paid-in
|
Retained
|
Comprehensive
|
controlling
|
Total
|
||||||||||||||||||||||||||
| Shares | Amount | Stock | Capital | Earnings | Income (Loss)(a) | Interests | Equity | |||||||||||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||||||||||||||
|
Balances at December 31, 2007
|
8,753 | $ | (202,855 | ) | $ | 52,323 | $ | 166,391 | $ | 468,190 | $ | (7,765 | ) | $ | 9,896 | $ | 486,180 | |||||||||||||||
|
Net (loss) income
|
(40,430 | ) | 1,596 | (38,834 | ) | |||||||||||||||||||||||||||
|
Other comprehensive income (loss), net of tax:
|
||||||||||||||||||||||||||||||||
|
Foreign currency translation
|
(23,490 | ) | 300 | (23,190 | ) | |||||||||||||||||||||||||||
|
Postretirement benefit liabilities
|
(65,235 | ) | 20 | (65,215 | ) | |||||||||||||||||||||||||||
|
Raw material commodity swaps
|
713 | 713 | ||||||||||||||||||||||||||||||
|
Interest rate swaps
|
(2,973 | ) | (2,973 | ) | ||||||||||||||||||||||||||||
|
Other
|
(52 | ) | (52 | ) | ||||||||||||||||||||||||||||
|
Total comprehensive loss
|
(129,551 | ) | ||||||||||||||||||||||||||||||
|
Cash dividends(b):
|
||||||||||||||||||||||||||||||||
|
Common
|
(25,192 | ) | (25,192 | ) | ||||||||||||||||||||||||||||
|
Preferred
|
(877 | ) | (877 | ) | ||||||||||||||||||||||||||||
|
Issuance of Convertible Notes
|
12,409 | 12,409 | ||||||||||||||||||||||||||||||
| Stock-based compensation transactions | (321 | ) | 5,331 | (423 | ) | 4,908 | ||||||||||||||||||||||||||
|
Income tax benefits
|
43 | 43 | ||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | (2,057 | ) | (2,057 | ) | ||||||||||||||||||||||||||||
|
Adjustment to apply FAS No. 158
as of January 1, 2008, net of tax |
(505 | ) | 366 | (139 | ) | |||||||||||||||||||||||||||
|
Balances at December 31, 2008
|
8,432 | (197,524 | ) | 52,323 | 178,420 | 401,186 | (98,436 | ) | 9,755 | 345,724 | ||||||||||||||||||||||
|
Net (loss) income
|
(42,916 | ) | 2,551 | (40,365 | ) | |||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||||||||||||||||||||
|
Foreign currency translation
|
14,250 | (2 | ) | 14,248 | ||||||||||||||||||||||||||||
|
Postretirement benefit liabilities
|
21,387 | 21,387 | ||||||||||||||||||||||||||||||
|
Raw material commodity swaps
|
579 | 579 | ||||||||||||||||||||||||||||||
|
Interest rate swaps
|
2,073 | 2,073 | ||||||||||||||||||||||||||||||
|
Total comprehensive loss
|
(2,078 | ) | ||||||||||||||||||||||||||||||
|
Issuance of common stock
|
41,113 | 174,542 | 215,655 | |||||||||||||||||||||||||||||
|
Cash dividends(b):
|
||||||||||||||||||||||||||||||||
|
Common
|
(437 | ) | (437 | ) | ||||||||||||||||||||||||||||
|
Preferred
|
(705 | ) | (705 | ) | ||||||||||||||||||||||||||||
| Stock-based compensation transactions | (1,057 | ) | 25,957 | (21,586 | ) | 4,371 | ||||||||||||||||||||||||||
| Distributions to noncontrolling interests | (2,035 | ) | (2,035 | ) | ||||||||||||||||||||||||||||
|
Balances at December 31, 2009
|
7,375 | (171,567 | ) | 93,436 | 331,376 | 357,128 | (60,147 | ) | 10,269 | 560,495 | ||||||||||||||||||||||
|
Net income
|
5,696 | 1,577 | 7,273 | |||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||||||||||||||||||||
|
Foreign currency translation
|
(2,141 | ) | 170 | (1,971 | ) | |||||||||||||||||||||||||||
|
Postretirement benefit liabilities
|
5,325 | (7 | ) | 5,318 | ||||||||||||||||||||||||||||
|
Raw material commodity swaps
|
(107 | ) | (107 | ) | ||||||||||||||||||||||||||||
|
Interest rate swaps
|
6,121 | 6,121 | ||||||||||||||||||||||||||||||
|
Total comprehensive income
|
16,634 | |||||||||||||||||||||||||||||||
|
Cash dividends(b):
|
||||||||||||||||||||||||||||||||
|
Preferred
|
(660 | ) | (660 | ) | ||||||||||||||||||||||||||||
|
Redemption of Convertible Notes
|
(4,925 | ) | (4,925 | ) | ||||||||||||||||||||||||||||
| Stock-based compensation transactions | (133 | ) | 7,310 | (3,436 | ) | 3,874 | ||||||||||||||||||||||||||
| Distributions to noncontrolling interests | (1,238 | ) | (1,238 | ) | ||||||||||||||||||||||||||||
|
Balances at December 31, 2010
|
7,242 | $ | (164,257 | ) | $ | 93,436 | $ | 323,015 | $ | 362,164 | $ | (50,949 | ) | $ | 10,771 | $ | 574,180 | |||||||||||||||
| (a) | Accumulated translation adjustments were $24,129, $26,270, and $12,020, accumulated postretirement benefit liability adjustments were $(75,026), $(80,351), and $(101,738), accumulated raw material commodity swap adjustments were $-0-, $108, and $(471), and accumulated interest rate swap adjustments were $-0-, $(6,122), and $(8,195), at December 31, 2010, 2009, and 2008, respectively, all net of tax. | |
| (b) | Dividends per share of common stock were $-0- in 2010, $0.01 in 2009, and $0.58 in 2008. Dividends per share of convertible preferred stock were $3.25 in 2010, 2009, and 2008. |
See accompanying notes to consolidated financial statements.
45
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Cash flows from operating activities
|
||||||||||||
|
Net income (loss)
|
$ | 7,273 | $ | (40,365 | ) | $ | (38,834 | ) | ||||
|
Adjustments to reconcile net income (loss) to net cash provided
by (used for) operating activities:
|
||||||||||||
|
Loss (gain) from discontinued operations, net of tax
|
— | 325 | (14,048 | ) | ||||||||
|
(Gain) loss on sale of assets and businesses
|
(2,330 | ) | 28 | 2,598 | ||||||||
|
Depreciation and amortization
|
76,936 | 88,138 | 74,595 | |||||||||
|
Restructuring and impairment charges
|
3,174 | 6,486 | 80,556 | |||||||||
|
Losses on extinguishment of debt
|
23,001 | — | 5,531 | |||||||||
|
Provision for allowance for doubtful accounts
|
2,935 | 2,676 | 5,843 | |||||||||
|
Retirement benefits
|
(1,630 | ) | 8,890 | (15,254 | ) | |||||||
|
Deferred income taxes
|
(5,258 | ) | (12,747 | ) | (14,105 | ) | ||||||
|
Changes in current assets and liabilities, net of effects of
acquisitions:
|
||||||||||||
|
Accounts and trade notes receivable
|
(24,697 | ) | 12,351 | 30,455 | ||||||||
|
Note receivable from Ferro Finance Corporation
|
— | — | (46,344 | ) | ||||||||
|
Inventories
|
(22,654 | ) | 76,254 | (6,462 | ) | |||||||
|
Deposits for precious metals
|
84,348 | (112,434 | ) | — | ||||||||
|
Other receivables and other current assets
|
(890 | ) | 31,566 | (23,137 | ) | |||||||
|
Accounts payable
|
12,618 | (29,230 | ) | (27,185 | ) | |||||||
|
Accrued expenses and other current liabilities
|
36,750 | (17,367 | ) | (23,898 | ) | |||||||
|
Other operating activities
|
9,289 | (12,091 | ) | (2,692 | ) | |||||||
|
Net cash provided by (used for) continuing operations
|
198,865 | 2,480 | (12,381 | ) | ||||||||
|
Net cash (used for) provided by discontinued operations
|
— | (329 | ) | 3,285 | ||||||||
|
Net cash provided by (used for) operating activities
|
198,865 | 2,151 | (9,096 | ) | ||||||||
|
Cash flows from investing activities
|
||||||||||||
|
Capital expenditures for plant and equipment of continuing
operations
|
(44,737 | ) | (43,260 | ) | (70,751 | ) | ||||||
|
Capital expenditures for plant and equipment of discontinued
operations
|
— | — | (2,317 | ) | ||||||||
|
Expenditures for other assets
|
— | — | (3,400 | ) | ||||||||
|
Expenditures for acquisitions, net of cash acquired
|
(6,938 | ) | — | — | ||||||||
|
Proceeds from sale of assets and businesses
|
18,214 | 483 | 2,360 | |||||||||
|
Net proceeds from sale of discontinued operations
|
— | — | 56,484 | |||||||||
|
Other investing activities
|
139 | 123 | 574 | |||||||||
|
Net cash used for investing activities
|
(33,322 | ) | (42,654 | ) | (17,050 | ) | ||||||
|
Cash flows from financing activities
|
||||||||||||
|
Net (repayments) borrowings under loans payable
|
(21,495 | ) | 15,462 | 3,687 | ||||||||
|
Proceeds from long-term debt
|
632,299 | 903,886 | 1,196,674 | |||||||||
|
Net proceeds from sale of common stock
|
— | 215,655 | — | |||||||||
|
Principal payments on long-term debt
|
(392,061 | ) | (1,075,102 | ) | (935,680 | ) | ||||||
|
Extinguishment of debt
|
(362,997 | ) | — | (205,269 | ) | |||||||
|
Debt issue costs
|
(9,848 | ) | (16,863 | ) | (5,570 | ) | ||||||
|
Cash dividends
|
(660 | ) | (1,142 | ) | (26,069 | ) | ||||||
|
Proceeds from exercise of stock options
|
137 | — | 58 | |||||||||
|
Other financing activities
|
(2,639 | ) | 4,729 | (3,977 | ) | |||||||
|
Net cash (used for) provided by financing activities
|
(157,264 | ) | 46,625 | 23,854 | ||||||||
|
Effect of exchange rate changes on cash and cash equivalents
|
2,249 | 2,194 | 458 | |||||||||
|
Increase (decrease) in cash and cash equivalents
|
10,528 | 8,316 | (1,834 | ) | ||||||||
|
Cash and cash equivalents at beginning of period
|
18,507 | 10,191 | 12,025 | |||||||||
|
Cash and cash equivalents at end of period
|
$ | 29,035 | $ | 18,507 | $ | 10,191 | ||||||
|
Cash paid during the period for:
|
||||||||||||
|
Interest
|
$ | 31,881 | $ | 51,505 | $ | 52,670 | ||||||
|
Income taxes
|
20,379 | 10,145 | 10,308 | |||||||||
See accompanying notes to consolidated financial statements.
46
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and 2008
| 1. | Our Business |
Ferro Corporation (“Ferro,” “we,”
“us” or “the Company”) produces performance
materials for a broad range of manufacturers in diversified
industries throughout the world. Our 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 our
customers. We use inorganic chemical processes, polymer science
and materials science to develop and produce these performance
materials. Performance materials require a high degree of
technical service on an individual customer basis. The value of
our products stems from the results and performance they achieve
in actual use. We manage our diverse businesses through seven
business units that are differentiated from one another by
product type. We have grouped these units by their product group
below:
|
Polymer and Ceramic Engineered
Materials
|
Electronic, Color and Glass
Materials
|
|
|
• Polymer Additives
|
• Electronic Materials | |
|
• Specialty Plastics
|
• Color and Glass Performance Materials | |
|
• Pharmaceuticals
|
||
|
• Tile Coating Systems
|
||
|
• Porcelain Enamel
|
We produce our products primarily in the United States
(“U.S.”), Europe, the Asia-Pacific region, and Latin
America.
We sell our products directly to customers or through the use of
agents or distributors throughout the world. Our products are
sold principally in the U.S., Europe, the Asia-Pacific region,
and Latin America. Our customers manufacture products to serve a
variety of end markets, including building and renovation,
electronics, automobiles, appliances, household furnishings,
packaging, industrial products, and pharmaceuticals.
| 2. | Significant Accounting Policies |
Principles
of Consolidation
Our consolidated financial statements include the accounts of
the parent company and the accounts of its subsidiaries. When we
consolidate our financial statements, we eliminate intercompany
transactions, accounts and profits. When we exert significant
influence over an investee but do not control it, we account for
the investment and the investment income using the equity
method. These investments are reported in the other non-current
assets section of our balance sheet. When we acquire a
subsidiary, its financial results are included in our
consolidated financial statements from the date of the
acquisition. When we dispose of a subsidiary, its financial
results are included in our consolidated financial statements
until the date of the disposition.
Use of
Estimates and Assumptions in the Preparation of Financial
Statements
We prepare our consolidated financial statements in conformity
with United States Generally Accepted Accounting Principles,
which requires us to make estimates and to use judgments and
assumptions that affect the timing and amount of assets,
liabilities, equity, revenues and expenses recorded and
disclosed. The more significant estimates and judgments relate
to revenue recognition, restructuring and cost reduction
programs, goodwill, income taxes, derivative financial
instruments, pension and other postretirement benefits,
inventories, and environmental liabilities. Actual outcomes
could differ from our estimates, resulting in changes in
revenues or costs that could have a material impact on the
Company’s results of operations, financial position, or
cash flows.
47
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
Foreign
Currency Translation
The financial results of our operations outside of the
U.S. are recorded in local currencies, which generally are
also the functional currencies for financial reporting purposes.
The results of operations outside of the U.S. are
translated from these local currencies into U.S. dollars
using the average monthly currency exchange rates. We use the
average currency exchange rate for these results of operations
as a reasonable approximation of the results had specific
currency exchange rates been used for each individual
transaction. Assets and liabilities are translated into
U.S. dollars using exchange rates at the balance sheet
dates, and we record the resulting foreign currency translation
adjustment as a separate component of accumulated other
comprehensive loss in shareholders’ equity.
Foreign currency transaction gains and losses are recorded as
incurred as other expense (income) in the consolidated
statements of operations.
Revenue
Recognition
We typically recognize sales when we ship goods to our customers
and when all of the following criteria are met:
| • | Persuasive evidence of an arrangement exists; | |
| • | The selling price is fixed and determinable; | |
| • | Collection is reasonably assured; and | |
| • | Title and risk of loss has passed to our customers. |
In order to ensure the revenue recognition in the proper period,
we review material sales contracts for proper cut-off based upon
the business practices and legal requirements of each country.
For sales of all products, including those containing precious
metals, we report revenues gross along with their corresponding
cost of sales to arrive at gross profit. We record revenues this
way because we act as the principal in the transactions we enter
into and take title and the risks and rewards of ownership of
the inventory we process, although the timing of when we take
title to inventory during the production process may vary.
The amount of shipping and handling fees invoiced to our
customers at the time our product is shipped is included in net
sales. Credit memos issued to customers for sales returns,
discounts allowed and sales adjustments are recorded when they
are incurred as a reduction of sales. We use estimated
allowances to state the related accounts receivable at their net
realizable value.
Additionally, we provide certain of our customers with incentive
rebate programs to promote customer loyalty and encourage
greater product sales. We accrue customer rebates over the
rebate periods based upon estimated attainments of the
provisions in the rebate agreements using available information
and record these rebate accruals as reductions of sales.
Cost
of Sales
We include in cost of sales the purchased cost of raw materials,
and labor and overhead directly associated with the production
process. Cost of sales also includes shipping and handling
costs, financing costs associated with precious metals,
purchasing and receiving costs, depreciation and leasing costs
of buildings and equipment used in production, utilities,
operating parts and supplies, warehousing costs, internal
transfer costs, other costs of distribution, costs of hazardous
materials control and disposal, physical inventory adjustments,
and obsolescence and rework costs.
48
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
Cost of sales is initially recorded using standard costs, which
are generally established at least annually to fully absorb
qualifying production costs into inventory based on normal
production capacity. Production variances related to volume,
rework, and other production inefficiencies are expensed as
incurred. We review manufacturing costs periodically to ensure
that only those costs that clearly relate to production and that
increase the economic utility of the related inventories are
capitalized into inventory. We adjust the standard cost of
inventory at the balance sheet date to actual by applying
material purchase price and the appropriate production variances
most recently incurred.
Selling,
General and Administrative Expenses
Expenses for sales and administrative functions, including
salaries and wages, benefits, stock-based compensation, sales
commissions, bad debt expense, lease costs and depreciation
related to buildings and equipment not used in production, and
outside services such as legal, audit, tax, and consulting fees,
are included in selling, general and administrative expenses.
Research and development expenses are expensed as incurred and
are also included in selling, general and administrative
expenses. Amounts expended for development or significant
improvement of new or existing products, services and techniques
were $27.3 million for 2010, $28.3 million for 2009,
and $33.6 million for 2008.
Restructuring
Programs
We expense costs associated with exit and disposal activities
designed to restructure operations and reduce ongoing costs of
operations when we incur the related liabilities or when other
triggering events occur. After the appropriate level of
management having the authority approves the detailed
restructuring plan and the appropriate criteria for recognition
are met, we establish accruals for employee termination costs.
The accruals are estimates that are based upon factors including
statutory and union requirements, affected employees’
lengths of service, contract provisions, salary level, and
health care benefit choices. We also analyze the carrying value
of the affected long-lived assets for impairment and reductions
in their remaining estimated useful lives. In addition, we
record the fair value of any new or remaining obligations when
existing operating lease contracts are terminated or abandoned
as a result of our exit and disposal activities.
We believe our estimates and assumptions used to calculate these
restructuring provisions are appropriate, and although we do not
anticipate significant changes, actual costs could differ from
the estimates should we make changes in the nature or timing of
the restructuring plans. The changes in costs, as a result of
the eventual timing and number of employees receiving
termination benefits and the final disposition or closure of the
manufacturing facilities, could have a material impact on the
Company’s results of operations, financial position, or
cash flows.
Asset
Impairment
The Company’s long-lived assets include property, plant and
equipment, goodwill, and amortizable intangible assets. We
review these assets for impairment whenever events or
circumstances indicate that their carrying values may not be
recoverable. The following are examples of such events or
changes in circumstances:
| • | An adverse change in the business climate or market price of a long-lived asset or asset group; | |
| • | An adverse change in the extent or manner in which a long-lived asset or asset group is used or in its physical condition; | |
| • | Current operating losses for a long-lived asset or asset group combined with a history of such losses or projected or forecasted losses that demonstrate that the losses will be continuing; or |
49
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
| • | A current expectation that, more likely than not, a long-lived asset or asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. |
The carrying amount of long-lived assets, including amortizable
intangible assets, is not recoverable if the recorded value of
the asset group exceeds the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of the
asset group. In the event of impairment, we recognize a loss 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.
We review goodwill for impairment annually using a measurement
date of October 31st, primarily due to the timing of our
annual budgeting process, or more frequently in the event of an
impairment indicator. The fair value of each reporting unit that
has goodwill is estimated using the average of both the income
approach and the market approach, which we believe provides a
reasonable estimate of the reporting unit’s fair value,
unless facts or circumstances exist which indicate a more
representative fair value. The income approach is a discounted
cash flow model, which uses projected cash flows attributable to
the reporting unit, including an allocation of certain corporate
expenses based primarily on a proportional sales method. We use
historical results and trends and our projections of market
growth, internal sales efforts, input cost movements, and cost
reduction opportunities to estimate future cash flows. Using a
risk-adjusted, weighted-average cost of capital, we discount the
cash flow projections to the measurement date. The market
approach estimates a price reasonably expected to be realized
from the sale of the reporting units based on a comparison to
similar businesses. If the fair value of any of the reporting
units were determined to be less than its carrying value, we
would obtain comparable market values or independent appraisals
of its net assets.
Derivative
Financial Instruments
As part of our risk management activities, we employ derivative
financial instruments, primarily foreign currency forward
contracts, to hedge certain anticipated transactions, firm
commitments, or assets and liabilities denominated in foreign
currencies. We also purchase portions of our energy and precious
metal requirements under fixed price forward purchase contracts
designated as normal purchase contracts.
We record derivatives on our balance sheet as either assets or
liabilities that are measured at fair value. For derivative
instruments that are designated and qualify as hedges, the gain
or loss on the derivative is reported as a component of other
comprehensive income and reclassified from accumulated other
comprehensive income into earnings when the hedged transaction
affects earnings. The ineffective portion, if any, in the change
in value of these derivatives is immediately recognized in
earnings. For derivatives that are not designated as hedges, the
gain or loss on the derivative is recognized in current
earnings. We use derivatives only to manage well-defined risks
and do not use derivatives for speculative purposes.
Postretirement
and Other Employee Benefits
We recognize postretirement and other employee benefits as
employees render the services necessary to earn those benefits.
