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Ferro Reports 2008 Full-Year and Fourth-Quarter Results; Delays 10-K Filing

Published on 2009-03-03. Author : SpecialChem

CLEVELAND -- Ferro Corporation announced net sales of $2,245 million for the year ended December 31, 2008, up 4.5 percent from net sales of $2,148 million in 2007. Loss from continuing operations for 2008 was $54 million, or $1.26 per diluted share, compared with a loss of $100 million, or $2.34 per diluted share, in 2007.

The improvement was primarily the result of lower selling, general and administrative expenses, lower interest expense, and a lower impairment charge, partially offset by increased restructuring charges and a loss on the extinguishment of debt. In 2008, the operating loss included net pre-tax charges of $116 million. These charges included impairment charges of $80 million for goodwill and other long-lived assets associated with the Company's tile, specialty plastics and electronic materials businesses and restructuring charges of $26 million. The Company recorded additional pre-tax charges of $10 million primarily related to a loss on the extinguishment of debt resulting from bond refinancing activities, manufacturing rationalization activities, and corporate development expenses. In 2007, the operating loss included $166 million in charges primarily related to impairment charges, restructuring charges and legal settlements.

"The past year closed with some of the most significant economic challenges in decades, and in response, our team took aggressive action to reduce costs and expenses, conserve cash and lower debt," said Chairman, President and Chief Executive Officer James F. Kirsch. "We are taking additional actions in 2009 to further lower costs and assure our continued access to liquidity. These actions, combined with the initiatives we began in 2006 to rationalize our worldwide manufacturing operations, are building a strong foundation for Ferro's future. While economic conditions are expected to remain difficult in 2009, we are focused on supporting our worldwide customers with the industry-leading products that they know and trust. I am confident that Ferro is poised to benefit strongly as the global economy rebounds."

Continued Focus on Cost Cutting and Improving Operational Efficiencies

"Although we are not satisfied with the results of the fourth quarter, we are pleased with the progress we have made to cut costs, improve efficiency and unlock the future earnings potential of the Company," Kirsch said. "Our restructuring programs around the world have generated annual cost and expense savings of more than $45 million, in aggregate, from mid-2006 through the end of 2008, and we expect to generate an additional $40 million in annual savings over the next two years. These efforts are lowering our fixed costs, and building a cost structure that will generate significantly improved earnings potential as the global economy recovers."

Actions taken in 2008 and 2009 include:

  • Headcount reductions at locations around the world which reduced total employment by approximately 12 percent during 2008, with an additional 2 percent staff reduction in January 2009.
  • Initiation of the fourth and final major phase of restructuring within Ferro's Inorganics business in Europe, which is expected to reduce annual costs by approximately $14 million over the next two years.
  • The closing of a pigments plant in Toccoa, Georgia, in December 2008, which is expected to generate annual savings of $3 million to $4 million.
  • Production reductions, extended holiday and post-holiday shutdowns, reduced staffing and shortened work weeks at manufacturing sites where customer orders do not support full-time operations.
  • A 50 percent reduction in planned capital spending for 2009 compared with 2008.
  • A reduction in the common stock dividend, which will result in a cash savings of $24 million on an annualized basis.
  • A worldwide hiring freeze, elimination of most 2009 wage increases for salaried and non-contract employees, and significant reductions in discretionary spending.
  • Suspension of Company's 401(k) matching contributions and additional cost saving changes in benefit plans and human resources policies.
  • Inventory reductions and other working capital improvements.

2008 Full-Year Results

Price increases and favorable changes in foreign currency exchange rates were the primary drivers of sales growth during 2008. Price increases during the year included those related to higher precious metal costs, which are passed through to customers as higher product prices. Changes in foreign currency exchange rates added approximately 3.5 percentage points to the increase in sales for the year. Volume declines partially offset the sales growth, particularly in the last two months of the year, as customers reduced orders sharply in concert with weakened economic activity.

