Debt and Other Financing

12 Months Ended

Dec. 31, 2011

Debt and Other Financing [Abstract]

Debt and Other Financing

6. Debt and Other Financing

Loans payable and current portion of long-term debt at December 31st consisted of the following:

	2011		2010
	(Dollars in thousands)
Loans payable to banks	$	404	$	709
International accounts receivable sales programs		8,150		—
Current portion of long-term debt		2,687		2,871
Total loans payable and current portion of long-term debt	$	11,241	$	3,580

Long-term debt at December 31st consisted of the following:

	2011			2010
	(Dollars in thousands)
7.875% Senior Notes	$	250,000		$	250,000
6.50% Convertible Senior Notes, net of unamortized discounts		33,537			33,368
Revolving credit facility		7,706			—
Capitalized lease obligations (see Note 14)		4,459			6,177
Other notes		5,067			4,297
Total long-term debt		300,769			293,842
Current portion		(2,687	)		(2,871	)
Long-term debt, less current portion	$	298,082		$	290,971

The annual maturities of long-term debt for each of the five years after December 31, 2011, were as follows:

	(Dollars in thousands)
2012	$	3,029
2013		36,125
2014		973
2015		8,704
2016		689
Thereafter		255,078
Total maturities of long-term debt		304,598
Unamortized discounts on 6.50% Convertible Senior Notes		(1,579	)
Imputed interest and executory costs on capitalized lease obligations		(2,250	)
Total long-term debt	$	300,769

Receivable Sales Programs

We have an asset securitization program for Ferro’s U.S. trade accounts receivable. We sell undivided variable percentage interests in our domestic receivables to various purchasers, and we may obtain up to $50.0 million in the form of cash or letters of credit. Advances received under this program are accounted for as borrowings secured by the receivables and included in net cash provided by financing activities. 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 May 2011, we made certain modifications to and extended the maturity of this credit facility through May 2012. No advances by purchasers for interests in our U.S. trade accounts receivables were outstanding at December 31, 2011 or 2010. After reductions for any non-qualifying receivables and outstanding letters of credit, we had $50.0 million of additional borrowings available under the program at December 31, 2011 and 2010.

Ferro Finance Corporation (“FFC”), a wholly-owned, consolidated subsidiary, holds Ferro’s U.S. trade accounts receivable. 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 the accounts receivable.

In 2011, we entered into several international programs to sell with recourse trade accounts receivable to financial institutions. Advances received under these programs are accounted for as borrowings secured by the receivables and included in net cash provided by financing activities. At December 31, 2011, the commitments supporting these programs totaled $18.1 million, the advances received of $8.2 million were secured by $11.7 million of accounts receivable, and no additional borrowings were available under the programs. The interest rates under these programs are based on EURIBOR rates plus 1.75%. At December 31, 2011, the weighted-average interest rate was 3.0%.

Prior to 2011, we maintained several international programs to sell without recourse trade accounts receivable to financial institutions. Advances received under these programs were accounted for as proceeds from the sales of receivables and included in net cash provided by operating activities. In 2011, these programs expired or were terminated. At December 31, 2010, the commitments supporting these programs totaled $30.1 million, the amount of outstanding receivables sold under these programs was $6.8 million, Ferro had received net proceeds under these programs of $3.4 million for outstanding receivables, and based on available and qualifying receivables, there was no additional availability under these programs. Ferro provided normal collection and administration services for the trade accounts receivable sold to certain financial institutions. Servicing fees were not material. Activity from these programs is detailed below:

	2011		2010		2009
	(Dollars in thousands)
Trade accounts receivable sold to financial institutions	$	—	$	91,233	$	112,745
Cash proceeds from financial institutions		—		92,528		121,350
Trade accounts receivable collected and remitted to financial institutions		2,512		12,177		34,101

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, 2011, 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 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, 2011, we were in compliance with the covenants under the Convertible Notes’ indenture.

In 2010, we purchased $136.7 million of the Convertible Notes through a tender offer or on the open market. In 2011, we purchased an additional $0.7 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 in 2010 and less than $0.1 million in 2011, 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 $35.1 million at December 31, 2011, and $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%. Contractual interest was $2.3 million in 2011, $9.0 million in 2010, $11.2 million in 2009, and amortization of the liability discount was $0.9 million in 2011, $3.0 million in 2010 and $3.4 million in 2009. At December 31, 2011, the remaining period over which the liability discount will be amortized was 1.6 years, the unamortized liability discount was $1.6 million, and the carrying amount of the equity component was $7.5 million. At December 31, 2010, the unamortized liability discount was $2.5 million, and the carrying amount of the equity component was $7.5 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. 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, 2011, we had borrowed $7.7 million under this facility and had $335.9 million available, after reductions for standby letters of credit secured by this facility. At December 31, 2010, there were no borrowings under this facility, and we had $342.8 million available. 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. At December 31, 2011, the interest rate was 3.0%.

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 borrowings and certain 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, 2011, 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 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.

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 $16.4 million at December 31, 2011, and $12.9 million at December 31, 2010. The unused portions of these lines provided additional liquidity of $11.7 million at December 31, 2011, and $9.3 million at December 31, 2010.