We determine defined benefit pension and other postretirement
benefit costs and obligations with the assistance of actuarial
calculations performed by third parties. The calculations and
the resulting amounts recorded in our consolidated financial
statements are affected by assumptions including the discount
rate, expected long-term rate of return on plan assets, the
annual rate of change in compensation for plan-eligible
employees, estimated changes in costs of healthcare benefits,
and other factors. We evaluate the assumptions used on an annual
basis.
50
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
Contingencies
We record loss contingencies when events that give rise to the
loss contingencies are probable and the amounts are reasonably
estimable. If a loss contingency is reasonably possible and the
amount of the loss is material, we disclose the item. If only a
range of possible losses can be estimated, we record the low end
of the range and disclose the possible range of outcomes.
However, if there is a best estimate of the amount of the loss
within the range, we will record that amount. Gain contingencies
are only recognized when their realization is assured beyond a
reasonable doubt.
Income
Taxes
We account for income taxes under the asset and liability
method, which requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of
events that have been included in the financial statements.
Under this method, deferred tax assets and liabilities are
determined based on the differences between the financial
statements and tax basis of assets and liabilities using enacted
tax rates in effect for the year in which the differences are
expected to reverse. The effect of a change in tax rates on
deferred tax assets and liabilities is recognized in income in
the period that includes the enactment date.
We record deferred tax assets to the extent we believe these
assets will more likely than not be realized. In making such
determination, we consider all available positive and negative
evidence, including future reversals of existing taxable
temporary differences, projected future taxable income, tax
planning strategies, and recent financial operations.
We recognize a tax benefit from an uncertain tax position when
it is more likely than not that the position will be sustained
upon examination, including resolutions of any related appeals
or litigation processes, based on the technical merits.
We recognize interest and penalties related to unrecognized tax
benefits within the income tax expense line in the accompanying
consolidated statements of operations.
Comprehensive
Income (Loss)
Comprehensive income (loss) includes charges and credits to
equity that are not the result of transactions with shareholders
or noncontrolling interests. Our total comprehensive income
(loss) consists of net income or loss, foreign currency
translation adjustments, postretirement benefit liability
adjustments, and adjustments for unrealized gains and losses on
derivative instruments that are designated and qualify as
hedges. The cumulative adjustments for foreign currency
translation, postretirement benefit liabilities, and derivative
instruments are included in accumulated other comprehensive
income (loss) in our consolidated balance sheets and statements
of equity.
Cash
Equivalents
We consider all highly liquid instruments with original
maturities of three months or less when purchased to be cash
equivalents. These instruments are carried at cost.
Accounts
Receivable and the Allowance for Doubtful Accounts
Ferro sells its products to customers in diversified industries
throughout the world. No customer or related group of customers
represents greater than 10% of net sales or accounts receivable.
We perform ongoing credit evaluations of our customers and
generally do not require collateral. We provide for
uncollectible accounts based on
51
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FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
historical experience and specific circumstances, as
appropriate. Customer accounts we deem to be uncollectible or to
require excessive collection costs are written off against the
allowance for doubtful accounts. Historically, write-offs of
uncollectible accounts have been within our expectations. When
Ferro Finance Corporation (“FFC”) was consolidated in
December 2008, the valuation allowance on Ferro’s note
receivable from FFC was combined with the valuation allowance on
accounts and trade notes receivable. Detailed information about
the allowance for doubtful accounts is provided below:
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Allowance for doubtful accounts
|
$ | 11,156 | $ | 10,685 | $ | 11,668 | ||||||
|
Bad debt expense
|
2,935 | 2,676 | 4,472 | |||||||||
Inventories
We value inventory at the lower of cost or market, with cost
determined utilizing the
first-in,
first-out (FIFO) method. We periodically evaluate the net
realizable value of inventories based primarily upon their age,
but also upon assumptions of future usage in production,
customer demand and market conditions. Inventories have been
reduced to the lower of cost or realizable value by allowances
for slow moving or obsolete goods. If actual circumstances are
less favorable than those projected by management in its
evaluation of the net realizable value of inventories,
additional write-downs may be required. Slow moving, excess or
obsolete materials are specifically identified and may be
physically separated from other materials, and we rework or
dispose of these materials as time and manpower permit.
We maintain raw material on our premises that we do not own,
including precious metals consigned from financial institutions
and customers, and raw materials consigned from vendors.
Although we have physical possession of the goods, their value
is not reflected on our balance sheet because we do not have
title.
We also obtain precious metals under consignment agreements with
financial institutions for periods of one year or less. These
precious metals are primarily silver, gold, platinum and
palladium and are used in the production of certain products for
our customers. Under these arrangements, the financial
institutions own the precious metals, and accordingly, we do not
report these precious metals as inventory on our consolidated
balance sheet although they physically are in our possession.
These agreements are cancelable by either party at the end of
each consignment period, however, because we have access to a
number of consignment arrangements with available capacity, our
consignment needs can be shifted among the other participating
institutions in order to ensure our supply. In certain cases,
these financial institutions require cash deposits to provide
additional collateral beyond the value of the underlying
precious metals. The financial institutions charge us fees for
these consignment arrangements, and these fees are recorded as
cost of sales.
Property,
Plant and Equipment
We record property, plant and equipment at historical cost. In
addition to the original purchased cost, including
transportation, installation and taxes, we capitalize
expenditures that increase the utility or useful life of
existing assets. For constructed assets, we capitalize interest
costs incurred during the period of construction. We expense
repair and maintenance costs, including the costs of major
planned overhauls of equipment, as incurred. We depreciate
property, plant and equipment on a straight-line basis,
generally over the following estimated useful lives of the
assets:
|
Buildings
|
20 to 40 years | |
|
Machinery and equipment
|
5 to 15 years |
52
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FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
We capitalize the costs of computer software developed or
obtained for internal use after the preliminary project stage
has been completed and management, with the relevant authority,
authorizes and commits to funding a computer software project,
and it is probable that the project will be completed and the
software will be used to perform the function intended. External
direct costs of materials and services consumed in developing or
obtaining internal-use computer software, payroll and
payroll-related costs for employees who are directly associated
with the project, and interest costs incurred when developing
computer software for internal use are capitalized.
Capitalization ceases when the project is substantially
complete, generally after all substantial testing is completed.
We expense training costs and data conversion costs as incurred.
We amortize software on a straight-line basis over its estimated
useful life, which has historically been in a range of 1 to
12 years.
Environmental
Liabilities
As part of the production of some of our products, we handle,
process, use and store hazardous materials. As part of these
routine processes, we expense recurring costs associated with
control and disposal of hazardous materials as they are
incurred. Occasionally we are subject to ongoing, pending or
threatened litigation related to the handling of these materials
or other matters. If, based on available information, we believe
that we have incurred a liability and we can reasonably estimate
the amount, we accrue for environmental remediation and other
contingent liabilities. We disclose material contingencies if
the likelihood of the potential loss is reasonably possible but
the amount is not reasonably estimable.
In estimating the amount to be accrued for environmental
remediation, we use assumptions about:
| • | Remediation requirements at the contaminated site; | |
| • | The nature of the remedy; | |
| • | Existing technology; | |
| • | The outcome of discussions with regulatory agencies; | |
| • | Other potentially responsible parties at multi-party sites; and | |
| • | The number and financial viability of other potentially responsible parties. |
We actively monitor the status of sites, and, as assessments and
cleanups proceed, we update our assumptions and adjust our
estimates as necessary. Because we are uncertain about the
timing of related payments, we do not discount the estimated
remediation costs.
Unanticipated government enforcement actions, differences in
actual results as compared with expected remediation outcomes,
changes in health, safety or environmental regulations, or
testing requirements could result in higher or lower costs and
changes to our estimates.
Reclassifications
We made reclassifications in the prior year consolidated
financial statements to conform the presentation to the current
year. In the statements of operations, impairment charges of
$8.2 million in 2009 and $80.2 million in 2008 and
restructuring charges of $11.1 million in 2009 and
$25.9 million in 2008 were combined into a single caption.
In the statements of cash flows, impairment charges of
$8.2 million in 2009 and $80.2 million in 2008 and
restructuring charges of $(1.7) million in 2009 and
$0.4 million in 2008 were combined into a single caption.
Also in the statements of cash flows, losses on extinguishment
of debt of $5.5 million in 2008 were reclassified from
other
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FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
operating activities. In the balance sheet, accrued payroll
taxes and employee benefits of $12.5 million at
December 31, 2009, were reclassified from accrued expenses
and other current liabilities to accrued payrolls.
Recently
Adopted Accounting Pronouncements
On January 1, 2008, we adopted the measurement provisions
of Financial Accounting Standards Board (“FASB”)
Statement No. 158,
Employers’ Accounting for
Defined Benefit Pension and Other Postretirement
Plans — an amendment of FASB Statements No. 87,
88, 106, and 132(R)
, (“FAS No. 158”),
which is codified primarily in
FASB Accounting Standards
Codification
tm
(“ASC”) Topic 715, Compensation — Retirement
Benefits. The measurement provisions require companies to
measure defined benefit plan assets and obligations as of the
annual balance sheet date. Previously, we used September 30 as
the measurement date for U.S. pension and other
postretirement benefits. We have elected to use the
September 30, 2007, measurement of assets and benefit
obligations to calculate the fiscal year 2008 expense. Expense
for the gap period from September 30 to December 31, 2007,
was recognized as of January 1, 2008, as a charge of
$0.5 million, net of tax, to retained earnings and a credit
of $0.4 million, net of tax, to accumulated other
comprehensive income.
On January 1, 2010, we adopted FASB Accounting Standards
Update (“ASU”)
2009-16,
Accounting for Transfers of Financial Assets
, (“ASU
2009-16”),
which is codified in ASC Topic 860, Transfers and Servicing.
This pronouncement provides guidance for derecognition of
transferred financial assets. Adoption of ASU
2009-16
had
no effect on our consolidated financial statements.
On January 1, 2010, we adopted ASU
2009-17,
Improvements to Financial Reporting by Enterprises Involved
with Variable Interest Entities
, (“ASU
2009-17”),
which is codified in ASC Topic 810, Consolidations. This
pronouncement amends the consolidation guidance that applies to
variable interest entities. Adoption of ASU
2009-17
did
not have a material effect on our consolidated financial
statements.
On January 1, 2010, we adopted most of the provisions of
ASU
2010-06,
Improving Disclosures About Fair Value Measurements
,
(“ASU
2010-06”),
which is codified in ASC Topic 820, Fair Value Measurements, and
Topic 715, Compensation — Retirement Benefits. The
remaining provisions will be effective for our fiscal year that
begins January 1, 2011. This pronouncement expands
disclosures about fair value measurements. Adoption of ASU
2010-06
did
not and will not have a material effect on our consolidated
financial statements.
On December 31, 2010, we adopted ASU
2010-29,
Disclosure of Supplementary Pro Forma Information for
Business Combinations
, (“ASU
2010-29”),
which is codified in ASC Topic 805, Business Combinations. This
pronouncement provides guidance on pro forma revenue and
earnings disclosure requirements for business combinations.
Adoption of ASU
2010-29
did
not have a material effect on our consolidated financial
statements.
New
Accounting Pronouncements Not Yet Adopted
In October 2009, the FASB issued ASU
2009-13,
Multiple Deliverable Revenue Arrangements
, (“ASU
2009-13”),
which applies to all deliverables in contractual arrangements in
which a vendor will perform multiple revenue-generating
activities. In April 2010, the FASB issued ASU
2010-17,
Revenue Recognition — Milestone Method
,
(“ASU
2010-17”),
which defines a milestone and determines when it may be
appropriate to apply the milestone method of revenue recognition
for research or development transactions. These pronouncements
are codified in ASC Topic 605, Revenue Recognition, and will be
effective for our fiscal year that begins January 1, 2011.
These pronouncements may be applied prospectively or
retrospectively, and early adoption is permitted. Adoption of
these pronouncements on January 1, 2011, will not have a
material effect on our consolidated financial statements.
54
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FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
| 3. | Inventories |
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
|
Raw materials
|
$ | 63,856 | $ | 54,481 | ||||
|
Work in process
|
38,684 | 37,449 | ||||||
|
Finished goods
|
99,527 | 88,770 | ||||||
|
Total
|
$ | 202,067 | $ | 180,700 | ||||
In the production of some of our products, we use precious
metals, some of which we obtain from financial institutions
under consignment agreements with terms of one year or less. The
financial institutions retain ownership of the precious metals
and charge us fees based on the amounts we consign. These fees
were $5.3 million for 2010, $4.3 million for 2009, and
$4.6 million in 2008 and were charged to cost of sales. We
had on hand precious metals owned by participants in our
precious metals program of $205.7 million at
December 31, 2010, and $101.4 million at
December 31, 2009, measured at fair value based on market
prices for identical assets. In 2009, several participants in
our precious metals program renewed their requirement for us to
deliver cash collateral to secure our obligations arising under
the consignment agreements. We had delivered $28.1 million
at December 31, 2010, and $112.4 million at
December 31, 2009, in cash collateral to induce those
financial institutions to participate in our precious metals
program at the amounts requested.
| 4. | Property, Plant and Equipment |
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
|
Land
|
$ | 31,120 | $ | 41,809 | ||||
|
Buildings
|
264,004 | 265,367 | ||||||
|
Machinery and equipment
|
666,118 | 749,913 | ||||||
|
Construction in progress
|
24,584 | 19,205 | ||||||
|
Total property, plant and equipment
|
985,826 | 1,076,294 | ||||||
|
Total accumulated depreciation
|
(594,330 | ) | (643,889 | ) | ||||
|
Net property, plant and equipment
|
$ | 391,496 | $ | 432,405 | ||||
Assets under capital leases are presented within the major
classes of property, plant and equipment. Depreciation expense
from continuing operations was $60.5 million for 2010,
$64.7 million for 2009, and $65.3 million for 2008.
Noncash investing activities for capital expenditures,
consisting of new capital leases during the year and unpaid
capital expenditure liabilities at year end, amounted to
$11.1 million for 2010, $6.0 million for 2009, and
$12.8 million for 2008. Capitalized interest costs related
to property, plant and equipment under construction were
$1.0 million in 2010, $1.6 million in 2009, and
$1.7 million in 2008.
In 2010, we shut down manufacturing activities and closed a
number of facilities as a result of restructuring programs. The
restructuring actions and plant closures indicated a possible
impairment of these facilities’ property, plant, and
equipment. We estimated the fair value of these assets primarily
based on third-party appraisals (a Level 3 measurement
within the fair value hierarchy) and recorded $12.6 million
of restructuring and impairment charges, of which
$7.3 million related to our Color and Glass Performance
Materials segment, $4.5 million related to our Electronic
Materials segment, and $0.8 million related to our
Performance Coatings segment.
55
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FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
There was no asset impairment recorded in 2009.
In 2008, the decline in automobile sales and U.S. home
construction indicated a possible impairment of the property,
plant and equipment utilized in our Specialty Plastics segment.
In addition, decline in operating results and reduced future
sales projections indicated a possible impairment of the
property, plant, and equipment at our Electronic Materials
facility in Uden, Netherlands. We estimated the fair value of
these assets primarily based on third-party appraisals (a
Level 3 measurement within the fair value hierarchy) and
recorded $1.9 million and $19.9 million related to our
Specialty Plastics and Electronic Materials segments,
respectively, of restructuring and impairment charges.
At December 31, 2010, we had assets held for sale totaling
$9.2 million and classified as other non-current assets due
to the nature of the underlying assets, although we expect to
sell these assets within the next twelve months. These assets
are primarily land and buildings at our Toccoa, Georgia,
facility; the Porcelain Enamel facility in Rotterdam,
Netherlands; and the remaining portion of our Uden, Netherlands,
facility.
| 5. | Goodwill and Other Intangible Assets |
A summary of goodwill activity follows:
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
|
Balance at beginning of year
|
$ | 221,044 | $ | 229,665 | ||||
|
Acquisitions
|
4,038 | — | ||||||
|
Write-offs
|
(4,237 | ) | — | |||||
|
Impairments
|
— | (8,225 | ) | |||||
|
Other adjustments
|
(219 | ) | (1,325 | ) | ||||
|
Currency translation adjustments
|
(910 | ) | 929 | |||||
|
Balance at end of year
|
$ | 219,716 | $ | 221,044 | ||||
56
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FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
Details and activity of goodwill by segment follow:
|
Color and Glass
|
||||||||||||||||||||||||||||
|
Electronic
|
Performance
|
Performance
|
Polymer
|
Specialty
|
||||||||||||||||||||||||
| Materials | Coatings | Materials | Additives | Plastics | Pharmaceuticals | Total | ||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||
|
Balance at December 31, 2008:
|
||||||||||||||||||||||||||||
|
Gross goodwill
|
$ | 151,901 | $ | 41,978 | $ | 68,949 | $ | 73,447 | $ | 16,973 | $ | 40,431 | $ | 393,679 | ||||||||||||||
|
Accumulated impairment losses
|
— | (41,388 | ) | — | (73,447 | ) | (16,973 | ) | (32,206 | ) | (164,014 | ) | ||||||||||||||||
| 151,901 | 590 | 68,949 | — | — | 8,225 | 229,665 | ||||||||||||||||||||||
|
Impairment loss
|
— | — | — | — | — | (8,225 | ) | (8,225 | ) | |||||||||||||||||||
|
Other adjustments
|
(67 | ) | — | (1,258 | ) | — | — | — | (1,325 | ) | ||||||||||||||||||
|
Foreign currency adjustment
|
141 | 6 | 782 | — | — | — | 929 | |||||||||||||||||||||
|
Balance at December 31, 2009:
|
||||||||||||||||||||||||||||
|
Gross goodwill
|
151,975 | 41,984 | 68,473 | 73,447 | 16,973 | 40,431 | 393,283 | |||||||||||||||||||||
|
Accumulated impairment losses
|
— | (41,388 | ) | — | (73,447 | ) | (16,973 | ) | (40,431 | ) | (172,239 | ) | ||||||||||||||||
| 151,975 | 596 | 68,473 | — | — | — | 221,044 | ||||||||||||||||||||||
|
Acquisitions
|
4,038 | 4,038 | ||||||||||||||||||||||||||
|
Write-offs
|
(4,237 | ) | (4,237 | ) | ||||||||||||||||||||||||
|
Other adjustments
|
(17 | ) | — | (202 | ) | — | — | — | (219 | ) | ||||||||||||||||||
|
Foreign currency adjustment
|
637 | (22 | ) | (1,525 | ) | — | — | — | (910 | ) | ||||||||||||||||||
|
Balance at December 31, 2010:
|
||||||||||||||||||||||||||||
|
Gross goodwill
|
152,595 | 46,000 | 62,509 | 73,447 | 16,973 | 40,431 | 391,955 | |||||||||||||||||||||
|
Accumulated impairment losses
|
— | (41,388 | ) | — | (73,447 | ) | (16,973 | ) | (40,431 | ) | (172,239 | ) | ||||||||||||||||
| $ | 152,595 | $ | 4,612 | $ | 62,509 | $ | — | $ | — | $ | — | $ | 219,716 | |||||||||||||||
The significant assumptions and ranges of assumptions we used in
our impairment analysis of goodwill follow:
|
Significant Assumptions
|
2010 | 2009 | ||
|
Weighted-average cost of capital
|
12.0% - 13.0% | 13.5% - 14.0% | ||
|
Residual growth rate
|
3.0% - 5.0% | 3.0% - 5.0% |
While no impairment was indicated as a result of our 2010 annual
test for any reporting unit that has goodwill balance, a future
potential impairment is possible for any of these reporting
units if actual results should differ materially from forecasted
results. The fair values of these reporting units exceeded their
respective carrying value in the range of $89 million to
$660 million.
In 2009, an impairment of goodwill in our Pharmaceuticals
business was triggered by changes made to the assumptions used
to determine valuation under the market approach. We compared
the carrying value of this reporting unit against its fair
value, and determined that the carrying value exceeded the fair
value. We then performed the step two analysis and measured the
impairment to be $8.2 million. As a result, we recorded a
goodwill impairment of $8.2 million for the Pharmaceuticals
business. The amount is included in restructuring and impairment
charges in the consolidated statements of operations.
In 2008, an impairment of goodwill in our Tile Coating Systems
business was triggered by the cumulative negative effect on
operating results of the significant downturn in the fourth
quarter 2008 in the housing and
57
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
construction markets both in the United States and Europe, which
led to lower demand from our customers serving those markets.
The lower demand in these markets was the triggering event for
our review of impairment. The Specialty Plastics business
experienced downtowns in automotive, appliance and container
markets, particularly in the fourth quarter of 2008. The decline
in auto sales and U.S. home construction, which negatively
impacted this business, and the extended recovery time
forecasted in these markets triggered an impairment. As a
result, at December 31, 2008, we recorded goodwill
impairments of $41.4 million for the Tile Coating Systems
business and $17.0 million for the Specialty Plastics
business. The amounts were included in restructuring and
impairment charges in the consolidated statements of operations.
