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Ferro Reports 2012 First-Quarter Results

CLEVELAND, Apr 25, 2012 (BUSINESS WIRE) --Ferro Corporation (NYSE: FOE, the "Company") today announced net sales of $466 million for the three-month period ended March 31, 2012, compared with net sales of $573 million in the first quarter of 2011. The Company recorded net income attributable to common shareholders of $1.3 million, or $0.01 per diluted share, in the 2012 first quarter, compared with $22.7 million, or $0.26 per diluted share, in the prior-year quarter. The adjusted net income attributable to common shareholders, excluding special charges, was $3.9 million, or $0.04 per diluted share, compared with $25.1 million, or $0.29 per diluted share, in the first quarter of 2011. "Ferro generated income and positive earnings in the 2012 first quarter and sales increased in all businesses except Electronic Materials compared with the first quarter of 2011. While we continued to experience weak demand for conductive pastes and powders in our Electronic Materials business, we recorded sequential sales and income improvement in our Performance Coatings, Color and Glass Performance Materials, Polymer Additives, and Specialty Plastics businesses, compared with the fourth quarter of 2011," said Chairman, President and Chief Executive Officer James F. Kirsch. "We will continue to carefully manage costs, expenses and cash, given the existing uncertainties regarding the timing and strength of a recovery of solar paste demand in the Electronic Materials business." 2012 First-Quarter Results Net sales for the three months ended March 31, 2012, were $466 million, a decline of 19 percent from net sales of $573 million in the first quarter of 2011. Reduced sales of Electronic Materials products, including precious metal sales, were the driver of the decline in consolidated net sales. Excluding the Electronic Materials segment, sales increased by 6.5 percent. Reduced customer demand for conductive pastes used in solar cell applications and metal powders used in a variety of electronic products resulted in a $131 million decline in sales for the Electronic Materials segment, including an $88 million decline in sales of precious metals due to reduced volume and lower silver prices. Demand for conductive pastes remains weak. Sales increased in the Performance Coatings, Specialty Plastics, Polymer Additives, Color and Glass Performance Materials and Pharmaceuticals segments compared with the prior-year quarter. Gross profit was $88 million, or 18.9 percent of net sales, during the 2012 first quarter, compared with $120 million, or 21.0 percent of net sales, during the first quarter of 2011. Excluding special charges, gross profit was 21.0 percent of sales excluding precious metals during the quarter, compared with 27.5 percent in the first quarter of 2011. The primary driver of the decline in gross profit dollars was lower sales volume in the Electronic Materials segment, including conductive pastes and powders sold to manufacturers of solar cells and other electronic products. During the 2012 first quarter, gross profit was reduced by charges of $0.7 million, related to residual costs at closed manufacturing sites that were affected by prior-period restructuring actions. In the first quarter of 2011, gross profit was reduced by charges of $1.6 million, primarily as a result of residual costs at closed manufacturing sites. Selling, general and administrative ("SG&A") expenses were $78 million during the first quarter compared with $77 million in the prior-year quarter. SG&A expenses were 16.7 percent of net sales during the quarter, compared with 13.4 percent of net sales in the first quarter of 2011. Increased pension expense, salary adjustments and higher expenses related to an initiative to streamline and standardize business processes and improve management information systems tools contributed to higher SG&A expenses for the quarter. These increases were partially offset by lower depreciation expense and cost containment in other discretionary SG&A spending. SG&A expenses during the 2012 first quarter included special charges of $1.8 million, primarily related to expenses at sites that were closed during earlier restructuring actions and severance expenses. During the first quarter of 2011, SG&A expense included $1.1 million in charges, primarily related to residual expenses at closed sites impacted by prior-period restructuring actions. Restructuring and impairment charges were $0.3 million in the first quarter of 2012, compared with $1.6 million in the prior-year quarter. The decline reflects the continued winding down of the Company's multi-year manufacturing rationalization activities. Interest expense was $6.7 million during the 2012 first quarter, down slightly from the prior-year period. Compared with the first quarter of 2011, average borrowings declined in the 2012 first quarter. Net income attributable to common shareholders for the 2012 first quarter was $1.3 million, or $0.01 per diluted share, compared with $22.7 million, or $0.26 per diluted share, in the first quarter of 2011. The adjusted net income attributable to common shareholders for the 2012 