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TO OUR SHAREHOLDERS:
We are very pleased to share with you the performance of yet one more very fine quarter, a quarter which established new highs for third quarter sales, net income and earnings per share. The excellent results of the third quarter represent the seventh consecutive up quarter. Such performance clearly demonstrates that the strategies and initiatives under way to ensure profitable growth and achieve our target of 28 percent gross margins are producing expected results. We are already seeing some of the early benefits of our realignment plan and expect further benefit as the plan progresses through its three-year project life and beyond.
Consolidated gross margins improved 10 percent, from 23.9 percent to 25.6 percent, with improvement in each core business. Margin expansion was aided by significant volume increases worldwide and the resulting improved capacity utilization. Volume improved 9 percent in the recent quarter, combining with the 10 percent volume increase of the prior quarter to very significantly add to year-to-date revenue growth by greatly exceeding the unfavorable impact of currency on sales.
Driven primarily by increases in Coatings, Colors and Ceramics, sales for ongoing operations were 4 percent greater than the prior year, while consolidated sales of $339.0 million were 3 percent greater than comparable 1996 sales of $329.2 million. Strong volume increases of 9 percent were nearly twice the 5 percent adverse currency impact due to the relative strength of the U.S. dollar. For the quarter, currency fluctuations reduced sales by $15.2 million. Sales for ongoing operations excluding the currency effect were up 9 percent.
Our marketing initiatives have been especially successful in increasing volumes. We are addressing rising demand with capacity increases throughout the Company, both from improved efficiencies and capital expenditures. We are running at or near capacity in a number of our manufacturing locations. In line with plans to expand our presence in Asia-Pacific, we are increasing installed capacity in Indonesia. Additionally, we are investing in our color business in Spain and our plastics business in both Europe and the United States. Volumes and margins in Europe have been enhanced by the efforts of our ceramic tile design centers in Spain and Italy.
Operating profit improved in all core businesses and in all regions. Coatings, Colors and Ceramics performance was led largely by improvements in Europe in general and continued improvement in powder coatings both domestically and in Europe. Chemicals again delivered record performance, with improvements largely in the United States and Canada. Plastics performance also improved, led by progress in the domestic business.
Excluding the effects of the second quarter pre-tax realignment charge of $152.8 million, net income for the nine months ending September 30 reached $46.6 million, 15 percent greater than 1996 nine months net income. Earnings per share of $1.60 excluding the effects of the realignment charge exceeded the comparable 1996 earnings by 19 percent. Including the realignment charge, the Company reported a net loss of $53.4 million, or a loss of $2.16 per share.
Nine-month sales from ongoing operations rose 4 percent over the comparable 1996 period, while consolidated sales of $1,044.2 million for the period were up 2 percent. Coatings, Colors and Ceramics was the major contributor to the sales increase. Volume for the nine months was up 8 percent, with the added volume coming primarily from the United States and Canada, and Europe. Currency shifts negatively impacted sales for the period by $36.7 million, or about 4 percent. Sales for ongoing operations excluding the currency effect were up 8 percent.
As a reflection of our commitment to enhancing shareholder value and our confidence in the continued growth and profitability of the Company, a 3-for-2 stock split and a 16.1 percent increase in the quarterly dividend were approved by the Board of Directors on October 24, 1997. Certificates for the additional shares are expected to be mailed December 1, 1997 to shareholders of record November 14, 1997. Ferro will make cash payments for fractional shares resulting from the split. The dividend action increases the quarterly cash dividend to $0.12 per share on an after-split basis. The dividend will be payable December 10, 1997 to shareholders of record November 14, 1997. The pre-split equivalent would have been an increase in the quarterly dividend from $0.155 to $0.18 per share.
Quarter after quarter, we have continued to make progress in achieving our objectives. Excluding realignment charges, earnings have grown several times faster than sales. Continuing improvement in virtually all parts of the business is expected as we continue to implement our plans. We anticipate further revenue growth and performance improvements in 1998 and beyond as we work to implement our growth strategies.
Sincerely,
Albert C. Bersticker
Chairman and Chief Executive Office
October 31, 1997
Certain statements contained in this letter reflect the Company's current expectations with respect to the future performance of the Company and may constitute "forward-looking statements" within the meaning of the federal securities laws. These statements are subject to a variety of uncertainties, unknown risks and other factors concerning the Company's operations and business environment, including, but not limited to: changes in customer requirements, markets or industries served; changing economic conditions, particularly in Europe or Latin America; foreign exchange rates; changes in the prices of major raw materials, in particular polypropylene and titanium dioxide; and significant technological or competitive developments.