Details of amortizable intangible assets follow:
|
Estimated
|
December 31, | |||||||||
| Economic Life | 2010 | 2009 | ||||||||
| (Dollars in thousands) | ||||||||||
|
Gross amortizable intangible assets:
|
||||||||||
|
Patents
|
5 - 16 years | $ | 5,714 | $ | 5,810 | |||||
|
Land rights
|
14 - 40 years | 4,885 | 4,787 | |||||||
|
Technological know-how and other
|
5 - 30 years | 11,475 | 9,400 | |||||||
|
Total gross amortizable intangible assets
|
22,074 | 19,997 | ||||||||
|
Accumulated amortization:
|
||||||||||
|
Patents
|
(4,447 | ) | (4,014 | ) | ||||||
|
Land rights
|
(2,125 | ) | (1,996 | ) | ||||||
|
Technological know-how and other
|
(3,633 | ) | (3,377 | ) | ||||||
|
Total accumulated amortization
|
(10,205 | ) | (9,387 | ) | ||||||
|
Amortizable intangible assets, net
|
$ | 11,869 | $ | 10,610 | ||||||
We amortize amortizable intangible assets on a straight-line
basis over the estimated useful lives of the assets.
Amortization expense from continuing operations related to
intangible assets was $0.9 million for 2010,
$1.1 million for 2009, and $0.9 million for 2008. The
weighted average remaining useful lives, in years, of the
amortizable intangible assets are 7, 31, and 15 for patents,
land rights, and technological know-how and other, respectively.
Aggregate amortization expense for intangible assets is expected
to be $1.0 million annually for 2011 and 2012 and
$0.9 million annually for 2013, 2014 and 2015.
| 6. | Financing and Short-term and Long-term Debt |
Loans payable and current portion of long-term debt at
December 31st consisted of the following:
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
|
Loans payable to banks
|
$ | 709 | $ | 5,891 | ||||
|
Accounts receivable asset securitization program
|
— | 17,762 | ||||||
|
Current portion of long-term debt
|
2,871 | 1,084 | ||||||
|
Total loans payable and current portion of long-term debt
|
$ | 3,580 | $ | 24,737 | ||||
58
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FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
Loans
payable to banks
Loans payable to banks are primarily from overdraft facilities.
The weighted-average interest rate on these loans was 3.5% at
December 31, 2010, and 5.1% at December 31, 2009.
Accounts
receivable asset securitization program
We have an asset securitization program for substantially all of
Ferro’s U.S. trade accounts receivable. We legally
sell these trade accounts receivable to FFC, a wholly-owned,
consolidated subsidiary. FFC finances its acquisition of trade
receivable assets by selling undivided variable percentage
interests in the receivables to certain purchasers under the
program. Advances by the purchasers are secured by, and repaid
through collections on, the receivables owned by FFC. FFC and
the purchasers have no recourse to Ferro’s other assets for
failure of payment of the receivables as a result of the lack of
creditworthiness or financial inability to pay of the related
obligor. In June 2010, we extended the maturity of our
$50 million facility through May 2011.
Ferro’s consolidated balance sheet includes outstanding
trade accounts receivable legally transferred to FFC of
$85.3 million at December 31, 2010, and
$76.4 million at December 31, 2009. After reductions
for non-qualifying receivables, additional availability under
the program was $50.0 million at December 31, 2010,
and $5.7 million at December 31, 2009. The interest
rate on the accounts receivable asset securitization program was
4.75% at December 31, 2009.
The program contains operating covenants that limit FFC’s
ability to engage in certain activities, including borrowings,
creation of liens, mergers, and investing in other companies.
The program also requires FFC and Ferro to provide periodic
financial statements and reports on the accounts receivable and
limits our ability to make significant changes in receivable
collection practices. In addition, FFC is required to maintain a
minimum tangible net worth. The program is subject to customary
termination events, including non-performance, deterioration in
the quality of the accounts receivable pool, and cross-default
provisions with Ferro’s 2010 Credit Facility (described
below) and other debt obligations with principal outstanding of
at least $5 million. If a termination event occurs and is
not cured, the program may be terminated or a third party may be
selected to act as administrator in collecting FFC’s
accounts receivable.
Long-term debt at December 31st consisted of the
following:
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
|
7.875% Senior Notes
|
$ | 250,000 | $ | — | ||||
|
6.50% Convertible Senior Notes, net of unamortized discounts
|
33,368 | 156,896 | ||||||
|
Former revolving credit facility
|
— | 1,700 | ||||||
|
Former term loan facility
|
— | 231,385 | ||||||
|
Capitalized lease obligations (see Note 15)
|
6,177 | 5,669 | ||||||
|
Other notes
|
4,297 | 4,154 | ||||||
|
Total long-term debt
|
293,842 | 399,804 | ||||||
|
Current portion
|
(2,871 | ) | (1,084 | ) | ||||
|
Total long-term debt, less current portion
|
$ | 290,971 | $ | 398,720 | ||||
59
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
The annual maturities of long-term debt for each of the five
years after December 31, 2010, were as follows:
|
(Dollars in
|
||||
| thousands) | ||||
|
2011
|
$ | 3,349 | ||
|
2012
|
2,111 | |||
|
2013
|
36,968 | |||
|
2014
|
1,092 | |||
|
2015
|
1,101 | |||
|
Thereafter
|
254,514 | |||
|
Total maturities of long-term debt
|
299,135 | |||
|
Unamortized discounts on 6.50% Convertible Senior Notes
|
(2,473 | ) | ||
|
Imputed interest and executory costs on capitalized lease
obligations
|
(2,820 | ) | ||
|
Total long-term debt
|
$ | 293,842 | ||
7.875% Senior
Notes
In 2010, we issued $250 million of 7.875% Senior Notes
due 2018 (the “Senior Notes”). We used portions of the
proceeds from the offering to repay all of the remaining term
loans and revolving borrowings outstanding under a credit
facility originally entered into in 2006 and as amended and
restated through November 2009 (the “2009 Amended and
Restated Credit Facility”). We also used portions of the
proceeds from the offering to repurchase the
6.50% Convertible Senior Notes (the “Convertible
Notes”) that were tendered pursuant to a related tender
offer. The Senior Notes were issued at par and bear interest at
a rate of 7.875% per year, payable semi-annually in arrears on
February 15 and August 15 of each year, beginning
February 15, 2011.
The Senior Notes mature on August 15, 2018. We
may redeem some or all of the Senior Notes beginning
August 15, 2014, at prices ranging from 100% to 103.938% of
the principal amount. In addition, through August 15, 2013,
we may redeem up to 35% of the Senior Notes at a price equal to
107.875% of the principal amount using proceeds of certain
equity offerings. We may also redeem some or all of the Senior
Notes prior to August 15, 2014, at a price equal to the
principal amount plus a defined applicable premium. The
applicable premium on any redemption date is the greater of 1.0%
of the principal amount of the note or the excess of
(1) the present value at such redemption date of the
redemption price of the note at August 15, 2014, plus all
required interest payments due on the note through
August 15, 2014, computed using a discount rate equal to
the Treasury Rate as of the redemption date plus 50 basis
points; over (2) the principal amount of the note.
The Senior Notes are unsecured obligations and rank equally in
right of payment with any other unsecured, unsubordinated
obligations. The Senior Notes contain certain affirmative and
negative covenants customary for high-yield debt securities,
including, without limitation, restrictions on our ability to
incur additional debt, create liens, pay dividends or make other
distributions or repurchase our common stock and sell assets
outside the ordinary course of business. At December 31,
2010, we were in compliance with the covenants under the Senior
Notes’ indenture.
6.50% Convertible
Senior Notes
In 2008, Ferro issued $172.5 million of
6.50% Convertible Senior Notes due 2013 (the
“Convertible Notes”). The Convertible Notes bear
interest at a rate of 6.5% per year, payable semi-annually in
arrears on
60
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
February 15th and August 15th of each year.
The Convertible Notes mature on August 15, 2013. Under
certain circumstances, holders of the Convertible Notes may
convert their notes prior to maturity.
The initial base conversion rate is 30.9253, equivalent to an
initial base conversion price of $32.34 per share of our common
stock. If the price of our common stock at conversion exceeds
the base conversion price, the base conversion rate is increased
by an additional number of shares. The base conversion rate and
the additional number of shares are adjusted in certain events.
Upon conversion of Convertible Notes, we will pay the conversion
value in cash up to the aggregate principal amount of the
Convertible Notes being converted and in shares of our common
stock, for the remainder, if any. Upon a fundamental change,
holders may require us to repurchase Convertible Notes for cash
equal to the principal amount plus accrued and unpaid interest.
The Convertible Notes are unsecured obligations and rank equally
in right of payment with any other unsecured, unsubordinated
obligations. At December 31, 2010, we were in compliance
with the covenants under the Convertible Notes’ indenture.
In 2010, we commenced a cash tender offer to purchase all of our
Convertible Notes, and we purchased $100.5 million of the
Convertible Notes, which were tendered pursuant to the offer.
Later in 2010, we purchased an additional $36.2 million of
the Convertible Notes on the open market. In connection with
these transactions, we recognized losses on extinguishment of
debt of $13.1 million, consisting of unamortized debt
issuance costs and the difference between the carrying value and
the fair value of these notes. The principal amount outstanding
was $35.8 million at December 31, 2010, and
$172.5 million at December 31, 2009.
We separately account for the liability and equity components of
the Convertible Notes in a manner that will reflect our
nonconvertible debt borrowing rate when interest cost is
recognized in subsequent periods. The effective interest rate on
the liability component is 9.5%. Contractual interest was
$9.0 million in 2010, $11.2 million in 2009 and
$4.1 million in 2008, and amortization of the liability
discount was $3.0 million in 2010, $3.4 million in
2009 and $1.2 million in 2008. At December 31, 2010,
the remaining period over which the liability discount will be
amortized was 2.6 years, the unamortized liability discount
was $2.5 million, and the carrying amount of the equity
component was $7.5 million. At December 31, 2009, the
unamortized liability discount was $15.6 million, and the
carrying amount of the equity component was $12.4 million.
2009
Amended and Restated Credit Facility
Our 2009 Amended and Restated Credit Facility included a senior
term loan facility and a senior revolving credit facility. At
December 31, 2009, we had $191.4 million available,
after reductions for standby letters of credit secured by this
facility. The interest rates under the 2009 Amended and Restated
Credit Facility were the sum of (A) either (1) LIBOR
or (2) the higher of the Federal Funds Rate plus 0.5%, the
Prime Rate, or LIBOR plus 1.0% and (B) for the revolving
credit facility, a variable margin based on the Company’s
leverage, or for the term loan facility, a fixed margin.
Borrowings of $175 million under the term loan facility
were restricted to using three-month LIBOR in determining their
interest rates in connection with interest rate swap agreements
that effectively fixed the interest rate on $150 million of
borrowings under the term loan facility. At December 31,
2009, the average interest rate for revolving credit borrowings
was 6.3%, and the effective interest rate for term loan
borrowings after adjusting for the interest rate swaps was 9.7%.
In 2010, we made early principal payments of $83.6 million
on our outstanding term loans and wrote off $2.3 million of
related unamortized debt issuance costs to interest expense.
Subsequently in 2010, we amended the 2009 Amended and Restated
Credit Facility and paid the remaining $147.8 million on
our outstanding term loans and the remaining $75.5 million
on our outstanding revolving borrowings. As a result of changes
in the creditors, we treated the amendment as an extinguishment
of the 2009 Amended and Restated Credit Facility and recognized
losses on extinguishment of debt of $9.9 million,
consisting of unamortized debt issuance costs related to this
facility.
61
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
2010
Credit Facility
In 2010, we entered into the Third Amended and Restated Credit
Agreement with a group of lenders for a five-year,
$350 million multi-currency senior revolving credit
facility (the “2010 Credit Facility”). At
December 31, 2010, there were no borrowings under this
facility. At December 31, 2010, we had $342.8 million
available, after reductions for standby letters of credit
secured by this facility. The interest rate under the 2010
Credit Facility is the sum of (A) either (1) LIBOR or
(2) the higher of the Federal Funds Rate plus 0.5%, the
Prime Rate, or LIBOR plus 1.0% and (B) a variable margin
based on the Company’s leverage.
The 2010 Credit Facility matures on August 24, 2015, and is
secured by substantially all of Ferro’s assets, generally
including 100% of the shares of the parent company’s
domestic subsidiaries and 65% of the shares of the foreign
subsidiaries directly owned by the parent company, but excluding
trade receivables legally sold pursuant to our accounts
receivable sales programs.
We are subject to a number of financial covenants under our 2010
Credit Facility. The covenants include requirements for a fixed
charge coverage ratio greater than 1.35 to 1.00 and a leverage
ratio less than 3.50 to 1.00 on the last day of any fiscal
quarter and calculated using the last four fiscal quarters. In
the fixed charge ratio, the numerator consists of earnings
before interest, tax, depreciation and amortization, and special
charges, less capital expenditures, and the denominator is the
sum of interest expense paid in cash, scheduled principal
payments, and restricted payments consisting of dividends and
any stock buy backs. In the leverage ratio, the numerator is
total debt, which consists of borrowing and letters of credit
outstanding on the 2010 Credit Facility and our international
facilities, the principal amount outstanding on our senior notes
and convertible notes, capitalized lease obligations, and
amounts outstanding on our U.S. and international receivables
sales programs, and the denominator is the sum of earnings
before interest, tax, depreciation and amortization, and special
charges. Our ability to meet these covenants is primarily driven
by our net income before interest, income taxes, depreciation
and amortization; our total debt; and our interest payments. Our
total debt is primarily driven by cash flow items, including net
income before amortization, depreciation, and other noncash
charges; our capital expenditures; requirements for deposits
from participants in our precious metals consignment program;
our customers’ ability to make payments for purchases and
the timing of such payments; and our ability to manage inventory
and other working capital items. Our interest payments are
driven by our debt level, external fees, and interest rates,
primarily the Prime rate and LIBOR. At December 31, 2010,
we were in compliance with the covenants of the 2010 Credit
Facility.
Our ability to pay common stock dividends is limited by certain
covenants in our 2010 Credit Facility and the bond indenture
governing the Senior Notes. The covenant in our 2010 Credit
Facility is the more limiting of the two covenants and limits
our ability to make restricted payments, which include, but are
not limited to, common stock dividends and the repurchase of
equity interests. We are not permitted to make restricted
payments in excess of $30 million dollars in any calendar
year. However, if we make less than $30 million of
restricted payments in any calendar year, the unused amount can
be carried over for restricted payments in future years,
provided that the maximum amount of restricted payments in any
calendar year cannot exceed $60 million.
62
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
International
Receivables Sales Programs
We maintain several international programs to sell trade
accounts receivable to financial institutions. The commitments
supporting these programs can be withdrawn at any time and
totaled $30.1 million at December 31, 2010, and
$61.1 million at December 31, 2009. The amount of
outstanding receivables sold under the international programs
was $6.8 million at December 31, 2010, and
$15.2 million at December 31, 2009. Ferro had received
net proceeds under the international programs of
$3.4 million at December 31, 2010, and
$10.3 million at December 31, 2009, for outstanding
receivables. Based on available and qualifying receivables,
there was no additional availability under these programs at
December 31, 2010, or December 31, 2009. Ferro
provides normal collection and administration services for the
trade accounts receivable sold to certain financial
institutions. Servicing fees are not material.
Activity from these programs is detailed below:
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Trade accounts receivable sold to financial institutions
|
$ | 91,233 | $ | 112,745 | $ | 232,065 | ||||||
|
Cash proceeds from financial institutions
|
92,528 | 121,350 | 221,509 | |||||||||
| Trade accounts receivable collected and remitted to financial institutions | 12,177 | 34,101 | 73,301 | |||||||||
Other
Financing Arrangements
We maintain other lines of credit to provide global flexibility
for Ferro’s short-term liquidity requirements. These
facilities are uncommitted lines for our international
operations and totaled $12.9 million at December 31,
2010, and $10.4 million at December 31, 2009. The
unused portions of these lines provided additional liquidity of
$9.3 million at December 31, 2010, and
$5.3 million at December 31, 2009.
| 7. | Financial Instruments |
The carrying amounts of the following assets and liabilities
meeting the definition of a financial instrument approximate
their fair values due to the short period to maturity of the
instruments:
| • | Cash and cash equivalents; | |
| • | Notes receivable; | |
| • | Deposits; | |
| • | Miscellaneous receivables; and | |
| • | Short-term loans payable to banks. |
63
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
Long-term
Debt
The following financial instruments are measured at fair value
at December 31st for disclosure purposes.
| 2010 | 2009 | |||||||||||||||
|
Fair
|
Fair
|
|||||||||||||||
| Carrying Amount | Value | Carrying Amount | Value | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
7.875% Senior Notes
|
$ | 250,000 | $ | 266,563 | $ | — | $ | — | ||||||||
|
6.50% Convertible Senior Notes
|
33,368 | 36,379 | 156,896 | 157,191 | ||||||||||||
|
Former revolving credit facility
|
— | — | 1,700 | 1,747 | ||||||||||||
|
Former term loan facility
|
— | — | 231,385 | 237,047 | ||||||||||||
|
Other notes
|
4,297 | 3,600 | 4,154 | 3,084 | ||||||||||||
The fair values of the Senior Notes and the Convertible Notes
are based on a third party’s estimated bid price. The fair
values of the former revolving credit facility, the former term
loan facility, and the other long-term notes are based on the
present value of expected future cash flows and assumptions
about current interest rates and the creditworthiness of the
Company that market participants would use in pricing the debt.
Derivative
Instruments
Interest rate swaps.
To reduce our exposure to
interest rate changes on variable-rate debt, we entered into
interest rate swap agreements in 2007. These swaps effectively
converted $150 million of our variable-rate term loan
facility to a fixed interest rate. These swaps were designated
and qualified as cash flow hedges. The fair value of these swaps
was based on the present value of expected future cash flows,
which reflected assumptions about current interest rates and the
creditworthiness of the Company that market participants would
use in pricing the swaps. The interest rate swaps were moved
from Level 2 to Level 3 within the fair value
hierarchy as of the beginning of the second quarter of 2009 and
then back to Level 2 as of the beginning of the fourth
quarter of 2009 because during only the second and third
quarters of 2009 the assumption about the creditworthiness of
the Company was not an observable market-based input nor an
unobservable input that could be corroborated by market data for
sufficiently similar financial instruments. During that period,
we based our assumption about the creditworthiness of the
Company on the assumption implicit in the bid price of our
Convertible Notes, adjusted by us for differences between these
financial instruments in their conversion, security and
liquidity features. In August 2010, in conjunction with
repayment of our remaining outstanding term loans, we settled
these swaps and reclassified $6.8 million from accumulated
other comprehensive income to miscellaneous expense.
Foreign currency forward contracts.
We manage
foreign currency risks principally by entering into forward
contracts to mitigate the impact of currency fluctuations on
transactions. These forward contracts are not formally
designated as hedges. The fair value of these contracts is based
on market prices for comparable contracts. The notional amount
of foreign currency forward contracts was $187.3 million at
December 31, 2010, and $178.9 million at
December 31, 2009.
64
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
The following table presents the fair value of derivative
instruments on our consolidated balance sheets at
December 31st:
| 2010 | 2009 | Balance Sheet Location | ||||||||
| (Dollars in thousands) | ||||||||||
| Derivatives designated as hedging instruments: | ||||||||||
|
Liability derivatives:
|
||||||||||
|
Interest rate swaps
|
$ | — | $ | (9,516 | ) | Other non-current liabilities | ||||
| Derivatives not designated as hedging instruments: | ||||||||||
|
Asset derivatives:
|
||||||||||
|
Foreign currency forward contracts
|
$ | — | $ | 899 | Other receivables | |||||
|
Foreign currency forward contracts
|
1,261 | — |
Accrued expenses and other
current liabilities |
|||||||
|
Total fair value
|
$ | 1,261 | $ | 899 | ||||||
|
Liability derivatives:
|
||||||||||
|
Foreign currency forward contracts
|
$ | — | $ | (176 | ) | Other receivables | ||||
|
Foreign currency forward contracts
|
(1,501 | ) | — |
Accrued expenses and other
current liabilities |
||||||
|
Total fair value
|
$ | (1,501 | ) | $ | (176 | ) | ||||
The inputs to the valuation techniques used to measure fair
value are classified into the following categories:
Level 1: Quoted market prices in active markets
for identical assets or liabilities.
Level 2: Observable market-based inputs or
unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not
corroborated by market data.