first quarter was $0.04 per diluted share, excluding special charges, compared with adjusted earnings of $0.29 per diluted share in the first quarter of 2011. A reconciliation of reported results to adjusted results excluding special charges is available in the supplementary financial data included in this press release. Cash used by operating activities was $11.0 million during the first quarter of 2012, compared with $28.6 million used in the prior-year quarter. Cash flow in the 2011 first quarter benefited from the return of $28.1 million in cash deposits for precious metal leases. There were no cash deposits related to precious metal leases during the first quarter of 2012, and no deposit-related impact on cash flow. The decrease in cash used by operating activities during the quarter was driven by lower cash used in inventory and receivables. The Company has refined its methodology for the allocation of corporate expenses to its reportable segments beginning with the 2012 first quarter to better align segment reporting to the current manner in which strategic decisions are made and resources allocated. Prior-period results have been adjusted to be consistent with the new methodology. The effect of the change was to reduce unallocated corporate expenses, with a corresponding increase in total segment expenses. This change has no net effect on the consolidated income reported by the Company. Prior-year segment income and unallocated corporate expenses shown in the tables within this press release have been adjusted to reflect the current allocation methodology. Income by segment for the prior eight quarters, adjusted to reflect the new allocation methodology, is shown in the supplementary table included in this press release. 2012 Outlook The Company expects 2012 sales, excluding precious metal pass-throughs, to be approximately the same as in 2011, after 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 Europe. Sales of Electronic Materials products are expected to be lower in 2012 compared with 2011. However, sales of these products are expected to improve during the course of 2012, with most of the improvement expected in the second half of the year. The 2012 worldwide demand for solar power is expected to be flat to down, after taking into account recent changes in European incentive programs. The Company has limited visibility regarding the strength and timing of a recovery in demand for solar pastes and the pace of customer adoption of the Company's new paste products. Based on the Company's current view of demand for its Electronic Materials products, adjusted earnings per share in 2012 are expected to be toward the low end of the previously provided guidance range of $0.40 to $0.65 per diluted share. Non-GAAP Measures Adjusted earnings per share is equal to income (loss) before taxes, plus restructuring and impairment charges, and other special charges, adjusted for a normalized tax rate that is consistent with the Company's expected future effective tax rate excluding discrete items, and divided by the average number of common shares outstanding. The Company's expected future effective tax rate is lower than the U.S. statutory rate because of expected earnings in foreign jurisdictions with lower tax rates. 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 first quarter financial results, its outlook for general business conditions and its current outlook for 2012 on Thursday, April 26, 2012, at 10:00 a.m. Eastern time. To participate in the call, dial 800-750-5845 if calling from the United States or Canada, or dial 212-231-2930 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 April 26 through noon Eastern time on May 3. To access the replay, dial 800-633-8284 if calling from the United States or Canada, or dial 402-977-9140 if calling from outside North America. Use the program ID #21587900 to access the audio replay. The conference call also will be broadcast live over the Internet and will be available for replay through September 30, 2012. 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; 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; 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; 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's ability to successfully implement and/or administer its restructuring programs and produce the desired results; 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 our 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 our 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 March 31, (Dollars in thousands, except share and per share amounts) 2012 2011 Net sales $466,390 $573,009 Cost of sales 378,067 452,683 Gross profit 88,323 120,326 Selling, general and administrative expenses 77,685 76,818 Restructuring and impairment charges 311 1,630 Other expense (income): Interest expense 6,740 6,826 Interest earned (84) (74) Foreign currency losses, net 144 1,310 Miscellaneous expense, net 394 518 Income before income taxes 3,133 33,298 Income tax expense 1,719 10,107 Net income 1,414 23,191 Less: Net income attributable to noncontrolling interests 124 301 Net income attributable to Ferro Corporation 1,290 22,890 Dividends on preferred stock 0 (165) Net income attributable