STOCK DATA
(Symbol : FOE)
New York Stock Exchange - Composite
High | Low | Close | Average Daily Volume | |
Full Year 1996 | 301/8 | 227/8 | 283/8 | 47,500 |
First Quarter 1997 | 323/8 | 28 | 30 | 49,000 |
Second Quarter 1997 | 387/8 | 293/4 | 371/16 | 67,283 |
Third Quarter 1997 | 391/16 | 353/8 | 383/16 | 53,958 |
CONSOLIDATED STATEMENTS OF INCOME
FERRO CORPORATION AND SUBSIDIARIES
(Unaudited) | (Unaudited) | ||||||||||||||||||||||||||||||||||||
Three Months Ended September 30 | Nine Months Ended September 30 |
(Dollars in Thousands) | 1997 | 1996 | 1997 | 1996 | |||||
Segment Sales | |||||||||
Coatings, Colors, and Ceramics | $198,775 | $188,921 | $ 613,168 | $ 581,145 | |||||
Plastics | 59,650 | 57,044 | 180,142 | 182,531 | |||||
Chemicals | 80,532 | 83,247 | 250,889 | 258,435 | |||||
Total Net Sales | $338,957 | $329,212 | $1,044,199 | $1,022,111 | |||||
Cost of Sales | 252,179 | 250,497 | 778,113 | 773,630 | |||||
Selling, Administrative | |||||||||
and General Expenses | 58,323 | 54,170 | 176,393 | 170,717 | |||||
Realignment Expense | 0 | 0 | 152,790 | 0 | |||||
Interest Expense | 2,951 | 3,447 | 9,021 | 9,861 | |||||
Net Foreign Currency (Gain) Loss | 161 | (208) | (2,139) | (555) | |||||
Other Expense - Net | 989 | 218 | 3,847 | 2,875 | |||||
Income Before Taxes | 24,354 | 21,088 | (73,826) | 65,583 | |||||
Income Tax Expense (Benefit) | 8,990 | 7,861 | (20,438) | 24,890 | |||||
Net Income (Loss) | 15,364 | 13,227 | (53,388) | 40,693 | |||||
Dividend on Preferred Stock, Net of Tax | 936 | 937 | 2,817 | 2,799 | |||||
Net Income (Loss) Available | |||||||||
to Common Shareholders | $ 14,428 | $ 12,290 | ($56,205) | $ 37,894 | |||||
Per Common Share Data: | |||||||||
Primary Earnings (Loss) | $0.55 | $0.46 | ($2.16) | $1.42 | |||||
Fully Diluted Earnings (Loss) | $0.53 | $0.44 | ($2.16) | $1.35 | |||||
Average Shares Outstanding | 25,998,451 | 26,442,282 | 25,995,024 | 26,711,778 |
CONSOLIDATED BALANCE SHEET
FERRO CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
(Dollars in Thousands)
(Unaudited) | (Audited) | ||
ASSETS | 1997 | 1996 | |
Current Assets: | |||
Cash and Cash Equivalents | $ 41,705 | $ 14,026 | |
Net Receivables | 246,709 | 214,131 | |
Inventories | 120,961 | 149,343 | |
Other Current Assets | 45,448 | 39,022 | |
Total Current Assets | $454,823 | $416,522 | |
Unamortized Excess of Cost Over | |||
Net Assets Acquired | 55,369 | 93,302 | |
Other Assets | 58,330 | 53,261 | |
Net Plant & Equipment | 240,602 | 307,383 | |
$809,124 | $870,468 |
(Dollars in Thousands)
(Unaudited) | (Audited) | |
LIABILITIES | 1997 | 1996 |
Current Liabilities: | ||
Notes and Loans Payable | $ 30,154 | $ 30,200 |
Accounts Payable, Trade | 112,075 | 113,156 |
Income Taxes | 8,074 | 10,597 |
Accrued Payrolls | 18,758 | 16,559 |
Accrued Expenses and Other Current Liabilities | 116,165 | 81,821 |
Total Current Liabilities | $285,226 | $252,333 |
Long-Term Debt | 103,417 | 105,308 |
ESOP Loan Guarantee | 16,075 | 22,592 |
Postretirement Liabilities | 46,520 | 44,846 |
Other Liabilities | 72,127 | 61,185 |
Shareholders' Equity | 285,759 | 384,204 |
$809,124 | $870,468 |