Ferro Reports Fourth-Quarter and Full-Year 2006 Results
•
Record full-year sales of $2.04 billion up 8.5 percent
•
2006 total segment income up 29 percent
•
Full-year net income from continuing operations increases to $0.45 per diluted share
CLEVELAND, Ohio – March 1, 2007 – Ferro Corporation (NYSE: FOE) announced today that sales for the year ended December 31, 2006 were a record $2.04 billion, up 8.5 percent from 2005. Sales for the fourth quarter were $497 million, an increase of 8.6 percent from the fourth quarter of 2005.
Income from continuing operations for 2006 was $20.6 million, or $0.45 per diluted share, compared with $17.1 million, or $0.37 per share, in 2005. In 2006, operating income included net pre-tax expenses of $34.9 million primarily related to previously announced manufacturing rationalization activities and costs associated with an accounting investigation and restatement. In 2005, operating income was reduced by pre-tax expenses of $14.1 million, primarily related to expenses from restructuring and the accounting investigation and restatement.
“We delivered substantial growth in sales, and a strong 29 percent increase in our total segment income in 2006,” said Chairman, President and Chief Executive Officer James Kirsch. “We have initiated important restructuring programs that will provide significant future cost savings. And with a new senior team in place, we are committed to delivering sustained global growth and improved profitability in 2007 and beyond.”
2006 Full-Year Results
Sales growth in 2006 was a result of strong performances in Ferro’s Electronic Materials, Performance Coatings and Color and Glass Performance Materials segments. Sales in the Polymer Additives and Specialty Plastics segments were negatively impacted by weakness in the U.S. residential construction and automotive markets in the second half of the year.
Increased prices, including higher precious metal prices, and improved product mix across all of the Company’s businesses, were the primary drivers of sales growth for 2006. Overall volume declined slightly as volume improvements in Electronic Materials and Performance Coatings were offset by declines in Specialty Plastics and Polymer Additives.
Gross margins were 20.3 percent of sales for the year, compared with 20.4 percent of sales in 2005. The Company’s 2006 gross profit was reduced by $4.6 million of costs related to manufacturing rationalization activities. Gross margins were also negatively impacted by increased precious metal sales, compared to 2005. Precious metals costs are largely passed through to customers with minimal margin contribution.
Selling, general and administrative (SG&A) expense was $305.2 million in 2006, or 15.0 percent of sales. Included in the 2006 SG&A expense were $8.2 million in charges, primarily related to the accounting investigation and restatement. SG&A expense in 2005 was $310.1 million, or 16.5 percent of sales, including charges of $10.5 million related to the accounting investigation and restatement.
Total segment income for 2006 was $151.8 million, up 29 percent from the prior-year level of $118.0 million. The increase reflected higher income from all segments except Polymer Additives.
Interest expense increased in 2006, reflecting higher borrowing levels and higher interest rates on funds borrowed. Interest expense for 2006 was $64.4 million, compared with $46.9 million in 2005. The 2006 interest expense included a $2.5 million write-down of previously unamortized fees and discounts associated with the Company’s prior credit facility and debentures that were accelerated. The interest rate on the Company’s term loans and revolving credit borrowings declined by 50 basis points as a result of becoming current on its financial filings in December 2006.
During 2006, the Company’s effective tax rate declined to 19.6 percent from 28.8 percent in 2005, largely as a result of a lower valuation reserve against certain deferred tax assets and reduced tax rates in certain foreign jurisdictions. These benefits were partially offset by a higher reserve for possible future U.S. taxes on accumulated foreign earnings that may be repatriated to the U.S. The Company expects its effective tax rate in 2007 will be approximately 33 percent.