The carrying amount, fair value, and classification within the
fair value hierarchy of these financial instruments at
December 31st were as follows:
| 2010 | ||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | 2009 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
|
Assets:
|
||||||||||||||||||||
|
Foreign currency forward contracts, net
|
$ | — | $ | — | $ | — | $ | — | $ | 723 | ||||||||||
|
Liabilities:
|
||||||||||||||||||||
|
Interest rate swaps
|
$ | — | $ | — | $ | — | $ | — | $ | (9,516 | ) | |||||||||
|
Foreign currency forward contracts, net
|
— | (240 | ) | — | (240 | ) | — | |||||||||||||
|
Total fair value
|
$ | — | $ | (240 | ) | $ | — | $ | (240 | ) | $ | (9,516 | ) | |||||||
65
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
A reconciliation of the 2009 beginning and ending balances of
the financial instruments in Level 3 is as follows:
|
(Dollars in
|
||||
| thousands) | ||||
|
Balance at December 31, 2008
|
$ | — | ||
|
Total losses included in other comprehensive loss
|
(1,802 | ) | ||
|
Settlements
|
3,544 | |||
|
Transfers in and/or out of Level 3
|
(1,742 | ) | ||
|
Balance at December 31, 2009
|
$ | — | ||
The following table presents the effect of derivative
instruments on our consolidated financial performance:
|
Amount of Gain (Loss)
|
||||||||||||||||||
|
Amount of Gain (Loss)
|
Reclassified from AOCI into
|
Location of Gain (Loss)
|
||||||||||||||||
| Recognized in OCI | Income |
Reclassified from AOCI into
|
||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | Income | ||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||
| Derivatives in Cash Flow Hedging Relationships: | ||||||||||||||||||
|
Interest rate swaps
|
$ | (4,885 | ) | $ | (7,101 | ) | Interest expense | |||||||||||
| (6,849 | ) | — | Miscellaneous expense | |||||||||||||||
|
Total
|
$ | (2,218 | ) | $ | (3,893 | ) | $ | (11,734 | ) | $ | (7,101 | ) | ||||||
|
Amount of Gain (Loss)
|
||||||||||||
| Recognized in Income | ||||||||||||
| 2010 | 2009 | Location of Gain (Loss) in Income | ||||||||||
| (Dollars in thousands) | ||||||||||||
| Derivatives Not Designated as Hedging Instruments: | ||||||||||||
|
Foreign currency forward contracts
|
$ | 5,553 | $ | (11,833 | ) | Foreign currency losses, net | ||||||
66
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
| 8. | Income Taxes |
Income tax (benefits) expenses are based on our (losses)
earnings from continuing operations before income taxes as
presented in the following table:
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
U.S.
|
$ | 65,366 | $ | (18,755 | ) | $ | (12,171 | ) | ||||
|
Foreign
|
(41,625 | ) | (24,800 | ) | (43,915 | ) | ||||||
|
Total
|
$ | 23,741 | $ | (43,555 | ) | $ | (56,086 | ) | ||||
Our income tax expense (benefit) from continuing operations
consists of the following components:
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Current:
|
||||||||||||
|
U.S. federal
|
$ | 6,388 | $ | 982 | $ | (2,262 | ) | |||||
|
Foreign
|
14,964 | 8,403 | 21,713 | |||||||||
|
State and local
|
374 | (153 | ) | 580 | ||||||||
|
Total current
|
21,726 | 9,232 | 20,031 | |||||||||
|
Deferred:
|
||||||||||||
|
U.S. federal
|
13,693 | (8,490 | ) | (8,117 | ) | |||||||
|
Foreign
|
(11,321 | ) | (4,592 | ) | (15,167 | ) | ||||||
|
State and local
|
(7,630 | ) | 335 | 49 | ||||||||
|
Total deferred
|
(5,258 | ) | (12,747 | ) | (23,235 | ) | ||||||
|
Total income tax expense (benefit)
|
$ | 16,468 | $ | (3,515 | ) | $ | (3,204 | ) | ||||
67
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
In addition, income tax expense (benefit) we allocated directly
to Ferro Corporation shareholders’ equity is detailed in
the following table:
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Foreign currency translation adjustments
|
$ | 1,717 | $ | 583 | $ | 1,952 | ||||||
|
Postretirement benefit liability adjustments
|
4,553 | 6,453 | (32,783 | ) | ||||||||
|
Raw material commodity swap adjustments
|
83 | 285 | 394 | |||||||||
|
Interest rate swap adjustments
|
3,396 | 1,134 | (1,643 | ) | ||||||||
|
Issuance of convertible debt
|
— | — | 7,164 | |||||||||
|
Dividends on performance shares
|
— | — | (43 | ) | ||||||||
|
Stock options exercised
|
— | — | (3 | ) | ||||||||
|
Other
|
— | — | (35 | ) | ||||||||
|
Total income tax expense (benefit) allocated to Ferro
Corporation shareholders’ equity
|
$ | 9,749 | $ | 8,455 | $ | (24,997 | ) | |||||
A reconciliation of the U.S. federal statutory income tax
rate and our effective tax rate follows:
| 2010 | 2009 | 2008 | ||||||||||
|
U.S. federal statutory income tax rate
|
35.0 | % | (35.0) | % | (35.0) | % | ||||||
|
Adjustment of valuation allowances
|
39.0 | 2.9 | 17.4 | |||||||||
|
State taxes
|
7.4 | 0.4 | (0.7) | |||||||||
|
Medicare subsidy
|
6.1 | (0.3) | (0.1) | |||||||||
|
Foreign tax rate difference
|
3.6 | 9.7 | 11.6 | |||||||||
|
Goodwill write-offs and impairments
|
0.9 | 6.6 | 27.5 | |||||||||
|
U.S. tax cost of foreign dividends
|
0.8 | 4.7 | (10.9) | |||||||||
|
Stock options
|
0.1 | 1.4 | 0.7 | |||||||||
|
Domestic production activities deduction
|
(8.7) | — | — | |||||||||
|
Net adjustment of prior year accrual
|
(4.6) | 4.3 | (4.0) | |||||||||
|
Foreign exchange on loan settlement
|
(4.1) | — | — | |||||||||
|
Uncertain tax positions
|
(3.3) | 6.6 | (10.2) | |||||||||
|
Research and development credit
|
(1.5) | (10.1) | (0.4) | |||||||||
|
ESOP dividends
|
(1.0) | (0.6) | (0.8) | |||||||||
|
Miscellaneous
|
(0.4) | 1.3 | (0.8) | |||||||||
|
Effective tax rate
|
69.3 | % | (8.1) | % | (5.7) | % | ||||||
68
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
The components of deferred tax assets and liabilities at
December 31st were:
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
|
Deferred tax assets:
|
||||||||
|
Pension and other benefit programs
|
$ | 61,074 | $ | 64,516 | ||||
|
Foreign operating loss carryforwards
|
55,984 | 44,595 | ||||||
|
Foreign tax credit carryforwards
|
30,510 | 42,023 | ||||||
|
Accrued liabilities
|
19,223 | 9,984 | ||||||
|
Other credit carryforwards
|
11,502 | 14,202 | ||||||
|
Capitalized research costs
|
10,278 | 12,347 | ||||||
|
Inventories
|
4,011 | 3,625 | ||||||
|
Allowance for doubtful accounts
|
3,285 | 4,654 | ||||||
|
State operating loss carryforwards
|
2,632 | 5,011 | ||||||
|
Other
|
14,715 | 16,125 | ||||||
|
Total deferred tax assets
|
213,214 | 217,082 | ||||||
|
Deferred tax liabilities:
|
||||||||
|
Property, equipment and intangibles — depreciation and
amortization
|
30,507 | 31,264 | ||||||
|
Unremitted earnings of foreign subsidiaries
|
2,051 | 3,037 | ||||||
|
Convertible debt instruments
|
866 | 5,725 | ||||||
|
Other
|
9,944 | 12,368 | ||||||
|
Total deferred tax liabilities
|
43,368 | 52,394 | ||||||
|
Net deferred tax assets before valuation allowance
|
169,846 | 164,688 | ||||||
|
Valuation allowance
|
(26,815 | ) | (17,969 | ) | ||||
|
Net deferred tax assets
|
$ | 143,031 | $ | 146,719 | ||||
The amounts of foreign operating loss carryforwards, foreign tax
credit carryforwards, and other credit carryforwards included in
the table of temporary differences are net of reserves for
unrecognized tax benefits. The amounts of foreign tax credit
carryforwards have been reduced by $0.4 million related to
unrealized stock option deductions.
69
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
At December 31, 2010, we had $2.6 million of state
operating loss carryforwards and $55.9 million of foreign
operating loss carryforwards, some of which can be carried
forward indefinitely and others expire in one to twenty years.
At December 31, 2010, we had $64.1 million of tax
credit carryforwards, some of which can be carried forward
indefinitely. These operating loss carryforwards and tax credit
carryforwards expire as follows:
|
Operating Loss
|
Tax Credit
|
|||||||
| Carryforwards | Carryforwards | |||||||
| (Dollars in thousands) | ||||||||
|
Expiring in:
|
||||||||
|
2011
|
$ | 243 | $ | 25 | ||||
|
2012-2016
|
12,360 | 36,409 | ||||||
|
2017-2021
|
18,326 | 15,159 | ||||||
|
2022-2026
|
665 | 7,538 | ||||||
|
2027-2031
|
271 | 2,520 | ||||||
|
2032-Indefinitely
|
26,663 | 2,402 | ||||||
|
Total
|
$ | 58,528 | $ | 64,053 | ||||
We assess the available positive and negative evidence to
estimate if sufficient future taxable income will be generated
to utilize the existing deferred tax assets. A significant piece
of objective negative evidence evaluated by jurisdiction was the
cumulative loss incurred over the three year period ended
December 31, 2010. Such objective evidence limits the
ability to consider other subjective evidence such as our
projections for future growth.
Based on this assessment, the Company released a valuation
allowance related to state and local deferred tax assets. The
impact, net of Federal taxes, was $6.6 million. At
December 31, 2010, the Company has recorded a valuation
allowance of $26.8 million in order to measure only the
portion of the deferred tax asset that more likely than not will
be realized. The most significant items that increased the
valuation allowance in 2010 primarily related to additions to
deferred tax assets for current year operating losses in certain
jurisdictions where it is not more likely than not that these
assets will be realized.
We classified net deferred income tax assets as of
December 31st as detailed in the following table:
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
|
Current assets
|
$ | 24,924 | $ | 19,618 | ||||
|
Non-current assets
|
121,640 | 133,705 | ||||||
|
Current liabilities
|
(1,322 | ) | (5,480 | ) | ||||
|
Non-current liabilities
|
(2,211 | ) | (1,124 | ) | ||||
|
Net deferred tax assets
|
$ | 143,031 | $ | 146,719 | ||||
70
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
Activity and balances of unrecognized tax benefits are
summarized below:
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Balance at beginning of year
|
$ | 36,399 | $ | 34,764 | $ | 52,173 | ||||||
|
Additions based on tax positions related to the current year
|
3,619 | 4,094 | 1,770 | |||||||||
|
Additions for tax positions of prior years
|
78 | 2,064 | 2,774 | |||||||||
|
Reductions for tax positions of prior years
|
(1,029 | ) | (656 | ) | (5,256 | ) | ||||||
|
Reductions as a result of expiring statutes of limitations
|
(3,644 | ) | (4,199 | ) | (11,420 | ) | ||||||
|
Foreign currency translation of
non-U.S.
dollar denominated reserves
|
(1,968 | ) | 1,282 | (1,472 | ) | |||||||
|
Settlements with taxing authorities
|
— | (950 | ) | (3,805 | ) | |||||||
|
Balance at end of year
|
$ | 33,455 | $ | 36,399 | $ | 34,764 | ||||||
The total amount of unrecognized tax benefits that, if
recognized, would affect the effective rate was
$14.0 million at December 31, 2010, and
$16.5 million at December 31, 2009. The Company
recognizes interest accrued and penalties related to
unrecognized tax benefits as part of income tax expense. The
Company recognized $0.5 million of expense in 2010,
$1.3 million of benefit in 2009, and $0.7 million of
benefit in 2008 for interest, net of tax, and penalties. The
Company accrued $1.7 million at December 31, 2010, and
$1.2 million at December 31, 2009, for payment of
interest, net of tax, and penalties.
We anticipate that $7.3 million of liabilities for
unrecognized tax benefits, including accrued interest and
penalties, may be reversed within the next 12 months. These
liabilities relate to
non-U.S. tax
issues and are expected to reverse due to the expiration of the
applicable statute of limitations periods.
The Company conducts business globally, and, as a result, the
U.S. parent company or one of its subsidiaries files income
tax returns in the U.S. federal jurisdiction and various
state and foreign jurisdictions. In the normal course of
business, the U.S. parent company and its subsidiaries are
subject to examination by taxing authorities throughout the
world. With few exceptions, we are not subject to federal,
state, local or
non-U.S. income
tax examinations for years before 2002.
At December 31, 2010, we provided $2.9 million for
deferred income taxes on $22.7 million of undistributed
earnings of foreign subsidiaries. We have not provided deferred
income taxes on undistributed earnings of approximately
$95.6 million, since we intend to indefinitely reinvest the
earnings.
| 9. | Contingent Liabilities |
The Company and certain other companies participating in the
plastics additives industry have been named as defendants in six
civil indirect purchaser class action lawsuits seeking monetary
damages and injunctive relief relating to alleged violations of
the antitrust laws by the defendants. All of these cases contain
similar allegations to direct purchaser class action lawsuits
that the Company has previously settled. Although the Company
decided to bring the direct purchaser actions to a close through
settlement, the Company did not admit to any of the alleged
violations and continues to deny any wrongdoing. Consequently,
the Company intends to vigorously defend the indirect purchaser
class actions, does not believe that a loss is probable, and
therefore, has not recorded a liability for these class actions.
The Company does not believe that the disposition of these cases
will materially affect the consolidated financial position,
results of operations, or cash flows of the Company.
71
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FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
There are various other lawsuits and claims pending against the
Company and its consolidated subsidiaries. In our opinion, 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.
The Company had bank guarantees and standby letters of credit
issued by financial institutions that totaled $12.2 million
at December 31, 2010, and $12.3 million at
December 31, 2009. These agreements primarily relate to
Ferro’s insurance programs, foreign energy purchase
contracts and foreign tax payments. If the Company fails to
perform its obligations, the guarantees and letters of credit
may be drawn down by their holders, and we would be liable to
the financial institutions for the amounts drawn.
The Company has a non-operating facility in Brazil that is
environmentally contaminated. We have recorded an undiscounted
remediation liability because we believe the liability is
incurred and the amount of contingent loss is reasonably
estimable. In 2010, we increased our estimate of the remediation
costs based on recent third-party engineering studies. The loss
associated with this facility was $9.8 million and
$1.1 million at December 31, 2010 and 2009,
respectively. The ultimate loss will depend on the extent of
contamination found as the project progresses and acceptance by
local authorities of remediation activities, including the time
frame of monitoring involved.
On January 4, 2011, the Company received an administrative
subpoena from the U.S. Department of the Treasury’s
Office of Foreign Assets Control (“OFAC”). OFAC has
requested that the Company provide documents and information
related to the possibility of direct or indirect transactions
with or to a prohibited country. The Company is cooperating with
OFAC in connection with the administrative subpoena. The Company
cannot predict the length, scope or results of the inquiry from
OFAC, or the impact, if any, on its business activities or
results of operations.
| 10. | Retirement Benefits |
Defined
Benefit Pension Plans
| U.S. Plans | Non-U.S. Plans | |||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
|
Net periodic benefit cost:
|
||||||||||||||||||||||||
|
Service cost
|
$ | 21 | $ | 24 | $ | 201 | $ | 3,289 | $ | 4,279 | $ | 5,405 | ||||||||||||
|
Interest cost
|
20,545 | 21,083 | 20,705 | 10,122 | 10,664 | 11,503 | ||||||||||||||||||
|
Expected return on plan assets
|
(18,138 | ) | (15,437 | ) | (22,652 | ) | (6,908 | ) | (7,145 | ) | (8,353) | |||||||||||||
|
Amortization of prior service cost (credit)
|
95 | 98 | 100 | (308 | ) | (401 | ) | 118 | ||||||||||||||||
|
Net amortization and deferral
|
12,630 | 15,794 | 2,495 | 753 | 1,047 | 189 | ||||||||||||||||||
|
Curtailment and settlement effects
|
— | — | 259 | 6,371 | (606 | ) | (747) | |||||||||||||||||
|
Special termination benefits
|
— | — | — | 38 | 46 | 121 | ||||||||||||||||||
|
Total net periodic benefit cost
|
$ | 15,153 | $ | 21,562 | $ | 1,108 | $ | 13,357 | $ | 7,884 | $ | 8,236 | ||||||||||||
|
Weighted-average assumptions:
|
||||||||||||||||||||||||
|
Discount rate
|
6.20 | % | 6.74 | % | 6.49 | % | 5.88 | % | 5.85 | % | 5.56% | |||||||||||||
|
Rate of compensation increase
|
N/A | N/A | N/A | 3.42 | % | 3.45 | % | 3.49% | ||||||||||||||||
|
Expected return on plan assets
|
8.50 | % | 8.50 | % | 8.50 | % | 5.28 | % | 5.24 | % | 5.25% | |||||||||||||
In 2010, we recorded a settlement loss of $12.2 million
related to establishing a fully insured arrangement for benefit
obligations at Rotterdam, Netherlands, and a settlement loss of
$0.2 million related to the transfer of some pension
obligations to another company in Germany. These losses were
partially offset by settlement and
72
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
curtailment gains of $5.2 million related to terminations
in Netherlands, France and Portugal, and a settlement gain of
$0.8 million due to the transfer of some pension
obligations and related assets to a defined contribution plan in
Japan. In addition, the improvement through December 2009 in the
valuation of pension investments increased the amount of our
expected return on plan assets and lowered the amount of
amortization of our unrecognized net actuarial losses.
In 2009, we recorded a curtailment gain of $0.5 million
related to terminations in France and Mexico, and a settlement
gain of $0.1 million related to lump-sum payouts in Italy.
In 2008, we recorded settlement losses of $0.3 million
related to retirements in the U.S., settlement gains of
$0.8 million related to retirements and terminations in
Mexico, Italy and Japan, a curtailment gain of $0.1 million
related to the closing of our Rotterdam, Netherlands, Porcelain
Enamel manufacturing facility, a settlement loss of
$0.2 million related to a required settlement of a plan in
France, and special termination benefits of $0.1 million
related to terminations in the Netherlands and Indonesia.
