Ferro Reports 2012 Third-Quarter Results

Ferro Reports 2012 Third-Quarter Results

CLEVELAND--(BUSINESS WIRE)-- Ferro Corporation (NYSE: FOE, the "Company") today announced net sales of $415 million for the three-month period ended September 30, 2012, compared with net sales of $546 million in the third quarter of 2011. The Company recorded a net loss attributable to common shareholders of $316 million, or $3.66 per diluted share, in the 2012 third quarter, compared with net income attributable to common shareholders of $19.3 million, or $0.22 per diluted share, in the prior-year quarter. The adjusted net loss attributable to common shareholders, excluding special charges, was $1.9 million, or $0.02 per diluted share, compared with net income attributable to common shareholders of $20.9 million, or $0.24 per diluted share, in the third quarter of 2011.

Restructuring and impairment charges of $199 million were recorded during the third quarter. The charges included a $147 million impairment of goodwill associated with the Electronic Materials segment and a $41 million impairment of certain property, plant and equipment primarily related to a reduced outlook in the Company's solar pastes business in the Electronic Materials segment. An impairment charge of $11 million was also recorded to reduce the value of properties and buildings related to manufacturing sites that were closed as part of restructuring initiatives executed in prior years. In addition, special charges of $5.8 million were included in cost of goods sold primarily related to write-downs of solar pastes inventories and residual costs at closed manufacturing sites involved in earlier restructuring initiatives. Special charges of $3.2 million were included in selling, general and administrative expenses primarily related to an increased reserve for other tax assets and residual expenses at sites closed as part of earlier restructuring initiatives. In addition, third-quarter results were impacted by an increased reserve on deferred tax assets that increased income tax expense by approximately $112 million. A reconciliation of reported to adjusted results excluding special charges is available in the supplementary financial data included in this press release.


The Company announced on October 9, 2012 that it is exploring strategic options for its solar pastes business in order to eliminate the ongoing negative impact from that business on earnings and cash flow. The decision was in response to a significant contraction in the worldwide market for solar pastes and insufficient progress in the qualification of the Company's products at large solar cell producers.

"We are taking decisive action to improve our future profitability and build shareholder value. Our management team is focused on determining the best options for the solar pastes business, and we intend to make and execute our decisions quickly. In addition, we are taking actions in our worldwide operations—including business process improvements and organizational changes—in order to reduce annual operating expenses by $30 million over the next two years," said Chairman, President and Chief Executive Officer James F. Kirsch. "We are analyzing further capacity consolidation, particularly in Europe, due to the weak economic conditions in the region. As a result of these initiatives, we are targeting worldwide headcount reductions of approximately 10 percent over the next two years."

2012 Third-Quarter Results

Net sales for the three months ended September 30, 2012, were $415 million, a decline of 24 percent from net sales of $546 million in the third quarter of 2011. Sales declined in all segments compared with the prior-year quarter. Reduced sales of Electronic Materials products, including precious metal sales, and reduced customer demand in Europe due to a weaker economic climate were the primary contributors to the decline in net sales. Reduced demand for conductive pastes used in solar cell applications, metal powders used in a variety of electronic products, and ceria-based surface finishing materials resulted in a $90 million decline in sales for the Electronic Materials segment, including a $59 million decline in sales of precious metals due to reduced volume and lower silver prices.

Gross profit was $62 million, or 15.0% of net sales, during the 2012 third quarter, compared with $104 million or 19.0% of net sales during the prior-year quarter. Excluding special charges, gross profit was 18.0% of sales excluding precious metals during the quarter, compared with 23.4% in the 2011 third quarter. The primary driver of the decline in gross profit dollars was lower sales volume in the Electronic Materials segment. During the 2012 third quarter, gross profit was reduced by charges of $5.8 million, primarily related to inventory write-downs of solar pastes in the Electronic Materials segment and residual costs at manufacturing sites closed as part of earlier restructuring initiatives. Gross profit was reduced by charges of $0.7 million during the third quarter of 2011, due to residual costs at closed manufacturing sites.