Total debt at the end of 2006 was $592.4 million, an increase of $38.7 million from the end of 2005. In addition, the Company had $60.6 million in its accounts receivable securitization program as of December 31, 2006, compared with $1.0 million at the end of 2005. An increase in working capital, including deposit requirements related to the Company’s precious metal consignments, was a primary driver of the higher borrowing. These deposit requirements were $70.1 million at the end of 2006, an increase from $19.0 million at the end of 2005. The year-end deposits were down $23.2 million from September 30, 2006, and the Company expects to further reduce these deposits in the first half of 2007.
2006 Fourth-Quarter Results
Sales of $497.3 million for the fourth quarter were led by year-over-year growth in Performance Coatings, Electronic Materials and Color and Glass Performance Materials. Sales in Polymer Additives and Specialty Plastics were lower due to slowing in the U.S. residential construction and automotive markets.
The fourth-quarter revenue increase of 8.6 percent was primarily due to increases in prices, including higher precious metal prices, improved product mix and favorable foreign exchange rates, compared with the fourth quarter of 2005. Favorable foreign currency exchange rates added less than 4 percentage points to the revenue growth rate. Lower volumes reduced sales growth by less than 2 percentage points.
Gross margin for the fourth quarter was 19.6 percent of sales, unchanged from the fourth quarter of 2005. Gross profit was reduced by $3.0 million during the 2006 fourth quarter, as a result of costs related to the Company’s manufacturing rationalization. Higher precious metal prices, which are generally passed through to customers with minimal mark-up, also had a negative impact on gross margin percentage for the quarter compared with the prior-year period.
Selling, general and administrative expense for the fourth quarter was $73.3 million, or 14.7 percent of sales. Included in quarterly SG&A expense were $1.6 million in charges, primarily related to divestment activities and severance. SG&A expense was $75.7 million, or 16.5 percent of sales, in the fourth quarter of 2005. Charges of $1.7 million, related to the accounting investigation and restatement, were included in fourth quarter 2005 SG&A expense.
Total segment income for the fourth quarter was $33.0 million, a 40-percent increase over the fourth quarter of 2005.
During the fourth quarter, net income was reduced as a result of net pre-tax charges of $23.1 million, primarily related to manufacturing rationalization activities in the Company’s European Inorganics business and the Electronic Materials business in the United States. Partially offsetting these charges was a benefit related to a litigation settlement.
2007 First-Quarter Guidance
Sales for the first quarter of 2007 are expected to be approximately $500 million to $525 million, reflecting continued growth across multiple business segments. Sequential growth over fourth-quarter 2006 sales is expected to be broadly based across the Company’s businesses.
The Company expects higher interest expense and smaller losses from forward supply contracts in the 2007 first quarter, compared with the prior-year period. Earnings for the first quarter are expected to be between $0.17 and $0.22 per share. This estimate includes expected charges of approximately 5 cents per share, primarily from ongoing manufacturing rationalization activities. The Company reported income from continuing operations of $0.19 per share in the first quarter of 2006.
Conference Call
The Company will host a conference call to discuss its financial results and general business outlook on Friday, March 2, 2007 at 8:00 a.m. Eastern time. If you wish to participate in the call, dial 800-779-0712 if calling from the United States or Canada, or dial 210-839-8501 if calling from outside North America. When prompted, refer to the pass code, FOE, and the conference leader, David Longfellow. Please call approximately 10 minutes before the conference call is scheduled to begin.
An audio replay of the call will be available from noon Eastern time on March 2 through 9 p.m. Eastern time on March 9. To access the replay, dial 800-945-5759 if calling from the United States or Canada, or dial 203-369-3502 if calling from outside North America.
The conference call also will be broadcast live over the Internet and will be available for replay through the end of the second quarter. The live broadcast and replay can be accessed through the Investor Information portion of the Company’s Web site atwww.ferro.com.
About Ferro Corporation
Ferro Corporation (http://www.ferro.com) 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, telecommunications, pharmaceuticals, building and renovation, appliances, automotive, household furnishings, and industrial products.
Headquartered in Cleveland, Ohio, the Company has approximately 6,700 employees globally and reported 2006 sales of $2.0 billion.