| U.S. Plans | Non-U.S. Plans | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
Change in benefit obligation:
|
||||||||||||||||
|
Benefit obligation at beginning of year
|
$ | 343,151 | $ | 320,539 | $ | 197,086 | $ | 185,064 | ||||||||
|
Service cost
|
21 | 24 | 3,289 | 4,279 | ||||||||||||
|
Interest cost
|
20,545 | 21,083 | 10,122 | 10,664 | ||||||||||||
|
Amendments
|
— | — | — | (1,523 | ) | |||||||||||
|
Curtailments
|
— | — | (2,966 | ) | (688 | ) | ||||||||||
|
Settlements
|
— | — | (98,340 | ) | (1,372 | ) | ||||||||||
|
Special termination benefits
|
— | — | 38 | 46 | ||||||||||||
|
Plan participants’ contributions
|
— | — | 329 | 528 | ||||||||||||
|
Benefits paid
|
(20,571 | ) | (20,624 | ) | (9,507 | ) | (8,655 | ) | ||||||||
|
Actuarial loss
|
17,338 | 22,129 | 14,842 | 1,511 | ||||||||||||
|
Exchange rate effect
|
— | — | (10,793 | ) | 7,232 | |||||||||||
|
Benefit obligation at end of year
|
$ | 360,484 | $ | 343,151 | $ | 104,100 | $ | 197,086 | ||||||||
|
Accumulated benefit obligation at end of year
|
$ | 360,484 | $ | 343,151 | $ | 98,198 | $ | 188,804 | ||||||||
|
Change in plan assets:
|
||||||||||||||||
|
Fair value of plan assets at beginning of year
|
$ | 230,789 | $ | 200,708 | $ | 149,921 | $ | 131,395 | ||||||||
|
Actual return on plan assets
|
29,564 | 42,232 | 9,863 | 13,957 | ||||||||||||
|
Employer contributions
|
18,155 | 8,473 | 10,441 | 8,155 | ||||||||||||
|
Plan participants’ contributions
|
— | — | 329 | 528 | ||||||||||||
|
Benefits paid
|
(20,571 | ) | (20,624 | ) | (9,507 | ) | (8,655 | ) | ||||||||
|
Effect of settlements
|
— | — | (97,491 | ) | (1,372 | ) | ||||||||||
|
Exchange rate effect
|
— | — | (8,259 | ) | 5,913 | |||||||||||
|
Fair value of plan assets at end of year
|
$ | 257,937 | $ | 230,789 | $ | 55,297 | $ | 149,921 | ||||||||
|
Amounts recognized in the balance sheet:
|
||||||||||||||||
|
Other non-current assets
|
$ | — | $ | — | $ | 607 | $ | 1,994 | ||||||||
|
Accrued expenses and other current liabilities
|
(373 | ) | (396 | ) | (1,832 | ) | (1,992 | ) | ||||||||
|
Postretirement and pension liabilities
|
(102,174 | ) | (111,966 | ) | (47,578 | ) | (47,167 | ) | ||||||||
|
Funded status
|
$ | (102,547 | ) | $ | (112,362 | ) | $ | (48,803 | ) | $ | (47,165 | ) | ||||
73
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
| U.S. Plans | Non-U.S. Plans | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Weighted-average assumptions as of the measurement date: | ||||||||||||||||
|
Discount rate
|
5.85 | % | 6.20 | % | 5.51 | % | 5.88 | % | ||||||||
|
Rate of compensation increase
|
N/A | N/A | 3.44 | % | 3.42 | % | ||||||||||
| Pension plans with benefit obligations in excess of plan assets: | ||||||||||||||||
|
Benefit obligations
|
$ | 360,484 | $ | 343,151 | $ | 101,819 | $ | 178,573 | ||||||||
|
Plan assets
|
257,937 | 230,789 | 52,409 | 129,414 | ||||||||||||
| Pension plans with accumulated benefit obligations in excess of plan assets: | ||||||||||||||||
|
Projected benefit obligations
|
$ | 360,484 | $ | 343,151 | $ | 99,261 | $ | 176,048 | ||||||||
|
Accumulated benefit obligations
|
360,484 | 343,151 | 94,151 | 169,768 | ||||||||||||
|
Plan assets
|
257,937 | 230,789 | 49,928 | 126,995 | ||||||||||||
Activity and balances in accumulated other comprehensive income
(loss) related to defined benefit pension plans are summarized
below:
| U.S. Plans | Non-U.S. Plans | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
Balance at beginning of year
|
$ | (126,596 | ) | $ | (147,153 | ) | $ | (12,180 | ) | $ | (18,948 | ) | ||||
|
Net gain (loss) arising during the year
|
(5,913 | ) | 4,665 | (9,830 | ) | 5,302 | ||||||||||
|
Prior service cost arising during the year
|
— | — | — | 1,523 | ||||||||||||
|
Amounts recognized as net periodic benefit costs
|
12,725 | 15,892 | 7,724 | 728 | ||||||||||||
|
Exchange rate effects
|
— | — | 909 | (785 | ) | |||||||||||
|
Balance at end of year
|
$ | (119,784 | ) | $ | (126,596 | ) | $ | (13,377 | ) | $ | (12,180 | ) | ||||
| Amounts recognized in accumulated other comprehensive income (loss): | ||||||||||||||||
|
Net loss
|
$ | (119,608 | ) | $ | (126,325 | ) | $ | (14,363 | ) | $ | (16,458 | ) | ||||
|
Prior service (cost) credit
|
(176 | ) | (271 | ) | 986 | 4,278 | ||||||||||
|
Total
|
$ | (119,784 | ) | $ | (126,596 | ) | $ | (13,377 | ) | $ | (12,180 | ) | ||||
|
Estimated amounts to be amortized in 2011:
|
||||||||||||||||
|
Net loss
|
$ | (12,938 | ) | $ | (630 | ) | ||||||||||
|
Prior service (cost) credit
|
(73 | ) | 140 | |||||||||||||
|
Total
|
$ | (13,011 | ) | $ | (490 | ) | ||||||||||
The overall investment objective for defined benefit pension
plan assets is to achieve the highest level of investment return
that is compatible with prudent investment practices, asset
class risk and current and future benefit obligations of the
plans. Based on the potential risks and expected returns of
various asset classes, the Company establishes asset allocation
ranges for major asset classes. For U.S. plans, the target
allocations are 30% fixed income and 70% equity investments. For
non-U.S. plans,
the target allocations are 73% fixed income, 24%
74
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
equity, and 3% other investments. The Company invests in funds
and with asset managers that track broad investment indices. The
equity indices generally capture the returns of the equity
markets in the U.S., Europe, Japan, and Asia-Pacific and also
reflect various investment styles, such as growth, value and
large or small capitalization. The fixed income indices
generally capture the returns of government and investment grade
corporate fixed income securities in the U.S. and Europe
and also reflect various durations of these securities.
We base the expected return on plan assets at the beginning of
the year on the weighted-average expected return for the target
asset allocations of the major asset classes 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.
The fair values of our pension plan assets at December 31,
2010, by asset category are as follows:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
U.S. plans:
|
||||||||||||||||
|
Fixed income:
|
||||||||||||||||
|
Cash and cash equivalents
|
$ | 8,792 | $ | — | $ | — | $ | 8,792 | ||||||||
|
Guaranteed deposits
|
— | 2,620 | — | 2,620 | ||||||||||||
|
Mutual funds
|
63,758 | 1,353 | 602 | 65,713 | ||||||||||||
|
Equities:
|
||||||||||||||||
|
Common stocks
|
117,391 | — | — | 117,391 | ||||||||||||
|
Index mutual funds
|
— | 63,421 | — | 63,421 | ||||||||||||
|
Total
|
$ | 189,941 | $ | 67,394 | $ | 602 | $ | 257,937 | ||||||||
|
Non-U.S.
plans:
|
||||||||||||||||
|
Fixed income:
|
||||||||||||||||
|
Cash and cash equivalents
|
$ | 2,735 | $ | — | $ | — | $ | 2,735 | ||||||||
|
Guaranteed deposits
|
— | 19,584 | — | 19,584 | ||||||||||||
|
Mutual funds
|
254 | 15,653 | — | 15,907 | ||||||||||||
|
Other
|
3,065 | — | — | 3,065 | ||||||||||||
|
Equities:
|
||||||||||||||||
|
Index mutual funds
|
386 | 12,486 | — | 12,872 | ||||||||||||
|
Real estate
|
— | — | 679 | 679 | ||||||||||||
|
Other assets
|
103 | — | 352 | 455 | ||||||||||||
|
Total
|
$ | 6,543 | $ | 47,723 | $ | 1,031 | $ | 55,297 | ||||||||
75
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
The fair values of our pension plan assets at December 31,
2009, by asset category are as follows:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
U.S. plans:
|
||||||||||||||||
|
Fixed income:
|
||||||||||||||||
|
Cash and cash equivalents
|
$ | 12,237 | $ | — | $ | — | $ | 12,237 | ||||||||
|
Guaranteed deposits
|
— | 2,835 | — | 2,835 | ||||||||||||
|
Mutual funds
|
57,604 | 1,238 | 547 | 59,389 | ||||||||||||
|
Equities:
|
||||||||||||||||
|
Common stocks
|
121,443 | — | — | 121,443 | ||||||||||||
|
Index mutual funds
|
— | 34,885 | — | 34,885 | ||||||||||||
|
Total
|
$ | 191,284 | $ | 38,958 | $ | 547 | $ | 230,789 | ||||||||
|
Non-U.S.
plans:
|
||||||||||||||||
|
Fixed income:
|
||||||||||||||||
|
Cash and cash equivalents
|
$ | 3,642 | $ | — | $ | — | $ | 3,642 | ||||||||
|
Guaranteed deposits
|
— | 25,335 | — | 25,335 | ||||||||||||
|
Mutual funds
|
— | 73,736 | — | 73,736 | ||||||||||||
|
Other
|
2,776 | — | — | 2,776 | ||||||||||||
|
Equities:
|
||||||||||||||||
|
Common stocks
|
83 | — | — | 83 | ||||||||||||
|
Index mutual funds
|
— | 38,398 | — | 38,398 | ||||||||||||
|
Real estate
|
— | — | 5,586 | 5,586 | ||||||||||||
|
Other assets
|
— | — | 365 | 365 | ||||||||||||
|
Total
|
$ | 6,501 | $ | 137,469 | $ | 5,951 | $ | 149,921 | ||||||||
Level 3 assets consist primarily of real estate investments
in the form of non-public mutual funds invested in non-public
real estate development and investment companies. Fair market
values are based on estimated capitalization factors applied to
the earnings streams from portfolio properties and fee income,
discounted cash flows of development projects, and estimated
market values of undeveloped land, all of which are reduced by
reported liabilities and appropriate taxes.
The Company’s U.S. pension plans held
424,651 shares of the Company’s common stock with a
market value of $6.2 million at December 31, 2010, and
$3.5 million at December 31, 2009, and received
dividends from the Company’s common stock of $-0- in 2010,
$4,000 in 2009, and $0.2 million in 2008.
We expect to contribute approximately $21.2 million to our
U.S. pension plans and $8.3 million to our
non-U.S. pension
plans in 2011.
76
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
We estimate that future pension benefit payments, which reflect
expected future service, will be as follows:
|
U.S. Plans
|
Non-U.S. Plans
|
|||||||
| (Dollars in thousands) | ||||||||
|
2011
|
$ | 21,078 | $ | 4,401 | ||||
|
2012
|
21,660 | 4,417 | ||||||
|
2013
|
22,141 | 4,971 | ||||||
|
2014
|
22,722 | 5,171 | ||||||
|
2015
|
23,012 | 5,053 | ||||||
|
2016-2020
|
122,265 | 33,112 | ||||||
Postretirement
Health Care and Life Insurance Benefit Plans
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Net periodic benefit cost:
|
||||||||||||
|
Service cost
|
$ | — | $ | 14 | $ | 64 | ||||||
|
Interest cost
|
2,426 | 2,877 | 2,923 | |||||||||
|
Amortization of prior service cost
|
(1,395 | ) | (1,748 | ) | (1,643 | ) | ||||||
|
Net amortization and deferral
|
(171 | ) | — | — | ||||||||
|
Curtailment and settlement effects
|
— | (626 | ) | — | ||||||||
|
Total net periodic benefit cost
|
$ | 860 | $ | 517 | $ | 1,344 | ||||||
|
Weighted-average assumptions:
|
||||||||||||
|
Discount rate
|
5.85 | % | 6.45 | % | 6.10 | % | ||||||
|
Current trend rate for health care costs
|
8.10 | % | 8.70 | % | 9.40 | % | ||||||
|
Ultimate trend rate for health care costs
|
4.50 | % | 5.20 | % | 5.20 | % | ||||||
|
Year that ultimate trend rate is reached
|
2028 | 2018 | 2017 | |||||||||
In 2009, we limited eligibility for retiree medical and life
insurance coverage for certain union employees and recorded a
curtailment gain of $0.6 million.
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 components
|
$ | 156 | $ | (137 | ) | |||
|
Effect on postretirement benefit obligation
|
2,291 | (2,015 | ) | |||||
77
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
|
Change in benefit obligation:
|
||||||||
|
Benefit obligation at beginning of year
|
$ | 43,827 | $ | 47,164 | ||||
|
Service cost
|
— | 14 | ||||||
|
Interest cost
|
2,426 | 2,877 | ||||||
|
Amendments
|
200 | — | ||||||
|
Curtailments
|
— | (626 | ) | |||||
|
Benefits paid
|
(3,305 | ) | (3,425 | ) | ||||
|
Actuarial (gain) loss
|
(5,955 | ) | (2,177 | ) | ||||
|
Benefit obligation at end of year
|
$ | 37,193 | $ | 43,827 | ||||
|
Change in plan assets:
|
||||||||
|
Fair value of plan assets at beginning of year
|
$ | — | $ | — | ||||
|
Employer contributions
|
3,305 | 3,425 | ||||||
|
Benefits paid
|
(3,305 | ) | (3,425 | ) | ||||
|
Fair value of plan assets at end of year
|
$ | — | $ | — | ||||
|
Amounts recognized in the balance sheet:
|
||||||||
|
Accrued expenses and other current liabilities
|
$ | (3,590 | ) | $ | (4,616 | ) | ||
|
Postretirement and pension liabilities
|
(33,603 | ) | (39,211 | ) | ||||
|
Funded status
|
$ | (37,193 | ) | $ | (43,827 | ) | ||
|
Weighted-average assumptions as of December 31:
|
||||||||
|
Discount rate
|
5.45 | % | 5.85 | % | ||||
|
Current trend rate for health care costs
|
7.90 | % | 8.00 | % | ||||
|
Ultimate trend rate for health care costs
|
4.50 | % | 4.50 | % | ||||
|
Year that ultimate trend rate is reached
|
2028 | 2028 | ||||||
78
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
Activity and balances in accumulated other comprehensive income
(loss) related to our postretirement health care and life
insurance benefit plans are summarized below:
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
|
Balance at beginning of year
|
$ | 10,042 | $ | 9,613 | ||||
|
Net gain arising during the year
|
5,955 | 2,177 | ||||||
|
Prior service cost arising during the year
|
(200 | ) | — | |||||
|
Amounts recognized as net periodic benefit costs
|
(1,566 | ) | (1,748 | ) | ||||
|
Balance at end of year
|
$ | 14,231 | $ | 10,042 | ||||
|
Amounts recognized in accumulated other comprehensive income
(loss):
|
||||||||
|
Net gain
|
$ | 12,570 | $ | 6,786 | ||||
|
Prior service credit
|
1,661 | 3,256 | ||||||
|
Total
|
$ | 14,231 | $ | 10,042 | ||||
|
Estimated amounts to be amortized in 2011:
|
||||||||
|
Net gain
|
$ | 639 | ||||||
|
Prior service credit
|
401 | |||||||
|
Total
|
$ | 1,040 | ||||||
The Medicare Prescription Drug, Improvement, and Modernization
Act of 2003 provides subsidies for certain drug costs to
companies that provide coverage that is actuarially equivalent
to the drug coverage under Medicare D. We estimate that future
postretirement health care and life insurance benefit payments
will be as follows:
|
Before Medicare
|
After Medicare
|
|||||||
| Subsidy | Subsidy | |||||||
| (Dollars in thousands) | ||||||||
|
2011
|
$ | 3,590 | $ | 3,204 | ||||
|
2012
|
3,506 | 3,118 | ||||||
|
2013
|
3,397 | 3,010 | ||||||
|
2014
|
3,292 | 2,913 | ||||||
|
2015
|
3,169 | 2,798 | ||||||
|
2016-2020
|
13,899 | 12,268 | ||||||
Other
Retirement Plans
We also have defined contribution retirement plans covering
certain employees. Our contributions are determined by the terms
of the plans and are limited to amounts that are deductible for
income taxes. Generally, benefits under these plans vest
gradually over a period of five years from date of employment.
The largest plan covers U.S. salaried and most hourly
employees. In this plan, the Company contributes a percentage of
eligible employee basic compensation and also a percentage of
employee contributions. For part of 2010 and most of 2009,
contributions as a percentage of employee contributions were
suspended. The expense applicable to these plans was
$7.2 million in 2010, $4.9 million in 2009, and
$8.3 million in 2008.
79
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
| 11. | Serial Convertible Preferred Stock |
We are 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”) at a price of $46.375 per
share for a total consideration of $70.5 million. All
shares of the Series A Preferred Stock have been allocated
to participating individual employee accounts. The Trustee may
redeem the Series A Preferred Stock to provide for
distributions to, loans to, or withdrawals by participants or to
satisfy an investment election provided to participants. The
Company can redeem any or all of the Series A Preferred
Stock at any time. The redemption price is $46.375 per preferred
share plus earned but unpaid dividends as of the date of
redemption. The redemption value approximates the carrying
value. In addition, the Trustee can convert any or all of the
Series A Preferred Stock at any time into Ferro common
stock at a conversion rate of 2.5988 shares of common stock
(adjusted for stock splits) per preferred share.
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, Ferro 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 is paid to holders of the
Company’s common stock.
At December 31, 2010 and 2009, there were
203,282 shares of Series A Preferred Stock
outstanding. There were no redemptions in 2010, but 45,735 and
44,749 shares were redeemed in 2009 and 2008, respectively.
| 12. | Common Stock |
Our common stock has a par value of $1 per share. At
December 31, 2010 and 2009, there were
300,000,000 shares of common stock authorized and
93,435,553 shares of common stock issued. In November 2009,
we issued 41,112,500 shares of common stock in an equity
offering. We used portions of the net proceeds to reduce
borrowings under our 2009 Amended and Restated Credit Facility
and to pay fees and expenses in connection with the amendment
and restatement of that facility. We did not purchase common
stock on the open market in 2010, 2009 or 2008.
| 13. | Stock-based Compensation |
In April 2010, our shareholders approved the 2010 Long-Term
Incentive Plan (the “Plan”). The Plan’s purpose
is to promote the Company’s and the shareholders’
long-term financial interests and growth by attracting,
retaining and motivating high-quality executives and directors
and aligning their interests with those of our shareholders. The
Plan reserved 5,000,000 shares of common stock to be issued
for grants of several different types of long-term incentives
including stock options, stock appreciation rights, deferred
stock units, restricted shares, performance shares, other common
stock-based awards, and dividend equivalent rights. Unissued
authorized shares or treasury stock may be issued under the
Plan. Generally, Ferro has issued treasury stock to satisfy the
common stock requirements of its long-term incentive plans.
Previous incentive plans authorized various types of long-term
incentives. No further grants may be made under these previous
plans. However, any outstanding awards or grants made under
these plans will continue until the end of their specified terms.
Stock options, deferred stock units, restricted share awards,
and performance shares are the only grant types currently
outstanding. Stock options are discussed below. Activities in
other grant types are not significant.
80
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
Stock
Options
General
Information
The Compensation Committee of the Board of Directors (the
“Committee”) awards stock options under the Plan and
generally grants stock options during regularly scheduled
meetings. The exercise price of stock options granted may not be
less than the per share fair market value of the Company’s
common stock on the date of the grant. Stock options granted and
outstanding as of December 31, 2010, have a term of
10 years and vest evenly over four years on the anniversary
of the grant date. The normal vesting period is used for
retirement eligible employees. In the case of death, retirement
or change in control, the stock options become 100% vested and
exercisable.
Stock
Option Valuation Model and Method Information
We estimate the fair value of each stock option on the date of
grant using the Black-Scholes option pricing model that uses the
assumptions noted in the following table. We use judgment in
selecting these assumptions because they may significantly
impact the timing and amount of compensation expense, and we
base our judgments primarily on historical data. When
appropriate, we adjust the historical data for circumstances
that are not likely to occur in the future. We adjust the
assumptions each year based upon new information.
The following table details the estimation methods used for
differing grants of stock options:
|
Assumption
|
Estimation Method
|
|
|
Expected life, in years
|
Historical stock option exercise experience | |
|
Risk-free interest rate
|
Yield of U.S. Treasury Bonds with remaining life equal to expected life of the stock option | |
|
Expected volatility
|
Historical daily price observations of the Company’s common stock over a period equal to the expected life of the stock option | |
|
Expected dividend yield
|
Historical dividend rate at the date of grant |
The following table details the weighted-average grant-date fair
value per option and the assumptions used for estimating the
fair value:
| 2010 | 2009 | 2008 | ||||
|
Weighted-average grant-date fair value per option
|
$5.64 | $0.49 | $4.25 | |||
|
Expected life, in years
|
7.2 | 6.8 | 6.8 | |||
|
Risk-free interest rate
|
1.94% - 3.12% | 2.07% - 2.42% | 2.67% - 3.44% | |||
|
Expected volatility
|
69.7% - 71.6% | 39.7% - 45.0% | 30.5% - 36.1% | |||
|
Expected dividend yield
|
0% | 2.92% - 8.09% | 2.73% - 6.99% |
81
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
Stock
Option Activity Information
A summary of stock option activity follows:
|
Weighted-
|
||||||||||||||||
|
Weighted-
|
Average
|
|||||||||||||||
|
Average
|
Remaining
|
|||||||||||||||
|
Number of
|
Exercise Price
|
Contractual
|
Aggregate
|
|||||||||||||
| Options | Per Option | Term | Intrinsic Value | |||||||||||||
| (In years) | (Dollars in thousands) | |||||||||||||||
|
Outstanding at December 31, 2009
|
4,221,330 | $ | 18.70 | |||||||||||||
|
Granted
|
778,600 | 8.21 | ||||||||||||||
|
Exercised
|
(115,306 | ) | 1.37 | |||||||||||||
|
Forfeited or expired
|
(557,912 | ) | 16.04 | |||||||||||||
|
Outstanding at December 31, 2010
|
4,326,712 | 17.61 | 5.0 | $ | 10,356 | |||||||||||
|
Exercisable at December 31, 2010
|
2,951,845 | $ | 21.94 | 3.4 | $ | 538 | ||||||||||
| Vested or expected to vest at December 31, 2010 | 4,245,465 | $ | 17.79 | 4.9 | $ | 9,791 | ||||||||||
We calculated the aggregate intrinsic value in the table above
by taking the total pretax difference between our common
stock’s closing market value per share on the last trading
day of the year and the stock option exercise price for each
grant and multiplying that result by the number of shares that
would have been received by the option holders had they
exercised all their
in-the-money
stock options. At December 31, 2010, there were 1,145,236
in-the-money
stock options. We do not record the aggregate intrinsic value
for financial accounting purposes, and the value changes daily
based on the changes in the market value of our common stock.