Selling, general and administrative ("SG&A") expenses were $65 million during the 2012 third quarter compared with $66 million in the prior-year quarter. SG&A expenses declined primarily due to lower incentive compensation expense. Higher special charges and increased reserves for bad debt partially offset the decline in SG&A expenses. SG&A expenses during the quarter included special charges of $3.2 million, primarily related to an increased reserve for other tax assets and residual expenses at sites closed as a part of earlier restructuring initiatives. During the third quarter of 2011, SG&A expense included $0.8 million in charges, primarily related to sites closed during prior-period restructuring actions.

During the third quarter of 2012, the Company elected to change its method of recognizing defined benefit pension and other postretirement benefit expenses. Under the new method, actuarial gains and losses will be recognized in operating results in the year in which the gains or losses occur. Prior-period results shown in this press release have been adjusted to apply the new method retrospectively.

Interest expense was $7.1 million during the 2012 third quarter, little changed from the prior-year quarter. Compared with the prior-year quarter, average interest rates paid on borrowings were slightly higher. The impact of higher average interest rates was largely offset by lower average borrowings during the quarter.

Income tax expense was $105 million during the 2012 third quarter. During the quarter, the Company recorded a reserve on its deferred tax assets which resulted in a $112 million increase in income tax expense. The net deferred tax assets, to which the valuation allowance was applied, are available for use in future periods. The valuation allowance that was recorded against the net deferred tax assets will be reversed when the assets are utilized or when the Company determines that these assets are likely to be realized.

The net loss attributable to common shareholders for the 2012 third quarter was $316 million, or $3.66 per diluted share, compared with net income attributable to common shareholders of $19.3 million, or $0.22 per diluted share, in the third quarter of 2011. The adjusted net loss attributable to common shareholders for the 2012 third quarter was $0.02 per diluted share, excluding special charges, compared with adjusted earnings of $0.24 per diluted share in the third quarter of 2011. A reconciliation of reported to adjusted results excluding special charges is available in the supplementary financial data included in this press release.

The Company has estimated that the negative impact on adjusted earnings from its solar pastes business was $0.04 per diluted share during the 2012 third quarter and $0.09 per diluted share during the first nine months of 2012. During 2011, the solar pastes business contributed income of approximately $0.04 per diluted share in the third quarter and $0.22 per diluted share during the first nine months of the year. The estimated per share loss or income attributed to solar pastes excludes allocated corporate expenses for all periods.

Cash generated by operating activities was $14 million during the 2012 third quarter compared with $3 million in the prior-year quarter. The cash generation during the quarter was driven by reduced net working capital (inventories plus accounts receivable less accounts payable). Total debt declined to $337 million at September 30, 2012 from $342 million on June 30, 2012.

2012 Outlook

The Company expects 2012 sales, excluding precious metal sales, to be down 8% to 10% compared with 2011, including the negative impact of lower forecasted foreign exchange rates. Sales of precious metals are expected to decline due to lower average prices and lower volume. The sales outlook assumes modest economic growth in all regions except in Europe where economic activity is expected to continue to decline compared with prior-year periods.

Based on the Company's current view of worldwide economic conditions, adjusted earnings in 2012 are expected to be in the range of $0.07 to $0.12 per diluted share. This forecast is unchanged from the forecast provided by the Company on October 9, 2012. The forecast includes an expected loss of approximately $0.14 to $0.17 per share related to the Company's solar pastes business.

Non-GAAP Measures

Adjusted earnings per share is equal to income (loss) before taxes, restructuring and impairment charges, and other special charges, adjusted for a normalized 36 percent tax rate that is consistent with the U.S. statutory corporate income tax rate, and divided by the average number of diluted shares outstanding. Ferro believes this data provides investors with additional useful information on the underlying operations of the business and enables period-to-period comparability of financial performance.

Conference Call

The Company will host a conference call to discuss its third-quarter financial results, its view of general business conditions and its current outlook for 2012 on Tuesday, October 30, 2012, at 10:00 a.m. Eastern time. To participate in the call, dial 800-926-9795 if calling from the United States or Canada, or dial 212-231-2910 if calling from outside North America. 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 October 30 through noon Eastern time on November 6. To access the replay, dial 800-633-8284 (toll-free) if calling from the United States or Canada, or dial 402-977-9140 if calling from outside North America. Use the program ID #21608706 to access the audio replay.