In 2008, sales growth was led by the Electronic Materials segment where demand increased for conductive pastes and powders, particularly for products used in the manufacture of solar cells. Increased precious metal costs contributed to the sales increase. Sales also increased in the Performance Coatings, Polymer Additives and Color and Glass Performance Materials segments. In each segment, sales were higher due to a combination of favorable changes in foreign currency exchange rates and higher product pricing, partially offset by lower volumes. Sales volume declines were the most significant in the final two months of the year, as customers cut their production volumes and their inventory because of weaker economic activity around the world. Sales declined in the Specialty Plastics segment, primarily as a result of lower sales volume.

Gross profit percentage was 18.0 percent of sales for the year, compared with 18.7 percent of sales in 2007. In 2008, gross profit was essentially flat with 2007 and was reduced by $3 million, primarily as a result of charges for asset write-offs and other costs associated with the Company's manufacturing rationalization programs. During 2007, gross profit was reduced by $8 million in charges, largely resulting from accelerated depreciation and other costs related to manufacturing rationalization programs.

Selling, general and administrative (SG&A) expense declined to $297 million in 2008, from $315 million in 2007. As a percentage of sales, SG&A declined to 13.2 percent in 2008, from 14.7 percent during 2007. The 2008 reduction in SG&A expense occurred largely during the final three months of the year as the Company made cost and expense reductions to align the business with the rapidly deteriorating global economy. Included in the 2008 SG&A expense were net charges of $4 million related to corporate development activities, asset write-offs and employee severance expenses, partially offset by benefits from litigation settlements and insurance proceeds. SG&A expense in 2007 included charges of $12 million primarily related to litigation settlements and corporate development activities.

Total segment income for 2008 was $144 million, compared with $147 million during 2007. Segment income increased in the Electronic Materials segment as a result of higher sales volume of conductive pastes and powders, manufacturing cost improvements and benefits from prior-period restructuring efforts. Segment income also increased in the Pharmaceutical segment, driven by an improved product mix. Income declined in all other segments, primarily due to lower sales volumes and higher raw material costs, partially offset by higher product prices. The Company estimates that costs for raw materials increased approximately $80 million during 2008, compared with the prior year. Product price increases across all product lines were adequate to offset the rising costs, but not sufficient to maintain gross margins.

The Company recorded an $80 million charge for impairment of goodwill and other long-lived assets in 2008. Goodwill was impaired related to tile coatings products in the Performance Coatings segment, and goodwill and property, plant and equipment were impaired related to plastics products in the Specialty Plastics segment. The impairments were due to lower forecasted cash flows in the businesses resulting from significant reductions in demand from customers due to the current worldwide economic downturn. In addition, the Company recorded an impairment of property, plant and equipment related to dielectric material products in the Electronic Materials segment. This asset impairment was the result of a decline in the operating results and reduced future sales projections for dielectric material products that are produced at a facility in the Netherlands.

Restructuring charges increased to $26 million in 2008, compared with $17 million in 2007. The increased charges were the result of manufacturing rationalization initiatives in Europe, Latin America and the United States, and other activities intended to improve efficiency and reduce costs in line with reduced customer demand.

Interest expense declined to $50 million in 2008, from $58 million in 2007. The lower interest expense was the result of lower interest rates on the Company's variable-rate borrowings and term loans, partially offset by higher average borrowing levels. During the year, the Company issued $172.5 million of 6.50% Convertible Senior Notes, due 2013. The Company purchased all of its 9 1/8% Senior Notes, due 2009, and recorded a loss of $6 million on the extinguishment of debt. Interest expense in 2007 included a $2 million write-off of unamortized fees and discounts associated with an unused portion of the Company's term loan arrangements.

Total debt on December 31, 2008 was $590 million. This amount includes the Company's U.S. accounts receivable securitization program, which was consolidated into the Ferro's balance sheet in December 2008. In addition, the Company had $17 million in net proceeds from international programs to sell receivables. At the end of 2007, Ferro recorded balance sheet debt of $526 million. In addition, the Company had year-end 2007 net proceeds of $55 million from its U.S. accounts receivable securitization program and $42 million from similar programs outside the U.S. Total borrowings, including consolidated balance sheet debt and proceeds from receivables programs, were $606 million on December 31, 2008, compared with $623 million at the end of 2007.