Information related to stock options exercised follows:
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Proceeds from the exercise of stock options
|
$ | 137 | $ | — | $ | 58 | ||||||
|
Intrinsic value of stock options exercised
|
1,169 | — | 7 | |||||||||
|
Income tax benefit related to stock options exercised
|
409 | — | 3 | |||||||||
Activity and balances for the Company’s nonvested stock
options is presented below:
|
Weighted-
|
||||||||
|
Average Grant-
|
||||||||
|
Number of
|
Date Fair Value
|
|||||||
| Options | Per Option | |||||||
|
Nonvested at December 31, 2009
|
1,214,040 | $ | 2.77 | |||||
|
Granted
|
778,600 | 5.64 | ||||||
|
Vested
|
(440,148 | ) | 3.68 | |||||
|
Forfeited
|
(177,625 | ) | 3.65 | |||||
|
Nonvested at December 31, 2010
|
1,374,867 | 3.99 | ||||||
82
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
Stock-Based
Compensation Expense Information
A summary of amounts recorded and to be recorded for stock-based
compensation related to stock options follows:
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
| Compensation expense recorded in selling, general and administrative expenses | $ | 1,903 | $ | 1,794 | $ | 2,274 | ||||||
|
Deferred income tax benefits related to compensation expense
|
666 | 628 | 796 | |||||||||
|
Total fair value of stock options vested
|
1,620 | 1,998 | 2,195 | |||||||||
|
Unrecognized compensation cost
|
3,616 | 2,009 | 3,656 | |||||||||
| Expected weighted-average recognition period for unrecognized compensation, in years | 2.8 | 1.9 | 2.3 | |||||||||
Directors’
Deferred Compensation
Separate from the Plan, the Company has established the Ferro
Corporation Deferred Compensation Plan for Non-employee
Directors, permitting its non-employee directors to voluntarily
defer all or a portion of their compensation. The voluntarily
deferred amounts are placed in individual accounts in a benefit
trust known as a “rabbi trust” and invested in the
Company’s common stock with dividends reinvested in
additional shares. All disbursements from the trust are made in
the Company’s common stock. The stock held in the rabbi
trust is classified as treasury stock in shareholders’
equity and the deferred compensation obligation that is required
to be settled in shares of Company’s common stock is
classified as paid-in capital. The rabbi trust held 267,827 and
286,698 shares, valued at $4.4 million and
$4.5 million, at December 31, 2010 and 2009,
respectively.
83
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
Stock-based
Compensation Transactions in Shareholders’
Equity
The stock-based compensation transactions in shareholders’
equity consisted of the following:
| Common Shares in Treasury | ||||||||||||
| Shares | Amount | Paid-in Capital | ||||||||||
| (In thousands) | ||||||||||||
|
2008:
|
||||||||||||
|
Stock options
|
(3 | ) | $ | 50 | $ | 2,293 | ||||||
|
Deferred stock units
|
(33 | ) | 596 | (48 | ) | |||||||
|
Restricted shares
|
(100 | ) | 1,805 | (1,377 | ) | |||||||
|
Performance shares, net
|
— | 25 | (83 | ) | ||||||||
|
Directors’ deferred compensation
|
— | (664 | ) | 664 | ||||||||
|
Preferred stock conversions
|
(185 | ) | 3,519 | (1,872 | ) | |||||||
|
Total
|
(321 | ) | $ | 5,331 | $ | (423 | ) | |||||
|
2009:
|
||||||||||||
|
Stock options
|
— | $ | — | $ | 1,794 | |||||||
|
Deferred stock units
|
(34 | ) | 835 | (706 | ) | |||||||
|
Restricted shares
|
(115 | ) | 2,732 | (2,251 | ) | |||||||
|
Performance shares, net
|
181 | (594 | ) | 439 | ||||||||
|
Directors’ deferred compensation
|
— | (843 | ) | 843 | ||||||||
|
Preferred stock conversions
|
(1,089 | ) | 23,827 | (21,705 | ) | |||||||
|
Total
|
(1,057 | ) | $ | 25,957 | $ | (21,586 | ) | |||||
|
2010:
|
||||||||||||
|
Stock options
|
(113 | ) | $ | 2,790 | $ | (749 | ) | |||||
|
Deferred stock units
|
(34 | ) | 832 | (267 | ) | |||||||
|
Restricted shares
|
(105 | ) | 4,494 | (3,700 | ) | |||||||
|
Performance shares, net
|
119 | (1,065 | ) | 1,539 | ||||||||
|
Directors’ deferred compensation
|
— | 259 | (259 | ) | ||||||||
|
Preferred stock conversions
|
— | — | — | |||||||||
|
Total
|
(133 | ) | $ | 7,310 | $ | (3,436 | ) | |||||
84
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
| 14. | Restructuring and Cost Reduction Programs |
During 2010, we substantially completed all restructuring
programs. These programs were developed and initiated across a
number of our segments with the objectives of leveraging our
global scale, realigning and lowering our cost structure and
optimizing capacity utilization.
Total charges resulting from these activities were
$67.8 million, $15.8 million, and $26.8 million
in 2010, 2009, and 2008, respectively, of which
$4.1 million, $4.6 million, and $0.9 million,
respectively, were recorded in cost of sales as they relate
primarily to accelerated depreciation of assets to be disposed.
The remainder were reported as restructuring and impairment
charges. Descriptions of these restructuring programs follow:
European
Manufacturing Restructuring Program
In July 2006, we announced a multi-year, multi-phase program to
restructure our Performance Coatings, Color and Glass
Performance Materials, and Specialty Plastics segments in
Europe. To date, we have substantially completed the program and
the major activities are listed below.
Color and Glass Performance Materials:
| • | Manufacturing facilities in Casiglie, Italy, and Castanheira do Ribatejo, Portugal, were closed. Manufacturing capacity was transferred to Almazora, Spain, and Aveiro, Portugal. | |
| • | Manufacturing facilities in Limoges, France, and a portion of the facilities in Frankfurt, Germany, were shut down. The sites are being closed, and manufacturing capacity is being transferred to St. Dizier, France, and Frankfurt, Germany. | |
| • | Manufacturing facility in Burslem, United Kingdom, is being closed, and production will be transferred to Frankfurt, Germany, and Almazora, Spain. |
Performance Coatings:
| • | Porcelain Enamel manufacturing facility in Rotterdam, Netherlands, was shut down and closed. | |
| • | Tile Coating Systems manufacturing facilities in Casiglie, Italy; Castanheira do Ribatejo, Portugal; and Nules, Spain, were closed Manufacturing capacity was transferred to Almazora, Spain, and Aveiro, Portugal. |
Specialty Plastics:
| • | Manufacturing facilities in Castanheira do Ribatejo, Portugal, and Rotterdam, Netherlands, were shut down and closed. The Rotterdam site was sold. Manufacturing capacity was transferred to Almazora, Spain. |
85
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
Electronic
Materials Restructuring Program
In November 2006, we announced our intention to close the
Niagara Falls, New York, facility, and in 2010, we announced the
closure of the Uden, Netherlands, facility due to excess
capacity for production of dielectric and industrial ceramic
products. To date, we have substantially completed the
restructuring program and the major activities are listed below.
| • | Manufacturing facility in Niagara Falls, New York, was closed, and the site was sold. | |
| • | Manufacturing facility in Uden, Netherlands, was shut down. A portion of the real property was sold, and the site will be closed in the first quarter of 2011. | |
| • | Certain production from Niagara Falls, New York, and Uden, Netherlands, was transferred to Penn Yan, New York, and St. Dizier, France. |
Other
Restructuring Programs
Since 2008, we have initiated a number of restructuring
activities as part of a series of actions to respond to the
severe economic downturn. These activities reduced our fixed
cost structures in manufacturing facilities in the U.S. and
in our Latin America and Asia-Pacific regions and affected
Specialty Plastics, Polymer Additives, Color and Glass
Performance Materials, and Performance Coatings segments. To
date, we have substantially completed all these activities, and
the major activities are listed below.
| • | Color and Glass Performance Materials and Porcelain Enamel manufacturing facilities in Moorabin and Geelong, Australia, were shut down and are being closed. | |
| • | Color and Glass Performance Materials manufacturing facility in Toccoa, Georgia, was closed. The site is recorded as an asset held for sale. | |
| • | Specialty Plastics manufacturing facility in Aldridge, United Kingdom was shut down and closed. Manufacturing capacity was transferred to Almazora, Spain. | |
| • | Polymer Additives manufacturing facility in Villa Franca, Portugal was shut down and closed. Manufacturing capacity was transferred to Fort Worth, Texas. | |
| • | Fixed costs structures in Brazil, Mexico, and Venezuela were reduced. | |
| • | Selling, general, and administration costs were reduced through position eliminations. |
86
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FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
We have summarized the charges associated with these
restructuring programs by major type of charges below:
|
Employee
|
Other
|
Asset
|
||||||||||||||
| Severance | Costs | Impairment | Total | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
Expected restructuring charges:
|
||||||||||||||||
|
European manufacturing restructuring
|
$ | 62,766 | $ | 25,832 | $ | 9,901 | $ | 98,499 | ||||||||
|
Electronic Materials restructuring
|
11,139 | 903 | 19,095 | 31,137 | ||||||||||||
|
Other restructuring programs
|
9,653 | 1,575 | 4,095 | 15,323 | ||||||||||||
|
Total expected restructuring charges
|
$ | 83,558 | $ | 28,310 | $ | 33,091 | $ | 144,959 | ||||||||
|
Restructuring charges incurred:
|
||||||||||||||||
|
European manufacturing restructuring
|
$ | 12,878 | $ | 5,860 | $ | — | $ | 18,738 | ||||||||
|
Electronic Materials restructuring
|
499 | 103 | — | 602 | ||||||||||||
|
Other restructuring programs
|
4,813 | 874 | 910 | 6,597 | ||||||||||||
|
Charges incurred in 2008
|
$ | 18,190 | $ | 6,837 | $ | 910 | $ | 25,937 | ||||||||
|
European manufacturing restructuring
|
$ | 7,700 | $ | (408 | ) | $ | — | $ | 7,292 | |||||||
|
Electronic Materials restructuring
|
402 | 1 | — | 403 | ||||||||||||
|
Other restructuring programs
|
3,304 | 113 | — | 3,417 | ||||||||||||
|
Charges incurred in 2009
|
$ | 11,406 | $ | (294 | ) | $ | — | $ | 11,112 | |||||||
|
European manufacturing restructuring
|
$ | 27,662 | $ | 13,696 | $ | 5,582 | $ | 46,940 | ||||||||
|
Electronic Materials restructuring
|
7,460 | 2,241 | 4,572 | 14,273 | ||||||||||||
|
Other restructuring programs
|
(164 | ) | 188 | 2,495 | 2,519 | |||||||||||
|
Charges incurred in 2010
|
$ | 34,958 | $ | 16,125 | $ | 12,649 | $ | 63,732 | ||||||||
|
Cumulative restructuring charges incurred:
|
||||||||||||||||
|
European manufacturing restructuring
|
$ | 60,491 | $ | 23,451 | $ | 9,901 | $ | 93,843 | ||||||||
|
Electronic Materials restructuring
|
11,102 | 638 | 19,095 | 30,835 | ||||||||||||
|
Other restructuring programs
|
9,653 | 1,115 | 3,405 | 14,173 | ||||||||||||
|
Cumulative restructuring charges incurred as of
December 31, 2010
|
$ | 81,246 | $ | 25,204 | $ | 32,401 | $ | 138,851 | ||||||||
87
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FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
We have summarized the charges associated with the restructuring
programs by segments below:
|
Total
|
Cumulative
|
|||||||||||||||||||
|
Expected
|
Charges To
|
|||||||||||||||||||
| Charges | 2010 | 2009 | 2008 | Date | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
|
Electronic Materials
|
$ | 31,137 | $ | 14,273 | $ | 401 | $ | 602 | $ | 30,835 | ||||||||||
|
Performance Coatings
|
40,912 | 3,464 | 928 | 17,806 | 36,477 | |||||||||||||||
|
Color and Glass Performance Materials
|
55,124 | 31,910 | 9,734 | 3,877 | 53,753 | |||||||||||||||
|
Polymer Additives
|
1,639 | — | 22 | 1,617 | 1,639 | |||||||||||||||
|
Specialty Plastics
|
16,147 | 14,085 | 27 | 2,035 | 16,147 | |||||||||||||||
|
Pharmaceuticals
|
— | — | — | — | — | |||||||||||||||
|
Total Restructuring Charges
|
$ | 144,959 | $ | 63,732 | $ | 11,112 | $ | 25,937 | $ | 138,851 | ||||||||||
We have summarized the activities and accruals related to our
restructuring and cost reduction programs below:
|
Employee
|
Other
|
Asset
|
||||||||||||||
| Severance | Costs | Impairment | Total | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
Balance at December 31, 2007
|
$ | 8,381 | $ | 1,560 | $ | — | $ | 9,941 | ||||||||
|
Restructuring charges
|
18,189 | 6,839 | 909 | 25,937 | ||||||||||||
|
Cash payments
|
(24,852 | ) | (2,466 | ) | — | (27,318 | ) | |||||||||
|
Non-cash items
|
(512 | ) | (831 | ) | (909 | ) | (2,252 | ) | ||||||||
|
Balance at December 31, 2008
|
1,206 | 5,102 | — | 6,308 | ||||||||||||
|
Restructuring charges
|
11,406 | (294 | ) | — | 11,112 | |||||||||||
|
Cash payments
|
(9,389 | ) | (3,485 | ) | — | (12,874 | ) | |||||||||
|
Non-cash items
|
(142 | ) | 195 | — | 53 | |||||||||||
|
Balance at December 31, 2009
|
3,081 | 1,518 | — | 4,599 | ||||||||||||
|
Restructuring charges
|
34,958 | 16,125 | 12,649 | 63,732 | ||||||||||||
|
Cash payments
|
(36,132 | ) | (8,109 | ) | — | (44,241 | ) | |||||||||
|
Non-cash items
|
522 | (3,671 | ) | (12,649 | ) | (15,798 | ) | |||||||||
|
Balance at December 31, 2010
|
$ | 2,429 | $ | 5,863 | $ | — | $ | 8,292 | ||||||||
Other costs in the 2010 restructuring charges include a pension
settlement loss of $12.2 million related to Rotterdam,
Netherlands.
We expect to make cash payments to settle the remaining
liability for employee termination benefits and other costs
primarily over the next twelve months, except where legal or
contractual restrictions prevent us from doing so.
We did not incur any restructuring charges for discontinued
operations in 2010, 2009 or 2008.
88
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FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
| 15. | Leases |
Rent expense for all operating leases was $20.7 million in
2010, $18.3 million in 2009, and $21.1 million in
2008. 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 capital leases and included in property, plant and
equipment at December 31st follow:
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
|
Gross amounts capitalized:
|
||||||||
|
Buildings
|
$ | 3,100 | $ | 3,100 | ||||
|
Equipment
|
13,017 | 11,225 | ||||||
| 16,117 | 14,325 | |||||||
|
Accumulated amortization:
|
||||||||
|
Buildings
|
(1,821 | ) | (1,744 | ) | ||||
|
Equipment
|
(8,689 | ) | (8,790 | ) | ||||
| (10,510 | ) | (10,534 | ) | |||||
|
Net assets under capital leases
|
$ | 5,607 | $ | 3,791 | ||||
At December 31, 2010, future minimum lease payments under
all non-cancelable leases follow:
|
Capital Leases
|
Operating Leases
|
|||||
| (Dollars in thousands) | ||||||
|
2011
|
$ | 1,868 | $ | 13,345 | ||
|
2012
|
1,697 | 8,990 | ||||
|
2013
|
792 | 6,080 | ||||
|
2014
|
757 | 5,205 | ||||
|
2015
|
677 | 4,967 | ||||
|
Thereafter
|
3,206 | 13,087 | ||||
|
Total minimum lease payments
|
8,997 | $ | 51,674 | |||
|
Less amount representing executory costs
|
56 | |||||
|
Net minimum lease payments
|
8,941 | |||||
|
Less amount representing imputed interest
|
2,764 | |||||
|
Present value of net minimum lease payments
|
6,177 | |||||
|
Less current portion
|
1,390 | |||||
|
Long-term obligations at December 31, 2010
|
$ | 4,787 | ||||
89
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FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
| 16. | Miscellaneous Expense (Income), Net |
Components of the miscellaneous expense (income), net follow:
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Loss for Brazil environmental contingency
|
$ | 9,160 | $ | — | $ | — | ||||||
|
Loss on settlement of interest rate swaps
|
6,848 | — | — | |||||||||
|
Gain from Heraeus business combination
|
(8,255 | ) | — | — | ||||||||
|
Gain on sale of business
|
(1,247 | ) | — | — | ||||||||
|
Other, net
|
(692 | ) | (618 | ) | (357 | ) | ||||||
|
Total miscellaneous expense (income), net
|
$ | 5,814 | $ | (618 | ) | $ | (357 | ) | ||||
| 17. | Discontinued Operations |
In the fourth quarter of 2008, we sold our Fine Chemicals
business to Novolyte Technologies LP (“Novolyte”), an
affiliate of Arsenal Capital Management LP. Fine Chemicals was a
segment, previously included in the Other Businesses reportable
segment. The sale generated gross proceeds of
$60.0 million, subject to a post-closing working capital
adjustment, a pretax gain of $16.7 million, and an after
tax gain of $9.1 million. The gain (loss) on disposal of
discontinued operations also includes residual legal and
environmental costs directly related to the Powder Coatings,
Petroleum Additives and Specialty Ceramics businesses, which
were sold in 2002 and 2003.
The gain (loss) on disposal of discontinued operations resulted
in the following pre-tax losses and related income tax benefits:
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
| (Loss) gain on disposal of discontinued operations before income tax (benefit) expense | $ | — | $ | (523 | ) | $ | 16,614 | |||||
|
Income tax (benefit) expense
|
— | (198 | ) | 7,580 | ||||||||
|
(Loss) gain on disposal of discontinued operations, net of
income tax (benefit) expense
|
$ | — | $ | (325 | ) | $ | 9,034 | |||||
90
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FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
The following operations of the Fine Chemicals business, which
had previously been presented as a separate reporting segment,
have been segregated from continuing operations and are included
in discontinued operations in the Company’s consolidated
statements of operations. Interest expense has been allocated to
discontinued operations based on the ratio of the net assets of
discontinued operations to consolidated net assets before debt.
| 2008 | ||||
| (Dollars in thousands) | ||||
|
Net sales
|
$ | 60,980 | ||
|
Cost of sales
|
47,464 | |||
|
Gross profit
|
13,516 | |||
|
Selling, general and administrative expenses
|
4,303 | |||
|
Other expense:
|
||||
|
Interest expense
|
1,526 | |||
|
Foreign currency losses, net
|
19 | |||
|
Miscellaneous expense, net
|
76 | |||
|
Income from discontinued operations before income taxes
|
7,592 | |||
|
Income tax expense
|
2,578 | |||
|
Income from discontinued operations, net of income taxes
|
$ | 5,014 | ||
We have continuing environmental remediation obligations that
are related to these divestitures, and we had accrued
$2.9 million at December 31, 2010, and
$3.0 million at December 31, 2009, for these matters.
The estimated amounts we have accrued are based on our
assessment of the nature and extent of the soil
and/or
groundwater contamination and the remedial actions we expect to
perform. In some cases, we have agreed to the required remedial
actions with the relevant governmental authorities, and we have
based our estimates of the costs to remediate upon those
actions. Where alternative technologies exist to remediate a
contaminated site, we have determined our estimates of the costs
to remediate based on the technologies that we are most likely
to use.
