CLEVELAND, Ohio – August 8, 2007 – Ferro Corporation (NYSE: FOE) announced sales of $554 million for the quarter ended June 30, 2007, up 3 percent from sales of $538 million in the second quarter of 2006.
Income from continuing operations for the 2007 second quarter was $4.6 million, or $0.10 per diluted share, compared with $10.5 million, or $0.24 per diluted share, in the second quarter of 2006. Income from continuing operations declined primarily as a result of previously announced manufacturing rationalization, the costs of a temporary plant shutdown, and higher selling, general and administrative costs due to litigation settlements. These higher costs were partially offset by lower interest expenses. The 2007 second quarter income from continuing operations included net pre-tax expenses of $10.0 million primarily related to a reserve for litigation settlements and manufacturing rationalization costs. The second quarter 2006 income from continuing operations included net pre-tax expenses of $3.7 million from expenses primarily related to the write-off of previously unamortized fees and discounts related to the Company’s debentures and an accounting investigation and restatement.
“We maintained sales in the quarter, as our international business helped compensate for the effects of weak residential construction, appliance and automotive markets in the U.S.,” said Chairman, President and Chief Executive Officer James F. Kirsch. “Our segment income was negatively impacted by an interruption of manufacturing of our South Plainfield, New Jersey plant. However, we have improved the profitability in our Organic Specialties Group, through product repositioning and expense control. We continue to execute our restructuring programs to improve the cost structure to support our worldwide brand, technology and applications understanding.”
Changes in foreign currency exchange rates accounted for the increase in sales compared with the second quarter of 2006. Price increases and volume declines were largely offsetting during the quarter. Volumes were lower overall, driven by weaker market conditions in Electronic Materials, Polymer Additives and Specialty Plastics. Volumes were higher in Performance Coatings compared with the second quarter of 2006.
Gross margins were 19.4 percent of sales for the second quarter, compared with 20.6 percent of sales in the second quarter of 2006. The Company’s 2007 second quarter gross profit was reduced by $1.9 million in accelerated depreciation costs related to manufacturing rationalization activities. Gross margins were also negatively impacted by an interruption of manufacturing activities at our South Plainfield, New Jersey plant. Operations at the site were resumed after operational and safety issues were addressed, however, the interruption resulted in approximately $3 million in unrecovered manufacturing costs and other expenses during the quarter. In addition, gross margin as a percent of sales continues to be negatively impacted by rising precious metal costs. Higher precious metal costs are passed through to customers with minimal contribution to margins.
Selling, general and administrative (SG&A) expense was $84.4 million in the second quarter of 2007, or 15.2 percent of sales. Included in SG&A expense are charges totaling $7.8 million, primarily related to an increased reserve for litigation settlements. SG&A expense in the second quarter of 2006 was $78.7 million, or 14.6 percent of sales, including charges of $1.6 million primarily related to the accounting restatement.
Interest expense for the 2007 second quarter was $14.3 million, compared with $18.1 million in the year-ago period. The 2006 second quarter interest expense included a non-cash $2.5 million write-off of unamortized fees and discounts associated with the Company’s debentures. Interest expense also declined from the prior-year period as a result of lower borrowing levels resulting from the elimination of cash deposits on precious metal consignments. The elimination of these deposits also resulted in a decline in interest income during the second quarter compared with the second quarter of 2006.
The Company’s tax rate for the second quarter increased to 37.9 percent from 32.8 percent in the 2006 second quarter. The higher rate was largely the result of the mix of income by country and an increase in the anticipated level of foreign current-year earnings to be repatriated.
Total debt on June 30, 2007 was $559.2 million, a decrease of $33.2 million from the end of 2006. The Company had net proceeds of $61.3 million from its U.S. accounts receivable securitization program as of June 30, 2007, compared with $60.6 million at the end of 2006. It had $39.4 million in net proceeds from similar programs outside the U.S. at the end of the quarter, compared with $33.7 million at the end of 2006.
Segment Results
Sales in the Performance Coatings segment increased in both the tile and porcelain enamel product areas compared with the prior-year quarter. Both the Performance Coatings and Color and Glass Performance Materials segments experienced growth in international sales, particularly in Europe. Sales in Polymer Additives also increased compared with the prior-year quarter, with increased sales in both North America and internationally, driven by repositioning sales toward a more favorable price and product mix. Sales in Electronic Materials declined in the quarter, primarily driven by weaker dielectric materials demand from supply chain inventory reductions by customers who manufacture capacitors. Sales in Specialty Plastics declined compared with the second quarter of 2006, largely due to weaker demand in the U.S. residential housing, appliance and automotive markets.
Total segment income for the second quarter of 2007 was $40.4 million compared with $42.7 million in the prior-year period. The decline was driven by reduced segment income in the Electronic Material Systems segment as a result of lower volumes of dielectric materials sold and the impact of the temporary interruption of manufacturing at the South Plainfield site. Segment income also declined modestly in Performance Coatings, driven by lower income in the Company’s porcelain enamel business. Segment income increased in Color and Glass Performance Materials as a result of higher sales. Income also was higher in the Polymer Additives and Specialty Plastics segments primarily as a consequence of expense control initiatives taken during late 2006 and early 2007 in response to weak market conditions.