During 2008, the Company sold its Fine Chemicals business for $60 million. Results of operations for the Fine Chemicals business are now recorded as discontinued operations for all periods presented.

2008 Fourth-Quarter Results

Net sales for the three months ended December 31, 2008 were $432 million, compared with net sales of $557 million during the fourth quarter of 2007. The lower sales resulted from an abrupt decline in orders during the quarter, as customers reduced their production volumes and inventories in reaction to deteriorating economic conditions and difficult credit markets around the world. Sales related to applications in building and construction, automobiles and appliances in all global regions were particularly weak. All segments, with the exception of Pharmaceuticals, recorded sales declines compared with the fourth quarter of 2007. The primary drivers of the sales decline were lower sales volume, lower precious metal prices and unfavorable changes in foreign currency exchange rates, partially offset by higher product prices.

Gross profit percentage during the 2008 fourth quarter was 15.1 percent of sales, compared with 17.9 percent of sales in the fourth quarter of 2007. The Company took a number of actions during the quarter to reduce the cost of sales in response to the drop in customer orders. These actions included the closing of a pigments plant in Toccoa, Georgia, extended plant shutdowns, reductions in manufacturing staffing, and reduced production schedules. Additional actions have been taken since the end of the year, including personnel reductions and the initiation of the final phase in the Company's European manufacturing rationalization program. During the fourth quarter of 2007, gross profit was reduced by charges of approximately $3 million, primarily as a result of accelerated depreciation from manufacturing rationalization programs. Also in the 2007 fourth quarter, gross profit was negatively impacted by approximately $2 million in costs that were required to clean up an accidental discharge of product into the wastewater treatment facility at the Company's manufacturing plant in Bridgeport, New Jersey.

Selling, general and administrative expense for the 2008 fourth quarter was $63 million, or 14.5 percent of sales, a $21 million decrease from the fourth quarter of 2007. The decline was driven by cost and expense reduction efforts in response to lower customer orders, favorable changes in foreign currency exchange rates and lower incentive compensation expense. The fourth quarter 2007 SG&A expense included charges of $4 million related primarily to legal settlements and corporate development activities.

During the 2008 fourth quarter, miscellaneous income included a benefit of $3.2 million related primarily to reductions of accruals for contingencies.

At the end of the fourth quarter, the Company's total borrowings were $606 million, including proceeds from off balance sheet financing. This was a decline of $107 million from the total borrowings on September 30, 2008, when the Company recorded $609 million of consolidated balance sheet debt, proceeds of $75 million from its U.S. accounts receivable securitization program and $29 million in proceeds from similar international accounts receivable programs. During the fourth quarter of 2008, agreements related to the Company's U.S. accounts receivable program were amended and the program is now included in the Company's consolidated balance sheet.

Delay of Form 10-K Filing

Ferro has announced that it will delay filing its Annual Report on Form 10-K for 2008. The Company expects to make the filing on or before March 17, 2009, following the finalization of an amendment to its credit facility. The proposed amendment would provide Ferro with additional financial flexibility in the current challenging economic environment, and give the Company the capability to continue restructuring programs that improve long-term cost effectiveness.

Outlook

Customer demand is continuing at the depressed levels recorded in November and December, reflecting the effects of the global economic slowdown and customer inventory destocking. As a result, 2009 first-quarter sales are expected to be below the levels recorded during the last three months of 2008. Earnings, excluding special charges, also are expected to be lower than in the fourth quarter of 2008, primarily as a result of higher pension expense. The negative effect on earnings of lower estimated sales in the first quarter of 2009 is expected to be partially offset by cost and expense reductions.

Because of the continued volatility in customer orders and uncertainty in the global markets, the Company will not provide specific sales and earnings estimates for the first quarter.

About Ferro Corporation:

Ferro Corporation is a leading global supplier of technology-based performance materials for manufacturers. Ferro materials enhance the performance of products in a variety of end markets, including electronics, solar energy, telecommunications, pharmaceuticals, building and renovation, appliances, automotive, household furnishings, and industrial products. Headquartered in Cleveland, Ohio, the Company has approximately 5,800 employees globally and reported 2008 sales of $2.2 billion.

Source: Ferro Corporation


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