The conference call also will be broadcast live over the Internet and will be available for replay through March 31, 2013. The live broadcast and replay can be accessed through the Investor Information portion of the Company's Web site at www.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 Mayfield Heights, Ohio, the Company has approximately 5,100 employees globally and reported 2011 sales of $2.2 billion.

Cautionary Note on Forward-Looking Statements

Certain statements in this 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. 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:

  • demand in the industries into which Ferro sells its products may be unpredictable, cyclical or heavily influenced by consumer spending;

  • uncertainty in the development of the solar energy market, and Ferro's ability to successfully implement strategic options for its solar pastes business;

  • restrictive covenants in the Company's credit facilities could affect its strategic initiatives and liquidity;

  • Ferro's ability to access capital markets, borrowings, or financial transactions;

  • the effectiveness of the Company's efforts to improve operating margins through sales growth, price increases, productivity gains, and improved purchasing techniques;

  • Ferro's ability to successfully implement and/or administer its restructuring and cost reduction programs and produce the desired results;

  • implementation of new business processes and information systems;

  • the availability of reliable sources of energy and raw materials at a reasonable cost;

  • currency conversion rates and economic, social, regulatory, and political conditions around the world;

  • Ferro's presence in the Asia-Pacific region where it can be difficult to compete lawfully;

  • increasingly aggressive domestic and foreign governmental regulations on hazardous materials and regulations affecting health, safety and the environment;

  • Ferro's ability to successfully introduce new products;

  • sale of products into highly regulated industries;

  • limited or no redundancy for certain of the Company's manufacturing facilities and possible interruption of operations at those facilities;

  • Ferro's ability to complete future acquisitions or successfully integrate future acquisitions;

  • the impact of the Company's performance on its ability to utilize significant deferred tax assets;

  • competitive factors, including intense price competition;

  • Ferro's ability to protect its intellectual property or to successfully resolve claims of infringement brought against the Company;

  • the impact of operating hazards and investments made in order to meet stringent environmental, health and safety regulations;

  • stringent labor and employment laws and relationships with the Company's employees;

  • the impact of requirements to fund employee benefit costs, especially post-retirement costs;

  • the impact of interruption, damage to, failure, or compromise of the Company's information systems;

  • manufacture and sale of products into the pharmaceutical industry;

  • exposure to lawsuits in the normal course of business;

  • risks and uncertainties associated with intangible assets, including the amount of related impairment and other charges;

  • Ferro's borrowing costs could be affected adversely by interest rate increases;

  • liens on the Company's assets by its lenders affect its ability to dispose of property and businesses;

  • Ferro may not pay dividends on its common stock in the foreseeable future; and

  • other factors affecting the Company's business that are beyond its control, including disasters, accidents, and governmental actions.

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 Ferro'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. Additional information regarding these risks can be found in the Ferro Corporation Annual Report on Form 10-K for the period ended December 31, 2011.

Ferro Corporation and Subsidiaries
Consolidated Statements of Net Income (Unaudited)

Three months ended
September 30,

Nine months ended
September 30,

(Dollars in thousands, except share and per share amounts)

2012

As
adjusted
2011

2012

As
adjusted
2011

Net sales

$414,840

$546,114

$1,362,735

$1,713,097

Cost of sales

352,501

442,304

1,124,228

1,374,614

Gross profit

62,339

103,810

238,507

338,483

Selling, general and administrative expenses

65,109

65,766

206,306

210,153

Restructuring and impairment charges

198,790

869

203,829

4,044

Other expense (income):

Interest expense

7,101

7,030

20,689

21,208

Interest earned

(57)

(50)

(192)

(193)

Foreign currency losses, net

869

1,726

792

4,049

Miscellaneous expense, net

792

64

3,027

458

(Loss) income before income taxes

(210,265)

28,405

(195,944)

98,764

Income tax expense

105,473

9,057

113,618

32,825

Net (loss) income

(315,738)

19,348

(309,562)

65,939

Less: Net income attributable to noncontrolling interests

376

40

830

573

Net (loss) income attributable to Ferro Corporation

(316,114)

19,308

(310,392)

65,366

Dividends on preferred stock

0

0

0

(165)

Net (loss) income attributable to Ferro Corporation common shareholders

$(316,114)

$19,308

$(310,392)

$65,201

(Loss) earnings per share attributable to Ferro Corporation common shareholders:

Basic (loss) earnings per share

$(3.66)

$0.22

$(3.60)

$0.76

Diluted (loss) earnings per share

(3.66)

0.22

(3.60)

0.75

Shares outstanding:

Weighted-average basic shares

86,295,512

86,169,195

86,274,082

86,100,989

Weighted-average diluted shares

86,295,512

86,796,334

86,274,082

86,967,743

End-of-period basic shares

86,538,312

86,570,567

86,538,312

86,570,567

Ferro Corporation and Subsidiaries
Segment Net Sales and Segment Income (Loss) (Unaudited)

(Dollars in thousands)

Three months ended
September 30,

Nine months ended
September 30,

2012

As
adjusted
2011

2012

As
adjusted
2011

Segment Net Sales

Electronic Materials

$66,188

$156,081

$228,625

$538,790

Performance Coatings

137,229

153,365

447,058

453,546

Color and Glass Perf. Materials

84,262

100,525

285,586

306,806

Polymer Additives

79,881

85,634

251,055

262,767

Specialty Plastics

41,305

43,606

132,512

132,745

Pharmaceuticals

5,975

6,903

17,899

18,443

Total Segment Net Sales

$414,840

$546,114

$1,362,735

$1,713,097

Segment Income (Loss)

Electronic Materials

$(6,311)

$16,463

$(10,968)

$69,617

Performance Coatings

3,210

11,069

20,968

27,913

Color and Glass Perf. Materials

5,636

8,365

24,102

28,133

Polymer Additives

5,398

4,252

13,903

15,347

Specialty Plastics

3,728

2,717

12,182

7,416

Pharmaceuticals

85

1,254

1,892

3,525

Total Segment Income

11,746

44,120

62,079

151,951

Unallocated corporate expenses

14,516

6,076

29,878

23,621

Restructuring and impairment charges

198,790

869

203,829

4,044

Interest expense

7,101

7,030

20,689

21,208

Other expense, net

1,604

1,740

3,627

4,314

(Loss) income before income taxes

$(210,265)

$28,405

$(195,944)

$98,764

Ferro Corporation and Subsidiaries
Consolidated Balance Sheets (Unaudited)

As adjusted

(Dollars in thousands)

September 30,
2012

December 31,
2011

Assets

Current assets:

Cash and cash equivalents

$24,817

$22,991

Accounts receivable, net

322,620

306,775

Inventories

212,014

228,813

Deferred income taxes

6,419

17,395

Other receivables

37,338

37,839

Other current assets

12,746

17,086

Total current assets

615,954

630,899

Property, plant and equipment, net

331,894

379,336

Goodwill

68,952

215,601

Amortizable intangible assets, net

14,086

11,056

Deferred income taxes

16,835

117,658

Other non-current assets

71,913

86,101

Total assets

$1,119,634

$1,440,651

Liabilities and Equity

Current liabilities:

Loans payable and current portion of long-term debt

$67,180

$11,241

Accounts payable

196,977

214,460

Accrued payrolls

31,564

31,055

Accrued expenses and other current liabilities

69,508

67,878

Total current liabilities

365,229

324,634

Long-term debt, less current portion

270,132

298,082

Postretirement and pension liabilities

190,283

215,732

Other non-current liabilities

19,846

19,709

Total liabilities

845,490

858,157

Shareholders' equity

263,447

572,262

Noncontrolling interests

10,697

10,232

Total liabilities and equity

$1,119,634

$1,440,651

Ferro Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

Three months ended
September 30,

Nine months ended
September 30,

2012

As
adjusted
2011

2012

As
adjusted
2011

Cash flows from operating activities

Net (loss) income

$(315,738)

$19,348

$(309,562)

$65,939

Impairment and reserve charges

311,084

0

311,084

0

Depreciation and amortization

13,727

15,674

41,734

48,523

Precious metals deposits

0

0

0

28,086

Accounts receivable

27,617

4,807

(23,006)

(63,733)

Inventories

7,060

1,544

15,637

(41,550)

Accounts payable

(19,505)

(23,367)

(4,254)

3,989

Other changes in current assets and liabilities, net

(317)

(22,244)

7,814

(36,365)

Other adjustments, net

(9,570)

7,626