Ferro Reports 2007 Third-Quarter Results

Ferro Corporation (NYSE:FOE) announced sales of $551 million for the quarter ended September 30, 2007, up 10 percent from sales of $501 million in the third quarter of 2006. Income from continuing operations for the 2007 third quarter was $5.6 million, or $0.12 per diluted share, up 2.2 percent compared with $5.5 million, or $0.12 per diluted share, in the third quarter of 2006. During the quarter, lower selling, general and administrative expenses and lower interest expense were largely offset by restructuring charges related to the consolidation of certain manufacturing operations in Europe and higher income tax expense. The 2007 third quarter income from continuing operations included net pre-tax expenses of $6.5 million primarily related to restructuring costs. The third quarter 2006 income from continuing operations included net pre-tax expenses of $1.3 million primarily related to manufacturing rationalization activities. "We delivered strong third-quarter sales that were driven by the breadth of our international operations,” said Chairman, President and Chief Executive Officer James F. Kirsch. "Our segment income increased 7 percent, compared with the third quarter of 2006, despite weakness in a number of U.S. markets and continued raw material cost increases. While we delivered improved segment income from the third quarter of 2006, we remain focused on the opportunities we have identified to improve overall profitability and deliver enhanced shareholder value.” Net sales increased in the third quarter primarily as a result of product price increases and favorable changes in foreign currency exchange rates. Compared with the third quarter of 2006, sales increased in the Performance Coatings, Color and Glass Performance Materials, Electronic Materials and Polymer Additives segments. Sales declined from the prior-year period in the Specialty Plastics segment. International net sales grew 18 percent compared with the third quarter of 2006, while sales in the United States were flat. Gross margins were 18.2 percent of sales for the third quarter, compared with 19.7 percent of sales in the third quarter of 2006. The Company’s 2007 third quarter gross profit was reduced by $0.5 million in costs primarily related to accelerated depreciation and other costs associated with manufacturing rationalization activities. Gross profit was negatively impacted by lower volumes, particularly in porcelain enamel and plastics products, and higher raw material costs. In addition, gross margin as a percent of sales continued to be negatively impacted by rising precious metal costs. Precious metal costs are passed through to customers with minimal contribution to margins. Selling, general and administrative (SG&A) expense was $71.1 million in the third quarter of 2007, or 12.9 percent of sales. SG&A expense in the third quarter of 2006 was $74.1 million, or 14.8 percent of sales, including charges of $0.4 million primarily related to organizational initiatives and an accounting restatement. SG&A expense declined primarily as a result of expense reduction activities, particularly in the Specialty Plastics and Electronic Materials segments, lower incentive compensation accruals and lower audit fees. Restructuring charges were $5.8 million for the 2007 third quarter, primarily as a result of activities related to the consolidation of Ferro’s porcelain enamel manufacturing operations in Europe. There were no restructuring charges recorded in the third quarter of 2006. Interest expense for the 2007 third quarter was $14.5 million, compared with $16.8 million in the year-ago period. Interest expense declined from the prior-year period largely as a result of lower borrowing levels resulting from the elimination of cash deposits on precious metal consignments and lower interest rates. The elimination of these deposits also resulted in a decline in interest income during the third quarter compared with the third quarter of 2006. The Company’s tax rate for the third quarter increased to 38.3 percent from 33.0 percent in the 2006 third quarter. The higher rate was largely the result of the tax effects from the restructuring charges recorded in the quarter, the mix of income by country and an increase in the tax cost of foreign current-year earnings to be repatriated. Total debt on September 30, 2007 was $536.4 million, compared with $592.4 million at the end of 2006. The Company had net proceeds of $65.5 million from its U.S. accounts receivable securitization program as of September 30, 2007, compared with $60.6 million at the end of 2006. The Company also had $51.2 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 Company’s Inorganic Specialties Group, which includes the Performance Coatings