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Ferro Reports 2010 Second-Quarter Results

Published on 2010-07-29. Author : SpecialChem

CLEVELAND -- Ferro Corporation announced net sales of $543 million for the three months ended June 30, 2010, an increase of 36 percent from net sales of $399 million in the second quarter of 2009.

Income from continuing operations for the 2010 second quarter was $7.6 million, or $0.08 per diluted share, compared with a loss of $11.1 million, or $0.27 per diluted share, in the second quarter of 2009. The improvement was primarily the result of higher sales volume. Increased restructuring charges, higher selling, general and administrative expense and increased income tax expense partially offset the benefits of the higher sales volume. In the 2010 second quarter, the operating results included net pre-tax charges of $26.6 million. These charges included restructuring charges of $21.2 million partially offset by a net pre-tax gain of $7.8 million resulting from a business combination. The Company recorded other pre-tax charges of $13.2 million during the second quarter, primarily related to manufacturing rationalization and other expense reduction activities, and an increased environmental reserve. In the second quarter of 2009, the loss from continuing operations included net pre-tax charges of $6.4 million primarily related to manufacturing rationalization and other cost-reduction actions.

"Our excellent second-quarter results demonstrate the progress we have made to reduce costs and grow our global business," said Chairman, President and Chief Executive Officer James F. Kirsch. "The operating leverage that we have created through our manufacturing rationalization programs is delivering strong improvements in profitability. I am extremely proud of the achievements of Ferro employees around the world as they continue to demonstrate their commitment to winning. The Ferro organization is ready to pursue further opportunities for future growth."

2010 Second-Quarter Results

Net sales increased 36 percent compared with the second quarter of 2009 as customer demand continued to recover from the global economic downturn in 2009. In the second quarter of 2010, demand continued in a pattern of sequential growth that began in the second quarter of 2009. Compared with the 2009 second quarter, increased sales volume contributed 30 percentage points to the growth in sales while changes in product mix and price contributed 8 percentage points of sales growth. Changes in foreign currency exchange rates reduced sales growth by approximately 2 percentage points. Increased sales of precious metals, including changes in both price and volume, accounted for approximately 10 percentage points of the overall sales increase compared with the prior-year period.

Gross profit percentage increased to 22.5 percent of net sales for the quarter, compared with 16.3 percent of net sales in the second quarter of 2009. The increase was a result of a combination of higher sales volume, cost reductions achieved through restructuring initiatives and reduced staffing and benefits from changes in product pricing and mix. In the 2010 second quarter, gross profit was reduced by $2.5 million as a result of charges primarily for accelerated depreciation and other costs related to the Company's manufacturing rationalization programs.

Selling, general and administrative ("SG&A") expense increased by $7.4 million compared with the second quarter of 2009. SG&A expense declined to 12.9 percent of sales in the 2010 second quarter compared with 15.6 percent in the prior-year period. The primary drivers of the increase in SG&A spending on a dollar basis were higher accruals for incentive compensation and higher special charges. Included in SG&A expense during the 2010 second quarter were charges of $5.6 million, including severance and other costs related to manufacturing rationalization initiatives and corporate development expenses. SG&A expense in the second quarter of 2009 included $3.0 million in charges, primarily related to expense reduction actions and manufacturing rationalization related charges.

Income increased in all segments except Pharmaceuticals compared with the prior-year period. Segment income increased in Electronic Materials due to increased demand for many of the unit's products, particularly metal powders and silver and aluminum pastes used by manufacturers of solar cells. Segment income in Performance Coatings and Color and Glass Performance Materials improved due to higher sales volumes and reduced costs. Restructuring programs currently underway in France, Portugal and Australia are expected to further reduce costs in the Color and Glass Performance Materials operations during the remainder of 2010. Segment income also increased in Polymer Additives and Specialty Plastics due to a combination of higher sales volumes, reduced manufacturing costs and expense reductions.