Cautionary Note on Forward-Looking Statements
Certain statements in this Ferro press release may constitute “forward-looking statements” within the meaning of 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, which are difficult to predict and often beyond the control of the Company. Important factors that could cause actual results to differ materially from those suggested by these forward-looking statements, and that could adversely affect the Company’s future financial performance, include the following:
•
We depend on reliable sources of raw materials and other supplies at a reasonable cost, but availability of such materials and supplies could be interrupted and/or the prices charged for them could escalate.
•
The markets in which we participate are highly competitive and subject to intense price competition.
•
We are striving to improve operating margins through sales growth, price increases, productivity gains and improved purchasing techniques, but it may not be successful in achieving the desired improvements.
•
We are engaged in restructuring programs to improve manufacturing efficiency and reduce costs. If we are not successful in the execution of our restructuring programs we will not realize the expected cost savings.
•
Our products are sold into industries where demand is unpredictable, cyclical or heavily influenced by consumer spending.
•
The global scope of our operations exposes us to risks related to currency conversion and changing economic, social and political conditions around the world.
•
We have a growing presence in the Asia/Pacific region where it can be difficult for an American company to compete lawfully with local competitors.
•
Regulatory authorities in the U.S., European Union and elsewhere are taking a much more aggressive approach to regulating hazardous materials and those regulations could affect sales of our products.
•
Our operations are subject to stringent environmental, health and safety regulations and compliance with those regulations could require us to make significant investments.
•
We depend on external financial resources and any interruption in access to capital markets or borrowings could adversely affect our financial condition.
•
Interest rates on some of our external borrowings are variable and our borrowing cost could be affected adversely by interest rate increases.
•
Many of our assets are encumbered by liens that have been granted to lenders and those liens affect our flexibility in making timely dispositions of property and businesses.
•
We are subject to a number of restrictive covenants in its credit facilities and those covenants could affect our flexibility in funding strategic initiatives.
•
We have significant deferred tax assets and our ability to utilize these assets will depend on our future performance.
•
We are a defendant in several lawsuits that could have an adverse effect on our financial condition and/or financial performance, unless they are successfully resolved.
•
Our businesses depend of a continuous stream of new products and failure to introduce new products could affect our sales and profitability.
•
Employee benefit costs, especially post-retirement costs, constitute a significant element of our annual expenses, and funding these costs could adversely affect our financial condition.
•
We are exposed to risks associated with acts of God, terrorists and others, as well as fires, explosions, wars, riots, accidents, embargos, natural disasters, strikes and other work stoppages, quarantines and other governmental actions, and other events or circumstances that are beyond the Company’s reasonable control.
Additional information regarding these risk factors can be found in the Company’s Annual Report on Form 10-K for the period ended December 31, 2006.
The risks and uncertainties identified above are not the only risks the Company faces. Additional risks and uncertainties not presently known to the Company or that it currently believes to be immaterial also may adversely affect the Company. Should any known or unknown risks and uncertainties develop into actual events, these developments could have material adverse effects on the Company’s business, financial condition and results of operations.
This release contains time-sensitive information that reflects management’s best analysis only as of the date of this release. The Company does not undertake any obligation to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after the date of this release.