Outlook
The Company expects sales to increase in the third quarter compared with sales of $501 million in the third quarter of 2006. Consistent with historical seasonality, sales are expected to decline sequentially from the second quarter of 2007. Sales for the third quarter, ending September 30, are expected to be in the range of $505 million to $530 million. Sales in Electronic Material Systems are expected to increase sequentially from the second quarter of 2007 and compared with the prior-year quarter, as demand from manufacturers of capacitors recovers. Sales in Performance Coatings, Color and Glass Performance Materials and Polymer Additives are expected to increase compared with the prior-year period.
Net income per share in the third quarter is expected to be in the range of 17 to 22 cents per share, including approximately 2 cents per share for charges related to the Company’s manufacturing rationalization activities. Net income per share in the third quarter of 2006 was 12 cents per share.
Conference Call
The Company will host a conference call to discuss its second quarter financial results, third quarter earnings estimates, and general business outlook on Thursday, August 9, 2007, at 10:00 a.m. Eastern time. If you wish to participate in the call, dial 888-323-2711 if calling from the United States or Canada, or dial 210-234-0008 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 August 9 through 9 p.m. Eastern time on August 16. To access the replay, dial 866-499-4561 if calling from the United States or Canada, or dial 203-369-1806 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 third quarter. The live broadcast and replay can be accessed through the Investor Information portion of the Company’s Web site atwww.ferro.com. A podcast of the conference call will also be available on the Company’s Web site.
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, solar energy, 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 we 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 an 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 our 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 on 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, embargoes, 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.
# # #
1
*Note: In the following tables, adjustments to the Company’s 2006 financial results relate to the change in accounting for certain inventories from LIFO to FIFO and the adoption of AUG AIR-1,Accounting for Planned Maintenance Activities. See the Company’s Quarterly Report on Form 10-Q for additional information.
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 (Unaudited)
Three Months Ended June 30,
Six Months Ended June 30,
Adjusted*
Adjusted*
(Dollars in thousands, except per share amounts)
2007
2006
2007
2006
Net Sales
$
553,658
$
538,492
$
1,083,363
$
1,043,645
Cost of Sales
446,131
427,586
869,056
824,905
Gross Profit
107,527
110,906
214,307
218,740
Selling, General and Administrative Expenses
84,386
78,735
163,143
157,839
Restructuring Charges
332
—
1,863
—
Other Expense (Income):
Interest Expense
14,286
18,087
31,732
31,337
Interest Earned
(189
)
(1,026
)
(1,154
)
(1,770
)
Foreign currency transactions, net
423
219
934
540
Other (Income) Expense, Net
883
(758
)
(386
)
2,642
Income Before Taxes
7,406
15,649
18,175
28,152
Income Tax Expense
2,808
5,137
7,342
9,244
Income from Continuing Operations
4,598
10,512
10,833
18,908
Loss On Disposal of Discontinued Operations, net
58
341
214
467
Net Income
4,540
10,171
10,619
18,441
Dividends on Preferred Stock
259
317
545
645
Net Income Available to Common Shareholders
$
4,281
$
9,854
$
10,074
$
17,796
Per Common Share Data:
Basic Earnings
From Continuing Operations
$
0.10
$
0.24
$
0.24
$
0.43
From Discontinued Operations
0.00
(0.01
)
0.00
(0.01
)
$
0.10
$
0.23
$
0.24
$
0.42
Diluted Earnings
From Continuing Operations
$
0.10
$
0.24
$
0.24
$
0.43
From Discontinued Operations
0.00
(0.01
)
0.00
(0.01
)
$
0.10
$
0.23
$
0.24
$
0.42
Cash Dividends Declared
$
0.145
$
0.145
$
0.29
$
0.29
Shares Outstanding:
Basic
42,905,728
42,448,004
42,806,837
42,392,643
Diluted
42,967,331
42,463,737
42,867,651
42,405,558
End of Period
43,435,614
42,616,361
43,435,614
42,616,361
3
Ferro Corporation and Consolidated Subsidiaries Segment Net Sales and Segment Income (Unaudited)
(Dollars in thousands)
Three Months Ended June 30,
Six Months Ended June 30,
Adjusted*
Adjusted*
2007
2006
2007
2006
Segment Sales
Performance Coatings
$
158,501
$
135,959
$
297,316
$
262,068
Electronic Materials
108,823
123,167
221,767
230,533
Color and Glass Perf. Materials
109,920
102,987
215,620
197,599
Polymer Additives
85,160
82,519
167,673
165,242
Specialty Plastics
69,797
72,039
136,758