Restructuring charges increased to $21 million in the second quarter of 2010. Employee severance charges, related to initiatives to close one manufacturing plant in France and two plants in the Netherlands, were the primary drivers of the restructuring charges in the quarter.

Interest expense declined in the 2010 second quarter to $14 million from $17 million in the second quarter of 2009. The primary driver of the decline in interest expense was a decline in average borrowing levels compared with the prior-year quarter. Lower average interest rates also contributed to the decline in interest expense. Included in the second quarter interest expense was a non-cash write-off of $1.5 million in unamortized fees related to a $50 million pay down of the Company's term loan debt.

Total debt on June 30, 2010 was $353 million, a decrease of $71 million from December 31, 2009. In addition, at the end of the 2010 second quarter the Company had net proceeds of $2.6 million from international receivables factoring programs. Net proceeds from international receivables factoring on December 31, 2009 were $10.3 million.

During the second quarter, cash deposits related to precious metals declined to $56 million from $107 million on March 31, 2010, primarily as a result of reduced collateral requirements from participants in the Company's precious metal leasing program.

Agreement to Acquire Assets in Egypt

The Company has signed an agreement to purchase a newly constructed manufacturing plant for frits and glazes in Fayoum, Egypt. The acquisition will allow the Company to cost-effectively serve the growing tile manufacturing market in Egypt, the Middle East and North Africa. The closing of the transaction is subject to governmental approvals and the satisfaction or waiver of other customary closing conditions. Closing is expected in the 2010 third quarter.

Outlook

Customer demand is expected to follow historical seasonal trends during 2010, with higher sales and profitability in the first half of the year compared with the second half. Reductions in the Company's cost structure that were accomplished in 2009 are expected to provide improved profitability in 2010. In addition, the Company continues to execute additional manufacturing rationalization and expense reduction initiatives during 2010, including plant closings and staffing reductions.

The Company's current outlook for 2010 assumes that worldwide real GDP growth will recover to greater than 2% and that there will not be a return to recessionary conditions in the Company's major regional markets in the United States, Europe and Asia.

Based on these assumptions and the first half results, the Company has increased its estimates for 2010 financial performance. The Company currently estimates full-year 2010 net sales will increase between 15 and 20 percent compared with 2009, to between $1.9 billion and $2.0 billion. Adjusted EBITDA is expected to be in the range of $240 million to $255 million in 2010, compared with a previous outlook of $190 million to $210 million. Both sales and adjusted EBITDA are expected to be higher in the first half of 2010 than the second half of the year, consistent with the Company's normal seasonal trends.

Additional assumptions in the Company's outlook for 2010 include:

  • Capital expenditures of approximately $60 million;
  • Completion of currently planned restructuring projects by the end of 2010;
  • Pension expense of approximately $24 million and cash contributions to the Company's worldwide pension plans of approximately $25 million;
  • Depreciation and amortization of $80 million to $85 million, excluding accelerated depreciation associated with manufacturing rationalization projects; and
  • Interest expense of approximately $48 million, assuming no further return of cash collateral for precious metal leases.

Ferro expects to update its annual sales and adjusted EBITDA estimates in the third quarter earnings release to reflect regional economic conditions, progress on the Company's manufacturing rationalization programs, and updated customer demand forecasts.

Non-GAAP Measures

Adjusted EBITDA is equal to income (loss) before taxes, plus interest expense, depreciation and amortization, restructuring, impairment and other special charges.

Adjusted EBITDA is a financial measure not required by, or presented in accordance with, accounting principles generally accepted in the United States (U.S. GAAP). The measure is presented here because it provides additional information in a manner that is commonly used by investors and reported by third-party analysts. The amount and timing of restructuring, impairment and other special charges are difficult to forecast due to the number of restructuring and other cost-reduction projects currently underway within the Company and the uncertainty of factors that determine future charges, which make a detailed reconciliation to the most directly comparable U.S. GAAP measure impractical.

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 5,200 employees globally and reported 2009 sales of $1.7 billion.

Source: Ferro Corporation


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