MEDIA CONTACT: Mary Abood Director, Corporate Communications, Ferro Corporation Phone: 216-875-6202 E-mail:aboodm@ferro.com
2
Ferro Corporation and Consolidated Subsidiaries Condensed Consolidated Statements of Income
Three Months Ended December 31,
Year Ended December 31,
(Dollars in thousands, except per share amounts)
2006
2005
2006
2005
Net Sales
$
497,307
$
457,889
$
2,041,525
$
1,882,305
Cost of Sales
399,962
367,935
1,626,733
1,498,504
Gross Profit
97,345
89,954
414,792
383,801
Selling, General and Administrative Expenses
73,256
75,675
305,211
310,056
Restructuring Charges
23,146
(1,576
)
23,146
3,677
Other Expense (Income):
Interest Expense
16,272
12,057
64,427
46,919
Other Expense (Income), Net
(4,615
)
3,257
(3,580
)
(923
)
Income (Loss) Before Taxes
(10,714
)
541
25,588
24,072
Income Tax Expense (Benefit)
(6,917
)
(761
)
5,026
6,928
Income (Loss) from Continuing Operations
(3,797
)
1,302
20,562
17,144
Loss On Disposal of Discontinued Operations, net
67
317
472
868
Net Income (Loss)
(3,864
)
985
20,090
16,276
Dividends on Preferred Stock
(297
)
(361
)
(1,252
)
(1,490
)
Net Income (Loss) Available to Common Shareholders
$
(4,161
)
$
624
$
18,838
$
14,786
Per Common Share Data:
Basic Earnings (Loss)
From Continuing Operations
$
(0.10
)
$
0.02
$
0.45
$
0.37
From Discontinued Operations
—
(0.01
)
(0.01
)
(0.02
)
$
(0.10
)
$
0.01
$
0.44
$
0.35
Diluted Earnings (Loss)
From Continuing Operations
$
(0.10
)
$
0.02
$
0.45
$
0.37
From Discontinued Operations
—
(0.01
)
(0.01
)
(0.02
)
$
(0.10
)
$
0.01
$
0.44
$
0.35
Dividends
$
0.145
$
0.145
$
0.58
$
0.58
Shares Outstanding:
Basic
42,808,264
42,333,902
42,393,974
42,308,772
Diluted
42,454,579
42,345,913
42,422,119
42,344,984
End of Period
42,865,471
42,353,266
42,865,471
42,353,266
3
Ferro Corporation and Consolidated Subsidiaries Segment Sales and Segment Income
(Dollars in thousands)
Three Months Ended December 31,
Year Ended December 31,
2006
2005
2006
2005
Segment Sales
Performance Coatings
$
141,370
$
121,498
$
538,385
$
488,467
Electronic Materials
108,970
91,917
444,463
355,676
Color and Glass Perf. Materials
95,025
82,390
387,540
359,613
Polymer Additives
68,443
71,405
313,500
300,563
Specialty Plastics
61,782
67,386
271,307
279,119
Other
21,717
23,293
86,330
98,867
Total
$
497,307
$
457,889
$
2,041,525
$
1,882,305
Segment Income
Performance Coatings
$
10,508
$
8,167
$
42,094
$
31,600
Electronic Materials
9,259
4,177
35,129
13,463
Color and Glass Perf. Materials
10,297
6,639
43,345
38,879
Polymer Additives
(972
)
2,736
10,986
18,533
Specialty Plastics
2,264
2,711
14,535
13,387
Other
1,672
(769
)
5,674
2,175
Total Segment Income
33,028
23,661
151,763
118,037
Unallocated expenses
(32,085
)
(7,806
)
(65,328
)
(47,969
)
Interest expense
(16,272
)
(12,057
)
(64,427
)
(46,919
)
Interest earned
1,725
110
4,466
538
Foreign currency
(334
)
(245
)
(1,040
)
(1,284
)
Gain on sale of businesses
414
321
67
69
Miscellaneous, net
2,810
(3,443
)
87
1,600
Income (loss) before taxes from continuing operations
$
(10,714
)
$
541
$
25,588
$
24,072
4
Ferro Corporation and Consolidated Subsidiaries Condensed Consolidated Balance Sheets
(Dollars in thousands)
Year Ended December 31,
2006
2005
Assets
Current Assets:
Cash and Cash Equivalents
$
16,985
$
17,413
Accounts and Trade Notes Receivable, net
220,899
182,390
Inventories
254,513
215,257
Other Current Assets
130,208
195,659
Total Current Assets
622,605
610,719
Property, Plant & Equipment, net
526,802
531,139
Intangibles, net
406,340
410,666
Miscellaneous Other Assets
177,190
116,020
Total Assets
$
1,732,937
$
1,668,544
Liabilities and Shareholders’ Equity
Current Liabilities:
Notes and Loans Payable