143,763
Other
21,457
21,821
44,229
44,440
Total
$
553,658
$
538,492
$
1,083,363
$
1,043,645
Segment Income
Performance Coatings
$
10,815
$
11,319
$
21,498
$
20,410
Electronic Materials
4,929
10,353
11,012
18,634
Color and Glass Perf. Materials
12,668
12,035
27,735
24,806
Polymer Additives
4,053
3,307
7,159
7,851
Specialty Plastics
4,236
4,059
7,375
9,850
Other
3,698
1,651
7,389
3,248
Total Segment Income
40,399
42,724
82,168
84,799
Restructuring expense
(332
)
0
(1,863
)
0
Other unallocated expenses
(17,258
)
(10,553
)
(31,004
)
(23,898
)
Interest expense
(14,286
)
(18,087
)
(31,732
)
(31,337
)
Interest earned
189
1,026
1,154
1,770
Foreign currency
(423
)
(219
)
(934
)
(540
)
Miscellaneous, net
(883
)
758
386
(2,642
)
Income before taxes from continuing operations
$
7,406
$
15,649
$
18,175
$
28,152
4
Ferro Corporation and Consolidated Subsidiaries Condensed Consolidated Balance Sheets
Adjusted*
Year Ended December
(Dollars in thousands)
June 30,
31,
2007
2006
Assets
(Unaudited)
(Audited)
Current Assets:
Cash and Cash Equivalents
$
17,795
$
16,985
Accounts and Trade Notes Receivable, net
248,630
220,899
Note receivable from Ferro Finance Corporation
30,199
16,083
Inventories
291,833
269,234
Other Current Assets
42,311
124,324
Total Current Assets
630,768
631,442
Property, Plant & Equipment, net
525,335
526,802
Intangibles, net
405,710
406,340
Miscellaneous Other Assets
195,965
177,018
Total Assets
$
1,757,778
$
1,741,602
Liabilities and Shareholders’ Equity
Current Liabilities:
Notes and Loans Payable
$
22,790
$
10,764
Accounts Payable
253,589
237,018
Other Current Liabilities
121,515
133,265
Total Current Liabilities
397,894
381,047
Long-Term Debt, less current portion
536,394
581,654
Other Non-Current Liabilities
265,178
227,063
Total Liabilities
1,199,466
1,189,764
Series A Convertible Preferred Stock
14,602
16,787
Shareholders’ Equity
543,710
535,051
Total Liabilities and Shareholders’ Equity
$
1,757,778
$
1,741,602
5
Ferro Corporation and Consolidated Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited)
Adjusted*
Six Months Ended
Six Months Ended
June 30,
June 30,
(Dollars in thousands)
2007
2006
Cash flows from Operating Activities
Net Income
$
10,619
$
18,441
Depreciation and amortization
43,992
38,892
Precious metal deposits
70,073
(58,000
)
Changes in other current assets and liabilities, net
(47,673
)
14,191
Other adjustments, net
(7,149
)
5,814
Net cash provided by continuing operations
69,862
19,338
Net cash used for discontinued operations
(45
)
(766
)
Net cash provided by operating activities
69,817
18,572
Cash flows from investing activities
Capital expenditures for plant and equipment
(30,921
)
(20,829
)
Proceeds from sale of assets and businesses
1,964
5,606
Other investing activities
859
(24,938
)
Net cash used for investing activities
(28,098
)
(40,161
)
Cash flow from financing activities
Net (repayments) borrowings under term loan and revolving credit facilities
10,850
1,136
Proceeds from revolving credit facility
410,295
774,000
Proceeds from term loan facility
55,000
95,000
Principal payments on revolving credit facility
(507,649
)
(823,200
)
Principal payments on term loan facility
(1,525
)
0
Debt issue costs paid
(2,086
)
(14,402
)
Proceeds from exercise of stock options
8,233
2,196
Cash dividends paid
(13,041
)
(12,955
)
Other financing activities
(1,325
)
(1,658
)
Net cash (used for) provided by financing activities
(41,248
)
20,117
Effect of exchange rate changes on cash
339
(432
)
Increase (Decrease) in cash and cash equivalents
810
(1,904
)
Cash and cash equivalents at beginning of period
16,985
17,413
Cash and cash equivalents at end of period
$
17,795
$
15,509
Cash paid during the period for:
Interest
$
28,680
$
28,081
Income taxes
$
6,774
$
4,397
6
Ferro Corporation and Consolidated Subsidiaries Supplemental Information
Segment Net Sales Excluding Precious Metals and Reconciliation of Sales Excluding Precious Metals to Net Sales (Unaudited)
(Dollars in thousands)
Three Months Ended June 30,
Six Months Ended June 30,
2007
2006
2007
2006
Segment Sales excluding Precious Metals
Performance Coatings
$
158,303
$
136,473
$
297,118
$
262,582
Electronic Materials
61,214
68,699
124,881
133,598
Color and Glass Perf. Materials
99,460
92,452
196,696
181,232
Polymer Additives
85,160
82,381
167,673
165,104
Specialty Plastics
69,796
72,145
136,757
143,869
Other
21,693
22,143
44,465
44,762
Total Sales, Excluding Precious Metals
495,626
474,293
967,590
931,147
Sales of precious metals
58,032
64,200
115,773
112,499
Net Sales
$
553,658
$
538,493
$
1,083,363
$
1,043,646
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 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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