and Color and Glass Performance Materials segments, increased in all regions compared with the third quarter of 2006. Sales growth was strongest in Europe, continuing a trend from prior quarters. Sales in the Electronic Materials segment increased as demand for the Company’s dielectric materials recovered from the reduced levels in the first half of 2007. Strong demand for conductive pastes used by customers manufacturing solar cells continued to drive sales growth in the segment. Sales in the Organic Specialties Group, which includes the Polymer Additives, Specialty Plastics and Other businesses segments, increased slightly. Sales in Polymer Additives increased, driven primarily by increased product pricing. Sales in Specialty Plastics declined as a result of weak demand from U.S. customers in residential housing, automotive and appliance applications. Total segment income for the third quarter of 2007 was $36.3 million, compared with $33.9 million in the prior-year period. The increase was driven by higher segment income in the Color and Glass Performance Materials, Specialty Plastics and Electronic Materials segments. Segment income in the Performance Coatings segment declined, driven by results in the porcelain enamel business, which was affected by weaker demand from appliance manufacturers in the United States. Segment income also declined in Polymer Additives, primarily as a result of higher raw material costs. Outlook The Company expects sales in the fourth quarter to match or exceed sales of $497 million in the fourth quarter of 2006. Consistent with normal seasonality, sales are expected to decline sequentially from the third quarter of 2007. Sales for the fourth quarter, ending December 31, are expected to be in the range of $500 million to $525 million. Net income per share in the fourth quarter is expected to be in the range of 7 to 12 cents per share, including approximately 8 cents per share for charges related to the Company’s manufacturing rationalization activities. The Company reported a net loss of 10 cents per share in the fourth quarter of 2006. Conference Call The Company will host a conference call to discuss its third quarter financial results, fourth quarter earnings estimates, and general business outlook on Friday, November 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 November 9 through 9 p.m. Eastern time on November 16. To access the replay, dial 800-283-6499 if calling from the United States or Canada, or dial 402-220-9734 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 fourth quarter. 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 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. 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.   Ferro Corporation and Consolidated Subsidiaries Condensed Consolidated Statements of Income (Unaudited)     Three Months Ended September 30, Nine Months Ended September 30,   Adjusted   Adjusted (Dollars in thousands, except per share amounts) 2007 2006 2007 2006   Net Sales $550,701 $500,573 $1,634,064 $1,544,218   Cost of Sales 450,553 401,853 1,319,609 1,226,758   Gross Profit 100,148 98,720 314,455 317,460   Selling, General and Administrative Expenses 71,069 74,116 234,212 231,955 Restructuring Charges 5,826 - 7,689 - Other Expense (Income): Interest Expense 14,488 16,818 46,220 48,155 Interest Earned (271) (971) (1,425) (2,741) Foreign currency transactions, net (10) 166 924 706 Miscellaneous (Income) Expense, Net (13) 428 (399) 3,070 Income Before Taxes 9,059 8,163 27,234 36,315 Income Tax Expense 3,472 2,694 10,814 11,938   Income from Continuing Operations 5,587 5,469 16,420 24,377   Loss (Income) from Discontinued Operations, net of tax 2 (62) 216 405   Net Income 5,585 5,531 16,204 23,972   Dividends on Preferred Stock 252 310 797 955   Net Income Available to Common Shareholders $5,333 $5,221 $15,407 $23,017   Per Common Share Data: Basic Earnings From Continuing Operations $0.12 $0.12 $0.36 $0.55 From Discontinued Operations 0.00 0.00 0.00 (0.01) $0.12 $0.12 $0.36 $0.54 Diluted Earnings From Continuing Operations $0.12 $0.12 $0.36 $0.55 From Discontinued Operations 0.00 0.00 0.00 (0.01) $0.12 $0.12 $0.36 $0.54   Cash Dividends Declared $0.145 $0.145 $0.435 $0.435   Shares Outstanding: Basic 43,030,078 42,397,145 42,881,251 42,394,144 Diluted 43,112,632 42,422,781 42,949,311 42,411,299 End of Period 43,510,847 42,758,302 43,510,847 42,758,302   Ferro Corporation and Consolidated Subsidiaries Segment Net Sales and Segment Income (Unaudited)     (Dollars in thousands)   Three Months EndedSeptember 30,   Nine Months EndedSeptember 30,   Adjusted   Adjusted 2007 2006 2007 2006 Segment Net Sales Performance Coatings $153,742 $134,947 $451,058 $397,015 Electronic Materials 116,645 104,960 338,412 335,493 Color and