91
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FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
| 18. | Earnings (Loss) per Share from Continuing Operations |
Details of the calculations of basic and diluted earnings (loss)
per share follow:
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands, except per share amounts) | ||||||||||||
|
Basic earnings (loss) per share computation:
|
||||||||||||
|
Net income (loss) attributable to Ferro Corporation common
shareholders
|
$ | 5,036 | $ | (43,621 | ) | $ | (41,307 | ) | ||||
|
Adjustment for loss (income) from discontinued operations
|
— | 325 | (14,048 | ) | ||||||||
|
Total
|
$ | 5,036 | $ | (43,296 | ) | $ | (55,355 | ) | ||||
|
Weighted-average common shares outstanding
|
85,823 | 50,935 | 43,261 | |||||||||
| Basic earnings (loss) per share from continuing operations attributable to Ferro Corporation common shareholders | $ | 0.06 | $ | (0.85 | ) | $ | (1.28 | ) | ||||
|
Diluted earnings (loss) per share computation:
|
||||||||||||
|
Net income (loss) attributable to Ferro Corporation common
shareholders
|
$ | 5,036 | $ | (43,621 | ) | $ | (41,307 | ) | ||||
|
Adjustment for loss (income) from discontinued operations
|
— | 325 | (14,048 | ) | ||||||||
|
Plus: Convertible preferred stock
|
— | — | — | |||||||||
|
Total
|
$ | 5,036 | $ | (43,296 | ) | $ | (55,355 | ) | ||||
|
Weighted-average common shares outstanding
|
85,823 | 50,935 | 43,261 | |||||||||
|
Assumed exercise of stock options
|
319 | — | — | |||||||||
|
Assumed satisfaction of deferred stock unit conditions
|
74 | — | — | |||||||||
|
Assumed satisfaction of restricted share conditions
|
323 | — | — | |||||||||
|
Assumed conversion of convertible notes
|
— | — | — | |||||||||
|
Assumed conversion of convertible preferred stock
|
— | — | — | |||||||||
|
Weighted-average diluted shares outstanding
|
86,539 | 50,935 | 43,261 | |||||||||
| Diluted earnings (loss) per share from continuing operations attributable to Ferro Corporation common shareholders | $ | 0.06 | $ | (0.85 | ) | $ | (1.28 | ) | ||||
Anti-dilutive shares were 6.8 million, 13.6 million
and 13.6 million for 2010, 2009 and 2008, respectively.
| 19. | Business Combinations |
On April 30, 2010, Ferro Corporation and W.C. Heraeus GmbH
(“Heraeus”) acquired from each other certain business
lines related to decoration materials for ceramic and glass
products. We acquired Heraeus’ ceramic color business,
which advances our position in the ceramic colors industry,
while Heraeus acquired assets related to our business operations
in precious metal preparations and lustres for the decoration of
glass, ceramics, porcelain, and tile. Ferro recognized a pre-tax
gain of $8.3 million consisting of a $5.6 million gain
from remeasuring to fair value the assets transferred to Heraeus
and a $6.1 million bargain purchase gain from the fair
value of the net assets acquired exceeding the fair value of the
consideration transferred, less a $3.4 million write-off of
related goodwill. The gain is included in miscellaneous expense
(income), net.
92
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FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
On December 14, 2010, Ferro Corporation acquired a business
in Egypt with a newly constructed ceramic coatings plant. The
new plant will allow us to more cost-effectively serve the
growing tile manufacturing market in Egypt and other countries
in the Middle East and North Africa.
The following table summarizes the consideration transferred and
the amounts of the assets acquired and liabilities assumed at
the acquisition dates of these transactions:
|
(Dollars in
|
||||
| thousands) | ||||
|
Fair value of consideration transferred
|
||||
|
Cash
|
$ | 6,938 | ||
|
Inventories
|
1,089 | |||
|
Property, plant and equipment
|
164 | |||
|
Amortizable intangible assets
|
5,417 | |||
|
Total
|
$ | 13,608 | ||
|
Recognized amounts of identifiable assets acquired and
liabilities assumed
|
||||
|
Cash
|
$ | 6,856 | ||
|
Accounts receivable
|
1,399 | |||
|
Inventories
|
3,776 | |||
|
Property, plant and equipment
|
6,734 | |||
|
Goodwill
|
4,038 | |||
|
Amortizable intangible assets
|
2,156 | |||
|
Current liabilities
|
(5,003 | ) | ||
|
Noncurrent liabilities
|
(258 | ) | ||
|
Total
|
$ | 19,698 | ||
The final determination of fair values and certain asset and
liability adjustments have not been finalized, but any
adjustments are not expected to be material. Changes in the
Company’s revenues and earnings as if these business
combinations had occurred on January 1, 2009, were
immaterial.
| 20. | Reporting for Segments |
The Company has six reportable segments: Performance Coatings,
Electronic Materials, Color and Glass Performance Materials,
Polymer Additives, Specialty Plastics, and Pharmaceuticals. We
have aggregated our Tile Coating Systems and Porcelain Enamel
operating segments into one reportable segment, Performance
Coatings, based on their similar economic and operating
characteristics.
The accounting policies of our segments are consistent with
those described in the summary of significant accounting
policies found in Note 2. We measure segment income for
internal reporting purposes by excluding unallocated corporate
expenses, restructuring and impairment charges, other expenses
(income) and income taxes. Unallocated corporate expenses
consist primarily of corporate employment costs and professional
services.
93
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FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
We have presented net sales to external customers by segment in
the table below. Sales between segments were not material.
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Electronic Materials
|
$ | 675,401 | $ | 426,896 | $ | 558,313 | ||||||
|
Performance Coatings
|
555,023 | 487,891 | 627,918 | |||||||||
|
Color and Glass Performance Materials
|
382,155 | 321,750 | 456,644 | |||||||||
|
Polymer Additives
|
302,352 | 249,510 | 349,902 | |||||||||
|
Specialty Plastics
|
163,058 | 149,524 | 225,856 | |||||||||
|
Pharmaceuticals
|
23,876 | 21,998 | 26,519 | |||||||||
|
Total net sales
|
$ | 2,101,865 | $ | 1,657,569 | $ | 2,245,152 | ||||||
Below are each segment’s income and reconciliations to
income (loss) before taxes from continuing operations:
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Electronic Materials
|
$ | 132,585 | $ | 45,344 | $ | 52,868 | ||||||
|
Performance Coatings
|
39,416 | 29,551 | 36,935 | |||||||||
|
Color and Glass Performance Materials
|
31,514 | 13,123 | 39,112 | |||||||||
|
Polymer Additives
|
18,387 | 6,708 | 6,086 | |||||||||
|
Specialty Plastics
|
11,348 | 10,164 | 5,385 | |||||||||
|
Pharmaceuticals
|
814 | 438 | 3,524 | |||||||||
|
Total segment income
|
234,064 | 105,328 | 143,910 | |||||||||
|
Unallocated corporate expenses
|
69,135 | 63,315 | 37,362 | |||||||||
|
Restructuring and impairment charges
|
63,732 | 19,337 | 106,142 | |||||||||
|
Other expense, net
|
77,456 | 66,231 | 56,492 | |||||||||
|
Income (loss) before income taxes from continuing operations
|
$ | 23,741 | $ | (43,555 | ) | $ | (56,086 | ) | ||||
The following table details depreciation and amortization
expense by segment:
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Electronic Materials
|
$ | 11,586 | $ | 13,382 | $ | 17,294 | ||||||
|
Performance Coatings
|
17,004 | 17,726 | 17,736 | |||||||||
|
Color and Glass Performance Materials
|
7,012 | 6,520 | 8,101 | |||||||||
|
Polymer Additives
|
10,776 | 10,492 | 10,753 | |||||||||
|
Specialty Plastics
|
2,369 | 2,610 | 3,314 | |||||||||
|
Pharmaceuticals
|
2,073 | 1,950 | 1,693 | |||||||||
|
Total segment depreciation and amortization
|
50,820 | 52,680 | 58,891 | |||||||||
|
Unallocated depreciation and amortization
|
26,116 | 35,458 | 15,704 | |||||||||
|
Total depreciation and amortization
|
$ | 76,936 | $ | 88,138 | $ | 74,595 | ||||||
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FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
Segment assets primarily consist of trade accounts receivable;
inventories; property, plant and equipment; and intangible
assets. Unallocated assets primarily include cash and cash
equivalents, deposits for precious metals, deferred taxes and
assets related to uncertain tax positions. Total assets at
December 31st by segment are detailed below:
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
|
Electronic Materials
|
$ | 316,793 | $ | 302,537 | ||||
|
Performance Coatings
|
358,781 | 349,812 | ||||||
|
Color and Glass Performance Materials
|
256,626 | 254,683 | ||||||
|
Polymer Additives
|
117,482 | 118,222 | ||||||
|
Specialty Plastics
|
46,598 | 47,480 | ||||||
|
Pharmaceuticals
|
26,392 | 29,871 | ||||||
|
Total segment assets
|
1,122,672 | 1,102,605 | ||||||
|
Unallocated assets
|
311,683 | 423,750 | ||||||
|
Total assets
|
$ | 1,434,355 | $ | 1,526,355 | ||||
We have detailed each segment’s expenditures for long-lived
assets, including acquisitions, in the table below:
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Electronic Materials
|
$ | 9,308 | $ | 4,249 | $ | 18,892 | ||||||
|
Performance Coatings
|
19,748 | 11,803 | 29,294 | |||||||||
|
Color and Glass Performance Materials
|
19,472 | 10,665 | 7,715 | |||||||||
|
Polymer Additives
|
5,404 | 5,224 | 8,379 | |||||||||
|
Specialty Plastics
|
968 | 685 | 1,989 | |||||||||
|
Pharmaceuticals
|
860 | 1,830 | 3,645 | |||||||||
|
Total segment expenditures for long-lived assets
|
55,760 | 34,456 | 69,914 | |||||||||
|
Expenditures for long-lived assets of discontinued operations
|
— | — | 2,317 | |||||||||
|
Unallocated corporate expenditures for long-lived assets
|
1,905 | 8,804 | 4,237 | |||||||||
|
Total expenditures for long-lived assets
|
$ | 57,665 | $ | 43,260 | $ | 76,468 | ||||||
We sell our products throughout the world and we attribute sales
to countries based on the country where we generate the customer
invoice. No single country other than the U.S. and Spain
represents greater than 10% of our net sales. We have detailed
net sales by geographic region in the table below:
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
United States
|
$ | 1,039,457 | $ | 758,048 | $ | 973,717 | ||||||
|
Spain
|
319,711 | 258,485 | 362,370 | |||||||||
|
Other international
|
742,697 | 641,036 | 909,065 | |||||||||
|
Total net sales
|
$ | 2,101,865 | $ | 1,657,569 | $ | 2,245,152 | ||||||
95
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
None of our operations in countries other than the U.S. and
Spain owns greater than 10% of consolidated long-lived assets.
We have detailed long-lived assets that consist of property,
plant and equipment, goodwill, and amortizable intangible assets
by geographic region at December 31st in the table
below:
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
|
United States
|
$ | 377,158 | $ | 393,571 | ||||
|
Spain
|
90,845 | 96,475 | ||||||
|
Other international
|
155,078 | 174,013 | ||||||
|
Total long-lived assets
|
$ | 623,081 | $ | 664,059 | ||||
| 21. | Related Party Transactions |
We participate in several joint ventures that are located in
Spain, Italy, South Korea and Thailand through investments in
the common stock of affiliated companies. At December 31,
2010, our percentage of ownership interest in these affiliates
ranged from 36% to 50%. Because we exert significant influence
over these affiliates, but we do not control them, our
investments have been accounted for under the equity method.
Investment income from these equity-method investments, which is
reported in miscellaneous expense (income), net was
$1.1 million in 2010, $0.3 million in 2009, and
$1.2 million in 2008. The balance of our equity-method
investments, which is reported in other non-current assets, was
$16.6 million at December 31, 2010, and
$16.2 million at December 31, 2009.
We had the following transactions with our equity-method
investees:
| 2010 | 2009 | 2008 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Sales
|
$ | 8,928 | $ | 6,887 | $ | 10,157 | ||||||
|
Purchases
|
5,048 | 3,883 | 5,495 | |||||||||
|
Dividends and interest received
|
636 | 530 | 159 | |||||||||
|
Commissions and royalties received
|
173 | 956 | 194 | |||||||||
|
Commissions and royalties paid
|
88 | 86 | 230 | |||||||||
96
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2010, 2009 and
2008 — (Continued)
| 22. | Quarterly Data (Unaudited) |
|
Net Income
|
Earnings (Loss) Attributable
|
|||||||||||||||||||||||
|
(Loss)
|
to Ferro Corporation
|
|||||||||||||||||||||||
|
Attributable
|
Common Shareholders Per
|
|||||||||||||||||||||||
|
Net Income
|
to Ferro
|
Common Share | ||||||||||||||||||||||
| Net Sales | Gross Profit | (Loss) | Corporation | Basic | Diluted | |||||||||||||||||||
| (Dollars in thousands, except per share data) | ||||||||||||||||||||||||
|
2009
|
||||||||||||||||||||||||
|
Quarter 1
|
$ | 357,809 | $ | 55,246 | $ | (19,971 | ) | $ | (20,335 | ) | $ | (0.46 | ) | $ | (0.46 | ) | ||||||||
|
Quarter 2
|
399,277 | 65,229 | (11,188 | ) | (11,808 | ) | (0.27 | ) | (0.27 | ) | ||||||||||||||
|
Quarter 3
|
442,089 | 93,169 | 2,845 | 2,117 | 0.04 | 0.04 | ||||||||||||||||||
|
Quarter 4
|
458,394 | 100,628 | (12,051 | ) | (12,890 | ) | (0.19 | ) | (0.19 | ) | ||||||||||||||
|
Total
|
$ | 1,657,569 | $ | 314,272 | $ | (40,365 | ) | $ | (42,916 | ) | $ | (0.86 | ) | $ | (0.86 | ) | ||||||||
|
2010
|
||||||||||||||||||||||||
|
Quarter 1
|
$ | 492,865 | $ | 106,934 | $ | (812 | ) | $ | (68 | ) | $ | — | $ | — | ||||||||||
|
Quarter 2
|
543,485 | 122,330 | 7,594 | 7,100 | 0.08 | 0.08 | ||||||||||||||||||
|
Quarter 3
|
528,564 | 120,296 | (2,362 | ) | (3,345 | ) | (0.04 | ) | (0.04 | ) | ||||||||||||||
|
Quarter 4
|
536,951 | 109,105 | 2,853 | 2,009 | 0.02 | 0.02 | ||||||||||||||||||
|
Total
|
$ | 2,101,865 | $ | 458,665 | $ | 7,273 | $ | 5,696 | $ | 0.06 | $ | 0.06 | ||||||||||||
Quarterly earnings per share amounts do not always add to the
full-year amounts due to the averaging of shares.
Pre-tax restructuring and impairment charges (credits) in 2009
were $1.4 million in the first quarter, $(0.3) million
in the second quarter, $11.0 million in the third quarter
and $7.2 million in the fourth quarter. Pre-tax
restructuring and impairment charges in 2010 were
$13.3 million in the first quarter, $21.2 million in
the second quarter, $9.6 million in the third quarter, and
$19.6 million in the fourth quarter. Pre-tax losses on
extinguishment of debt in 2010 were $19.3 million in the
third quarter and $3.7 million in the fourth quarter.
Pre-tax charges for increased reserves for environmental
remediation costs in 2010 were $3.5 million in the second
quarter and $5.7 million in the fourth quarter. Pre-tax
gains related to a business combination in 2010 were
$7.8 million in the second quarter and $0.5 million in
the fourth quarter. The third quarter of 2010 also included a
pre-tax charge of $6.8 million related to settlement of
interest rate swaps. The fourth quarter of 2010 also included a
pre-tax gain of $1.2 million on sale of a business.
97
Table of Contents
| Item 9 — | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
| Item 9A — | Controls and Procedures |
Evaluation
of Disclosure Controls and Procedures
Ferro is committed to maintaining disclosure controls and
procedures that are designed to ensure that information required
to be disclosed in its Exchange Act reports is recorded,
processed, summarized, and reported within the time periods
specified in the U.S. Securities and Exchange
Commission’s rules and forms, and that such information is
accumulated and communicated to its management, including its
Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required
disclosure.
The Company’s 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 Company’s disclosure controls and
procedures, as defined in Exchange Act
Rule 13a-15(e),
as of December 31, 2010. Based on that evaluation,
management concluded that the disclosure controls and procedures
were effective as of December 31, 2010.
Management’s
Annual Report on Internal Control over Financial
Reporting
The Company’s management is responsible for establishing
and maintaining adequate internal control over financial
reporting as defined in Exchange Act
Rule 13a-15(f).
The Company’s internal control system is a process designed
by, or under the supervision of, the Company’s principal
executive and principal financial officers, or persons
performing similar functions, and effected by the Company’s
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 Company’s 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 Company’s 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 Company’s
internal control over financial reporting as of
December 31, 2010. 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
. Management concluded that the Company’s
internal control over financial reporting was effective as of
December 31, 2010.
Deloitte & Touche LLP, the independent registered
public accounting firm that audited the Company’s
consolidated financial statements, has issued an attestation
report on the Company’s internal control over financial
reporting as of December 31, 2010, which is included below.
98
Table of Contents
Report
of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Ferro Corporation
Cleveland, Ohio
We have audited the internal control over financial reporting of
Ferro Corporation and subsidiaries (the “Company”) as
of December 31, 2010, based on criteria established in
Internal Control — Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. The Company’s management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying
Management’s Annual Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion
on the Company’s 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, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a
process designed by, or under the supervision of, the
company’s principal executive and principal financial
officers, or persons performing similar functions, and effected
by the company’s 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 company’s
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
company’s 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.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2010, based on the criteria established in
Internal Control — Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also 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, 2010 of
the Company and our report dated February 28, 2011
expressed an unqualified opinion on those financial statements
and financial statement schedule.
/s/ Deloitte &
Touche LLP
Cleveland, Ohio
February 28, 2011
99
Table of Contents
Changes
in Internal Control over Financial Reporting and Other
Remediation
During the fourth quarter of 2010, there were no changes in our
internal controls or in other factors that materially affected,
or are reasonably likely to materially affect, our internal
controls over financial reporting.
| Item 9B — | Other Information |
None.
100
Table of Contents
PART III
| Item 10 — | Directors, Executive Officers and Corporate Governance |
The information on Ferro’s directors is contained under the
heading “Election of Directors” of the Proxy Statement
for Ferro Corporation’s 2011 Annual Meeting of Shareholders
and is incorporated here by reference. The information about the
Audit Committee and the Audit Committee financial expert is
contained under the heading “Corporate
Governance — Board Committees — Audit
Committee” of the Proxy Statement for Ferro
Corporation’s 2011 Annual Meeting of Shareholders and is
incorporated here by reference. Information on Ferro’s
executive officers is contained under the heading
“Executive Officers of the Registrant” in Part 1
of this Annual Report on
Form 10-K.
Section 16(a) filing information is contained under the
heading “Shareholdings — Section 16(a)
Beneficial Ownership Reporting Compliance” of the Proxy
Statement for Ferro Corporation’s 2011 Annual Meeting of
Shareholders and is incorporated here by reference.
Ferro has adopted a series of policies dealing with business and
ethics. These policies apply to all Ferro Directors, officers
and employees. A summary of these policies may be found on
Ferro’s Web site 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. Exceptions, waivers and amendments of those policies may be
made, if at all, only by the Audit Committee of the Board of
Directors, and, in the event any such exceptions, waivers or
amendments are granted, a description of the change or event
will be posted on Ferro’s Web site (
www.ferro.com
)
within four business days. Ferro maintains a worldwide 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.
| Item 11 — | Executive Compensation |
The information on executive compensation is contained under the
headings “Executive Compensation Discussion &
Analysis” and “2010 Executive Compensation” of
the Proxy Statement for Ferro Corporation’s 2011 Annual
Meeting of Shareholders and is incorporated here by reference.
| Item 12 — | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information on security ownership of certain beneficial
owners and management is contained under the headings
“Shareholdings — Stock Ownership by Other Major
Shareholders” and “Shareholdings — Stock
Ownership by Director, Executive Officers and Employees” of
the Proxy Statement for Ferro Corporation’s 2011 Annual
Meeting of Shareholders and is incorporated here by reference.
The numbers of shares issued and available for issuance under
Ferro’s equity compensation plans as of December 31,
2010, were as follows:
|
Weighted-Average
|
Number of Shares
|
|||||||||||
|
Number of Shares to Be
|
Exercise Price of
|
Remaining Available for
|
||||||||||
|
Issued on Exercise of
|
Outstanding
|
Future Issuance Under
|
||||||||||
|
Outstanding Options,
|
Options, and
|
Equity Compensation
|
||||||||||
| Equity Compensation Plan | and Other Awards | Other Awards | Plans(1) | |||||||||
|
Approved by Ferro Shareholders
|
4,712,837 shares | (2) | $ | 15.76 | 4,912,625 shares | (4) | ||||||
|
Not Approved by Ferro Shareholders
|
143,455 shares | (3) | $ | 24.96 | 0 shares | |||||||
|
Total
|
4,856,292 shares | $ | 15.91 | (5) | 4,912,625 shares | |||||||
| (1) | Excludes shares listed in the second column. | |
| (2) | Includes options and other awards issued under the Company’s 2010 Long-Term Incentive Compensation Plan and prior equity compensation plans. |
101
Table of Contents
| (3) | Includes options granted in 2001 and 2002 to the Company’s former Chief Executive Officer and phantom units issued under the Company’s Executive Employee Deferred Compensation Plan and Supplemental Executive Defined Contribution Plan. | |
| (4) | Shares are only available under the 2010 Long-Term Incentive Plan and may be issued as stock options, stock appreciation rights, restricted shares, performance shares, and other common stock-based awards. | |
| (5) | Weighted-average exercise price of outstanding options and other awards; excludes phantom units. |
A description follows of the material features of each plan that
was not approved by Ferro shareholders:
| • | Stock Options. On February 11, 2002 and February 9, 2001, respectively, the Board granted Mr. Ortino, the Company’s former Chief Executive Officer, 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 maximum terms of ten years and are fully vested. | |
| • | 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 Company’s 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. |
| Item 13 — | Certain Relationships and Related Transactions, and Director Independence |
There are no relationships or transactions that are required to
be reported. The information about director independence is
contained under the heading “Corporate
Governance — Director Independence” of the Proxy
Statement for Ferro Corporation’s 2011 Annual Meeting of
Shareholders and is incorporated here by reference.
| Item 14 — | Principal Accountant Fees and Services |
The information contained under the heading “Other
Independent Registered Public Accounting Firm
Information — Fees” of the Proxy Statement for
Ferro Corporation’s 2011 Annual Meeting of Shareholders is
incorporated here by reference.