$
10,764
$
7,555
Accounts Payable
237,018
236,282
Other Current Liabilities
135,102
123,047
Total Current Liabilities
382,884
366,884
Long-Term Debt, less current portion
581,654
546,168
Other Non-Current Liabilities
227,063
266,933
Total Liabilities
1,191,601
1,179,985
Series A Convertible Preferred Stock
16,787
20,468
Shareholders’ Equity
524,549
468,091
Total Liabilities and Shareholders’ Equity
$
1,732,937
$
1,668,544
5
Ferro Corporation and Consolidated Subsidiaries Condensed Consolidated Statements of Cash Flows
Year Ended December 31,
(Dollars in thousands)
2006
2005
Cash flows from Operating Activities
Net Income
$
20,090
$
16,276
Depreciation and amortization
79,501
74,823
Restructuring charges
23,146
3,677
Precious metal deposits
(51,073
)
(11,100
)
Changes in other current assets and liabilities, net
27,689
(29,226
)
Other adjustments, net
(27,723
)
(31,283
)
Net cash provided by continuing operations
71,630
23,167
Net cash used for discontinued operations
(686
)
(1,786
)
Net cash provided by operating activities
70,944
21,381
Cash flows from investing activities
Capital expenditures for plant and equipment
(50,615
)
(42,825
)
Proceeds from sale of assets and businesses
5,130
9,287
Cash investment in Ferro Finance Corp.
(25,000
)
—
Other investing activities
1,767
(2,276
)
Net cash used for investing activities
(68,718
)
(35,814
)
Cash flow from financing activities
Net borrowings under term loans and revolving credit facilities
193,187
46,266
Extinguishment of debentures
(155,000
)
—
Debt issue costs paid
(16,234
)
—
Cash dividends paid
(25,901
)
(25,937
)
Other financing activities
913
(2,192
)
Net cash (used for) provided by financing activities
(3,035
)
18,137
Effect of exchange rate changes on cash
381
(230
)
(Decrease) increase in cash and cash equivalents
(428
)
3,474
Cash and cash equivalents at beginning of period
17,413
13,939
Cash and cash equivalents at end of period
$
16,985
$
17,413
Cash paid during the period for:
Interest
$
62,980
$
44,092
Income taxes
$
10,687
$
9,487
6
Ferro Corporation and Consolidated Subsidiaries Supplemental Information
Segment Sales Excluding Precious Metals and Reconciliation of Sales excluding Precious Metals to Net Sales (Unaudited)
(Dollars in thousands)
Three Months Ended December 31,
Year Ended December 31,
2006
2005
2006
2005
Segment Sales excluding Precious Metals
Performance Coatings
$
141,370
$
121,498
$
538,385
$
488,467
Electronic Materials
62,838
58,104
262,949
229,950
Color and Glass Perf. Materials
85,146
79,834
353,789
351,166
Polymer Additives
68,443
71,405
313,500
300,563
Specialty Plastics
61,782
67,386
271,307
279,119
Other
21,717
23,293
86,330
98,867
Total Sales, Excluding Precious Metals
441,296
421,520
1,826,260
1,748,132
Precious Metals Sales
56,011
36,369
215,265
134,173
Net Sales
$
497,307
$
457,889
$
2,041,525
$
1,882,305
It should be noted that segment sales excluding precious metals is a financial measure not required by, or presented in accordance with, accounting principles generally accepted in the United States (U.S. GAAP). The sales are presented here to exclude the impact of volatile precious metal raw material costs. The precious metal raw material costs are generally passed through to directly to customers with minimal margin. We believe this data provides investors with additional information on the underlying operations of the business and enables period-to-period comparability of financial performance. In addition, these measures are used in the calculation of certain incentive compensation programs for selected employees.
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