Glass Perf. Materials 113,575 94,916 329,195 292,515 Polymer Additives 85,230 79,815 252,903 245,057 Specialty Plastics 62,236 65,762 198,994 209,525 Other businesses 19,273 20,173 63,502 64,613 Total Segment Net Sales $550,701 $500,573 $1,634,064 $1,544,218   Segment Income Performance Coatings $8,449 $11,527 $29,947 $31,937 Electronic Materials 8,522 7,261 19,534 25,895 Color and Glass Perf. Materials 11,727 8,187 39,462 32,993 Polymer Additives 3,417 4,133 10,576 11,984 Specialty Plastics 3,586 2,087 10,961 11,937 Other businesses 593 754 7,982 4,002 Total Segment Income 36,294 33,949 118,462 118,748   Restructuring charges (5,826) 0 (7,689) 0 Unallocated expenses (7,215) (9,345) (38,219) (33,243) Interest expense (14,488) (16,818) (46,220) (48,155) Interest earned 271 971 1,425 2,741 Foreign currency transactions, net 10 (166) (924) (706) Miscellaneous income (expense), net 13 (428) 399 (3,070) Income before income taxes from continuing operations $9,059 $8,163 $27,234 $36,315   Ferro Corporation and Consolidated Subsidiaries Condensed Consolidated Balance Sheets (Unaudited)     (Dollars in thousands)   September 30,   AdjustedYear EndedDecember 31, 2007 2006 Assets Current Assets: Cash and Cash Equivalents $25,821 $16,985 Accounts and Trade Notes Receivable, net 236,362 220,899 Note receivable from Ferro Finance Corporation   22,887 16,083 Inventories 280,044 269,234 Other Current Assets 52,275 108,241   Total Current Assets 617,389 631,442   Property, Plant & Equipment, net 535,713 526,802 Intangibles, net 406,461 406,340 Miscellaneous Other Non-Current Assets 200,901 177,018 Total Assets $1,760,464 $1,741,602     Liabilities and Shareholders' Equity Current Liabilities: Loans Payable and Current Portion of Long-term Debt   $11,515 $10,764 Accounts Payable 266,236 237,018 Other Current Liabilities 118,543 133,265   Total Current Liabilities 396,294 381,047   Long-Term Debt, less current portion 524,863 581,654 Other Non-Current Liabilities 266,858 227,063 Total Liabilities 1,188,015 1,189,764   Series A Convertible Preferred Stock 14,198 16,787   Shareholders' Equity 558,251 535,051 Total Liabilities and Shareholders' Equity $1,760,464 $1,741,602   Ferro Corporation and Consolidated Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited)       Nine MonthsEndedSeptember 30,   AdjustedNine MonthsEndedSeptember 30, (Dollars in thousands) 2007 2006   Cash flows from operating activities Net income $16,204 $23,972 Depreciation and amortization 63,825 59,030 Precious metal deposits 70,073 (74,250) Changes in other current assets and liabilities, net   (21,072) 13,863 Other adjustments, net (7,701) (6,843) Net cash provided by (used for) continuing operations 121,329 15,772 Net cash used for discontinued operations (48) (867) Net cash provided by operating activities 121,281 14,905   Cash flows from investing activities Capital expenditures for property, plant and equipment (43,247) (33,602) Proceeds from sale of assets and businesses 2,704 6,430 Other investing activities 551 (25,105) Net cash used for investing activities (39,992) (52,277)   Cash flow from financing activities Net repayments under short-term credit facilities (740) (468) Proceeds from revolving credit facility 592,167 966,200 Proceeds from term loan facility 55,000 250,000 Principal payments on revolving credit facility (700,864) (994,600) Principal payments on term loan facility (2,287) 0 Extinguishment of debentures 0 (155,000) Debt issue costs paid (1,783) (15,804) Proceeds from exercise of stock options 9,217 2,196 Cash dividends paid (19,570) (19,439) Other financing activities (4,442) (2,308) Net cash (used for) provided by financing activities   (73,302) 30,777 Effect of exchange rate changes on cash and cash equivalents 849 (202) Increase (decrease) in cash and cash equivalents 8,836 (6,797) Cash and cash equivalents at beginning of period 16,985 17,413 Cash and cash equivalents at end of period $25,821 $10,616   Cash paid during the period for: Interest $46,925 $48,710 Income taxes $11,387 $8,607   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 EndedSeptember 30,   Nine Months EndedSeptember 30, 2007   2006 2007   2006 Segment Net Sales Excluding Precious Metals Performance Coatings $153,742 $134,947 $451,058 $397,015 Electronic Materials 69,578 66,286 194,077 199,693 Color and Glass Performance Materials 102,977 86,415 300,092 268,642 Polymer Additives 85,230 79,815 252,903 245,057 Specialty Plastics 62,236 65,762 198,994 209,525 Other businesses 19,273 20,173   63,502 64,613 Total Net Sales Excluding Precious Metals 493,036 453,398   1,460,626 1,384,545   Sales of precious metals 57,665 47,175 173,438 159,673   Total Net Sales $550,701 $500,573 $1,634,064 $1,544,218     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.