102
Table of Contents
PART IV
| Item 15 — | Exhibits and Financial Statement Schedules |
The following documents are filed as part of this Annual Report
on
Form 10-K:
| (a) | The consolidated financial statements of Ferro Corporation and subsidiaries contained in Part II, Item 8 of this Annual Report on Form 10-K: |
| • | Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008; | |
| • | Consolidated Balance Sheets at December 31, 2010 and 2009; | |
| • | Consolidated Statements of Equity for the years ended December 31, 2010, 2009 and 2008; | |
| • | Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008; and | |
| • | Notes to Consolidated Financial Statements |
| (b) | Schedule II — Valuation and Qualifying Accounts and Reserves for the years ended December 31, 2010, 2009, and 2008, contained on page 105 of this Annual Report on Form 10-K. 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 U.S. Securities and Exchange Commission, or the required information is included in the consolidated financial statements. |
(c) The exhibits listed in the Exhibit Index
beginning on page 106 of this Annual Report on
Form 10-K.
103
Table of Contents
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.
FERRO
CORPORATION
| By |
/s/ James
F. Kirsch
|
James F. Kirsch
Chairman, President and Chief Executive Officer
Date: February 28, 2011
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
28th day of February 2011.
|
/s/ James
F. Kirsch
|
Chairman, President and Chief Executive Officer
(Principal Executive Officer) |
|||
|
/s/ Thomas
R. Miklich
|
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) |
|||
|
/s/ Richard
C. Brown
|
Director | |||
|
/s/ Sandra
Austin Crayton
|
Director | |||
|
/s/ Richard
J. Hipple
|
Director | |||
|
/s/ Jennie
S. Hwang
|
Director | |||
|
/s/ Gregory
E. Hyland
|
Director | |||
|
/s/ William
B. Lawrence
|
Director | |||
|
/s/ Timothy
K. Pistell
|
Director | |||
|
/s/ William
J. Sharp
|
Director | |||
|
/s/ Ronald
P. Vargo
|
Director | |||
104
Table of Contents
FERRO
CORPORATION AND SUBSIDIARIES
SCHEDULE II —
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years
Ended December 31, 2010, 2009 and 2008
|
Additions Charged
|
||||||||||||||||||||||||
|
Balance at
|
(Reductions Credited) to |
Adjustment for
|
Balance
|
|||||||||||||||||||||
|
Beginning of
|
Costs and
|
Other
|
Differences in
|
at End of
|
||||||||||||||||||||
| Period | Expenses | Accounts | Deductions | Exchange Rates | Period | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Allowance for Possible Losses on Collection of Accounts and Trade Notes Receivable: | ||||||||||||||||||||||||
|
Year ended December 31, 2010
|
$ | 10,685 | 2,935 | — | (2,091 | ) | (373 | ) | $ | 11,156 | ||||||||||||||
|
Year ended December 31, 2009
|
$ | 11,668 | 2,676 | — | (3,835 | ) | 176 | $ | 10,685 | |||||||||||||||
|
Year ended December 31, 2008
|
$ | 6,396 | 4,472 | 3,544 | (1) | (2,436 | ) | (308 | ) | $ | 11,668 | |||||||||||||
| Allowance for Possible Losses on Collection of Note Receivable from Ferro Finance Corporation: | ||||||||||||||||||||||||
|
Year ended December 31, 2010
|
$ | — | — | — | — | — | $ | — | ||||||||||||||||
|
Year ended December 31, 2009
|
$ | — | — | — | — | — | $ | — | ||||||||||||||||
|
Year ended December 31, 2008
|
$ | 3,015 | 1,371 | (3,544 | )(1) | (842 | ) | — | $ | — | ||||||||||||||
| Valuation Allowance on Net Deferred Tax Assets | ||||||||||||||||||||||||
|
Year ended December 31, 2010
|
$ | 17,969 | 9,608 | — | — | (762 | ) | $ | 26,815 | |||||||||||||||
|
Year ended December 31, 2009
|
$ | 21,451 | (3,683 | ) | — | — | 201 | $ | 17,969 | |||||||||||||||
|
Year ended December 31, 2008
|
$ | 8,906 | 20,598 | — | (8,053 | ) | — | $ | 21,451 | |||||||||||||||
| (1) | When Ferro Finance Corporation (“FFC”) was consolidated in December 2008, the valuation allowance on Ferro’s note receivable from FFC was combined with the valuation allowance on accounts and trade notes receivable. |
105
Table of Contents
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 | |
|
3.1
|
Eleventh Amended Articles of Incorporation of Ferro Corporation. (Reference is made to Exhibit 4.1 to Ferro Corporation’s Registration Statement on Form S-3, filed March 5, 2008, which Exhibit is incorporated here by reference.) | |
|
3.2
|
Certificate of Amendment to the Eleventh Amended Articles of Incorporation of Ferro Corporation filed December 29, 1994. (Reference is made to Exhibit 4.2 to Ferro Corporation’s Registration Statement on Form S-3, filed March 5, 2008, which Exhibit is incorporated here by reference.) | |
|
3.3
|
Certificate of Amendment to the Eleventh Amended Articles of Incorporation of Ferro Corporation filed June 23, 1998. (Reference is made to Exhibit 4.3 to Ferro Corporation’s Registration Statement on Form S-3, filed March 5, 2008, which Exhibit is incorporated here by reference.) | |
|
3.4
|
Ferro Corporation Code of Regulations. (Reference is made to Exhibit 4.4 to Ferro Corporation’s Registration Statement on Form S-3, filed March 5, 2008, which Exhibit is incorporated here by reference.) | |
|
3.5
|
Ferro Corporation Amended and Restated Code of Regulations. (Reference is made to Exhibit 3.4 to Ferro Corporation’s Quarterly Report for the quarter ended September 30, 2010, which Exhibit is incorporated here by reference.) | |
|
4
|
Instruments defining rights of security holders, including indentures | |
|
4.1
|
Senior Indenture, dated as of March 5, 2008, by and between Ferro Corporation and U.S. Bank National Association. (Reference is made to Exhibit 4.5 to Ferro Corporation’s Registration Statement on Form S-3, filed March 5, 2008, which Exhibit is incorporated here by reference.) | |
|
4.2
|
First Supplemental Indenture, dated August 19, 2008, by and between Ferro Corporation and U.S. Bank National Association (with Form of 6.50% Convertible Senior Notes due 2013). (Reference is made to Exhibit 4.2 to Ferro Corporation’s Current Report on Form 8-K, filed August 19, 2008, which Exhibit is incorporated here by reference.) | |
|
4.3
|
Form of Indenture, by and between Ferro Corporation and Wilmington Trust FSB (Reference is made to Exhibit 4.1 to Ferro Corporation’s Registration Statement on Form S-3ASR, filed July 27, 2010, which Exhibit is incorporated here by reference.) | |
|
4.4
|
First Supplemental Indenture, dated August 24, 2010, by and between Ferro Corporation and Wilmington Trust FSB (with Form of 7.875% Senior Notes due 2018). (Reference is made to Exhibit 4.1 to Ferro Corporation’s Current Report on Form 8-K, filed August 24, 2010, which Exhibit is incorporated here by reference.) | |
| The Company agrees, upon request, to furnish to the U.S. 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 | |
|
10.1
|
Third Amended and Restated Credit Agreement, dated August 24, 2010, by and among Ferro Corporation, PNC Bank, National Association, as the Administrative Agent, the Collateral Agent and the Issuer, and JPMorgan Chase Bank, N.A. and Bank of America, N.A., as the Syndication Agents. (Reference is made to Exhibit 10.1 to Ferro Corporation’s Current Report on Form 8-K, filed August 24, 2010, which Exhibit is incorporated here by reference.) | |
|
10.2
|
First Amendment to Second Amended and Restated Credit Agreement, dated July 26, 2010, by and among Ferro Corporation, the several banks and other financial institutions or entities listed on the signature pages hereto as Lenders, Credit Suisse AG, Cayman Islands Branch, as Original Term Loan Administrative Agent, and PNC Bank, National Association, as New Term Loan Administrative Agent and as Revolving Loan Administrative Agent. (Reference is made to Exhibit 10.1 to Ferro Corporation’s Current Report on Form 8-K, filed July 27, 2010, which Exhibit is incorporated here by reference.) |
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10.3
|
Second Amended and Restated Credit Agreement, dated October 26, 2009, among Ferro Corporation and certain of its subsidiaries; various financial institutions; Credit Suisse, Cayman Islands Branch; PNC Bank, National Association; National City Bank; KeyBank National Association; and Citigroup Global Markets, Inc. (Reference is made to Exhibit 10.1 to Ferro Corporation’s Current Report on Form 8-K, filed October 27, 2009, which Exhibit is incorporated here by reference.) | |
|
10.4
|
Amendment and Restatement and Resignation and Appointment Agreement, dated October 26, 2009, among Ferro Corporation; the several banks and other financial institutions or entities listed on the signature pages thereto; Credit Suisse, Cayman Islands Branch,; National City Bank; and PNC Bank, National Association. (Reference is made to Exhibit 10.2 to Ferro Corporation’s Current Report on Form 8-K, filed October 27, 2009, which Exhibit is incorporated here by reference.) | |
|
10.5
|
First Amendment to Amended and Restated Credit Agreement and First Amendment to Pledge and Security Agreement, dated December 17, 2007, among Ferro Corporation; certain of Ferro’s subsidiaries; Credit Suisse, Cayman Islands Branch, as Term Loan Administrative Agent; and National City Bank, as Revolving loan Administrative Agent; and various financial institutions as Lenders. (Reference is made to Exhibit 10.2 to Ferro Corporation’s Current Report on Form 8-K, filed January 10, 2008, which Exhibit is incorporated here by reference.) | |
|
10.6
|
Amended and Restated Credit Agreement, dated June 8, 2007, among Ferro; certain of Ferro’s subsidiaries; Credit Suisse, as Term Loan Administrative Agent; National City Bank, as Revolving Loan Administrative Agent and Collateral Agent; KeyBank National Association, as Documentation Agent; Citigroup Global Markets, Inc., as Syndication Agent; and various financial institutions as Lenders. (Reference is made to Exhibit 10.3 to Ferro Corporation’s Current Report on Form 8-K, filed June 11, 2007, which Exhibit is incorporated here by reference.) | |
|
10.7
|
Purchase Agreement, dated June 2, 2009, among Ferro Corporation, Ferro Color & Glass Corporation, and Ferro Pfanstiehl Laboratories, Inc. (Reference is made to Exhibit 10.1 to Ferro Corporation’s Current Report on Form 8-K, filed June 3, 2009, which Exhibit is incorporated here by reference.) | |
|
10.8
|
Purchase and Contribution Agreement, dated June 2, 2009, between Ferro Corporation and Ferro Finance Corporation. (Reference is made to Exhibit 10.2 to Ferro Corporation’s Current Report on Form 8-K, filed June 3, 2009, which Exhibit is incorporated here by reference.) | |
|
10.9
|
Receivables Purchase Agreement, dated June 2, 2009, among Ferro Finance Corporation, Ferro Corporation, certain purchasers from time to time party thereto and Wachovia Bank, National Association. (Reference is made to Exhibit 10.3 to Ferro Corporation’s Current Report on Form 8-K, filed June 3, 2009, which Exhibit is incorporated here by reference.) | |
|
10.10
|
Amendment No. 1 to Receivables Purchase Agreement, dated February 3, 2010, among Ferro Finance Corporation, Ferro Corporation, as initial Collection Agent, and Wachovia Bank, National Association, as Purchaser and in its capacity as Agent for the Purchasers. (Reference is made to Exhibit 10.1 to Ferro Corporation’s Quarterly Report on Form 10-Q, for the quarter ended June 30, 2010, which Exhibit is incorporated here by reference.) | |
|
10.11
|
Amendment No. 2 to Receivables Purchase Agreement, dated May 1, 2010, among Ferro Finance Corporation, Ferro Corporation, as initial Collection Agent, Wells Fargo Bank, N.A., as Purchaser and in its capacity as Agent for the Purchasers. (Reference is made to Exhibit 10.2 to Ferro Corporation’s Current Report on Form 8-K, filed June 2, 2010, which Exhibit is incorporated here by reference.) | |
|
10.12
|
Amendment No. 3 to Receivables Purchase Agreement, dated June 1, 2010, among Ferro Finance Corporation, Ferro Corporation, as initial Collection Agent, Wells Fargo Bank, N.A., as Purchaser and in its capacity as Agent for the Purchasers. (Reference is made to Exhibit 10.1 to Ferro Corporation’s Current Report on Form 8-K, filed June 2, 2010, which Exhibit is incorporated here by reference.) | |
|
10.13
|
Ferro Corporation Employee Stock Option Plan. (Reference is made to Exhibit 10.1 to Ferro Corporation’s Annual Report on Form 10-K for the year ended December 31, 2006, which Exhibit is incorporated here by reference.)* | |
|
10.14
|
Ferro Corporation 2003 Long-Term Incentive Compensation Plan. (Reference is made to Exhibit 10.16 to Ferro Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008, which Exhibit is incorporated here by reference.)* | |
|
10.15
|
Form of Terms of Incentive Stock Option Award Grants under the Ferro Corporation 2003 Long-Term Incentive Compensation Plan. (Reference is made to Exhibit 10.17 to Ferro Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008, which Exhibit is incorporated here by reference.)* |
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10.16
|
Form of Terms of Performance Share Awards under the Ferro Corporation 2003 Long-Term Incentive Compensation Plan. (Reference is made to Exhibit 10.18 to Ferro Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008, which Exhibit is incorporated here by reference.)* | |
|
10.17
|
Ferro Corporation 2006 Long-Term Incentive Plan. (Reference is made to Exhibit 10.01 to Ferro Corporation’s Current Report on Form 8-K, filed November 8, 2006, which Exhibit is incorporated here by reference.)* | |
|
10.18
|
Form of Terms of Incentive Stock Option Award Grants under the Ferro Corporation 2006 Long-Term Incentive Compensation Plan. (Reference is made to Exhibit 10.20 to Ferro Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008, which Exhibit is incorporated here by reference.)* | |
|
10.19
|
Form of Terms of Nonstatutory Stock Option Grants under the Ferro Corporation 2006 Long-Term Incentive Compensation Plan. (Reference is made to Exhibit 10.21 to Ferro Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008, which Exhibit is incorporated here by reference.)* | |
|
10.20
|
Form of Terms of Performance Share Awards under the Ferro Corporation 2006 Long-Term Incentive Compensation Plan. (Reference is made to Exhibit 10.22 to Ferro Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008, which Exhibit is incorporated here by reference.)* | |
|
10.21
|
Form of Terms of Restricted Share Awards under the Ferro Corporation 2006 Long-Term Incentive Compensation Plan. (Reference is made to Exhibit 10.23 to Ferro Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008, which Exhibit is incorporated here by reference.)* | |
|
10.22
|
Form of Terms of Deferred Stock Unit Awards under the Ferro Corporation 2006 Long-Term Incentive Compensation Plan. (Reference is made to Exhibit 10.24 to Ferro Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008, which Exhibit is incorporated here by reference.)* | |
|
10.23
|
Amendment to the Ferro Corporation Deferred Compensation Plan for Executive Employees. (Reference is made to Exhibit 10.18 to Ferro Corporation’s Annual Report on Form 10-K for the year ended December 31, 2009, which Exhibit is incorporated here by reference.)* | |
|
10.24
|
Ferro Corporation Deferred Compensation Plan for Executive Employees. (Reference is made to Exhibit 10.1 to Ferro Corporation’s Current Report on Form 8-K, filed September 24, 2007, which Exhibit is incorporated here by reference.)* | |
|
10.25
|
Ferro Corporation Deferred Compensation Plan for Non-Employee Directors. (Reference is made to Exhibit 10.2 to Ferro Corporation’s Current Report on Form 8-K, filed September 24, 2007, which Exhibit is incorporated here by reference.)* | |
|
10.26
|
Ferro Corporation Deferred Compensation Plan for Non-Employee Directors Trust Agreement. (Reference is made to Exhibit 10.11.1 to Ferro Corporation’s Annual Report on Form 10-K for the year ended December 31, 2006, which Exhibit is incorporated here by reference.)* | |
|
10.27
|
Ferro Corporation Supplemental Defined Benefit Plan for Executive Employees. (Reference is made to Exhibit 10.3 to Ferro Corporation’s Current Report on Form 8-K, filed September 24, 2007, which Exhibit is incorporated here by reference.)* | |
|
10.28
|
Amendment to the Ferro Corporation Supplemental Defined Contribution Plan for Executive Employees. (Reference is made to Exhibit 10.23 to Ferro Corporation’s Annual Report on Form 10-K for the year ended December 31, 2009, which Exhibit is incorporated here by reference.)* | |
|
10.29
|
Ferro Corporation Supplemental Defined Contribution Plan for Executive Employees. (Reference is made to Exhibit 10.4 to Ferro Corporation’s Current Report on Form 8-K, filed September 24, 2007, which Exhibit is incorporated here by reference.)* | |
|
10.30
|
Amended and Restated Employment Agreement, dated December 31, 2008, between Mr. Kirsch and Ferro Corporation. (Reference is made to Exhibit 10.3 to Ferro Corporation’s Current Report on Form 8-K, filed January 7, 2009, which Exhibit is incorporated here by reference.)* | |
|
10.31
|
Form of Indemnification Agreement. (James F. Kirsch is the only officer that is party to an indemnification agreement with Ferro Corporation.) (Reference is made to Exhibit 10.31 to Ferro Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008, which Exhibit is incorporated here by reference.)* | |
|
10.32
|
Change in Control Agreement, dated January 1, 2009, between Mr. Kirsch and Ferro Corporation. (Reference is made to Exhibit 10.1 to Ferro Corporation’s Current Report on Form 8-K, filed January 7, 2009, which Exhibit is incorporated here by reference.)* |
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10.33
|
Form of Change in Control Agreement, dated January 1, 2009. (Mark H. Duesenberg, Ann E. Killian, James F. Kirsch, Michael J. Murry and Peter T. Thomas have entered into this form of change in control agreement.) (Reference is made to Exhibit 10.2 to Ferro Corporation’s Current Report on Form 8-K, filed January 7, 2009, which Exhibit is incorporated here by reference.)* | |
|
10.34
|
Form of Change in Control Agreement, dated as of December 22, 2010. (Thomas R. Miklich has entered into this form of change in control agreement.) (Reference is made to Exhibit 10.2 to Ferro Corporation’s Current Report on Form 8-K, filed December 22, 2010, which Exhibit is incorporated here by reference.)* | |
|
10.35
|
Ferro Corporation 2010 Long-Term Incentive Plan (Reference is made to Exhibit 10.1 to Ferro Corporation’s Current Report on Form 8-K, filed May 6, 2010, which Exhibit is incorporated here by reference.)* | |
|
10.36
|
Ferro Corporation Executive Separation Policy. (Reference is made to Exhibit 10.1 to Ferro Corporation’s Current Report on Form 8-K, filed June 28, 2010, which Exhibit is incorporated here by reference.)* | |
|
10.37
|
Separation and Release Agreement, dated as of July 14, 2010, between Sallie B. Bailey and Ferro Corporation. (Reference is made to Exhibit 10.1 to Ferro Corporation’s Current Report on Form 8-K, filed July 20, 2010, which Exhibit is incorporated here by reference.)* | |
|
10.38
|
Annual Incentive Plan (AIP) Summary Document.* | |
|
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. | |
|
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. |
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TABLE OF CONTENTS
Part IprintItem 1 BusinessprintItem 1A. Risk FactorsprintItem 1B Unresolved Staff CommentsprintItem 2 PropertiesprintItem 3 Legal ProceedingsprintPart IIprintItem 5 Market For Registrant S Common Equity, Related Stockholder Matters, and Issuer Purchases Of Equity SecuritiesprintItem 6 Selected Financial DataprintItem 7 Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 7A Quantitative and Qualitative Disclosures About Market RiskprintItem 8 Financial Statements and Supplementary DataprintItem 9 Changes in and Disagreements with Accountants on Accounting and Financial DisclosureprintItem 9A Controls and ProceduresprintItem 9B Other InformationprintPart IIIprintItem 10 Directors, Executive Officers and Corporate GovernanceprintItem 11 Executive CompensationprintItem 12 Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersprintItem 13 Certain Relationships and Related Transactions, and Director IndependenceprintItem 14 Principal Accountant Fees and ServicesprintPart IVprintItem 15 Exhibits and Financial Statement Schedulesprint