to Ferro Corporation common shareholders $1,290 $22,725 Earnings per share attributable to Ferro Corporation common shareholders: Basic earnings per share $0.01 $0.26 Diluted earnings per share 0.01 0.26 Shares outstanding: Weighted-average basic shares 86,233,084 85,974,673 Weighted-average diluted shares 86,695,652 87,279,453 End-of-period basic shares 86,291,812 86,152,312 Ferro Corporation and Subsidiaries Segment Net Sales and Segment Income (Loss) (Unaudited) (Dollars in thousands) Three months ended March 31, 2012 2011 Segment Net Sales Electronic Materials $71,696 $202,347 Performance Coatings 152,514 136,700 Color and Glass Perf. Materials 101,435 99,805 Polymer Additives 87,724 85,862 Specialty Plastics 47,056 42,629 Pharmaceuticals 5,965 5,666 Total Segment Net Sales $466,390 $573,009 Segment Income (Loss) Electronic Materials $(4,690) $30,748 Performance Coatings 8,059 6,347 Color and Glass Perf. Materials 8,457 9,098 Polymer Additives 6,627 6,580 Specialty Plastics 4,648 1,872 Pharmaceuticals 1,187 1,326 Total Segment Income 24,288 55,971 Unallocated corporate expenses 13,650 12,463 Restructuring and impairment charges 311 1,630 Interest expense 6,740 6,826 Other expense, net 454 1,754 Income before income taxes $3,133 $33,298 Ferro Corporation and Subsidiaries Consolidated Balance Sheets (Dollars in thousands) March 31, 2012 December 31, 2011 Assets (Unaudited) (Audited) Current assets: Cash and cash equivalents $23,271 $22,991 Accounts receivable, net 343,668 306,775 Inventories 243,151 228,813 Deferred income taxes 17,291 17,395 Other receivables 33,915 37,839 Other current assets 10,076 17,086 Total current assets 671,372 630,899 Property, plant and equipment, net 378,988 379,336 Goodwill 215,830 215,601 Amortizable intangible assets, net 11,184 11,056 Deferred income taxes 118,978 117,658 Other non-current assets 89,096 86,101 Total assets $1,485,448 $1,440,651 Liabilities and Equity Current liabilities: Loans payable and current portion of long-term debt $43,194 $11,241 Accounts payable 217,457 214,460 Accrued payrolls 30,773 31,055 Accrued expenses and other current liabilities 71,789 67,878 Total current liabilities 363,213 324,634 Long-term debt, less current portion 300,530 298,082 Postretirement and pension liabilities 213,253 215,732 Other non-current liabilities 20,954 19,709 Total liabilities 897,950 858,157 Shareholders' equity 577,188 572,262 Noncontrolling interests 10,310 10,232 Total liabilities and equity $1,485,448 $1,440,651 Ferro Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) (Dollars in thousands) Three months ended March 31, 2012 2011 Cash flows from operating activities Net income $1,414 $23,191 Depreciation and amortization 13,879 16,229 Precious metals deposits 0 28,086 Accounts receivable (33,733) (50,070) Inventories (11,929) (41,891) Accounts payable 11,554 33,768 Other changes in current assets and liabilities, net 14,404 (14,084) Other adjustments, net (6,564) (23,809) Net cash used for operating activities (10,975) (28,580) Cash flows from investing activities Capital expenditures for property, plant and equipment (22,579) (16,037) Proceeds from sale of assets 368 1,132 Other investing activities 0 0 Net cash used for investing activities (22,211) (14,905) Cash flow from financing activities Net borrowings under loans payable 31,684 52,944 Proceeds from long-term debt 97,918 209,677 Principal payments on long-term debt (95,673) (209,677) Redemption of convertible preferred stock 0 (9,427) Cash dividends paid 0 (165) Other financing activities (440) 331 Net cash provided by financing activities 33,489 43,683 Effect of exchange rate changes on cash and cash equivalents (23) 360 Increase in cash and cash equivalents 280 558 Cash and cash equivalents at beginning of period 22,991 29,035 Cash and cash equivalents at end of period $23,271 $29,593 Cash paid during the period for: Interest $12,059 $11,540 Income taxes 1,229 6,930 Ferro Corporation and Subsidiaries Supplemental Information Reconciliation of Adjusted Earnings to Reported Earnings for the Three Months Ended March 31 (Unaudited) Three months ended March 31, 2012 Three months ended March 31, 2011 (Dollars in thousands, except per share amounts) As Reported Adjust- ments Non- GAAP As Reported Adjust- ments Non- GAAP Net sales $466,390 $466,390 $573,009 $573,009 Cost of sales 378,067 $(706) 377,361 452,683 $(1,567) 451,116 Gross profit 88,323 89,029 120,326 121,893 Selling, general and administrative expenses 77,685 (1,757) 75,928 76,818 (1,123) 75,695 Restructuring and impairment charges 311 (311) 0 1,630 (1,630) 0 Other expense, net 454 454 1,754 1,754 Earnings before interest, taxes and noncontrolling interest 9,873 12,647 40,124 44,444 Interest expense 6,740 6,740 6,826 6,826 Total adjustments (2,774) (4,320) Income before taxes 3,133 5,907 33,298 37,618 Income tax expense 1,719 10,107 Income tax expense1 1,890 12,038 Net income 1,414 4,017 23,191 25,580 Less: Net income attributable to noncontrolling interest 124 124 301 301 Net Income attributable to Ferro 1,290 3,893 22,890 25,279 Dividends on preferred stock 0 0 (165) (165) Net Income attributable to Ferro common shareholders $1,290 $3,893 $22,725 $25,114 Diluted earnings per share $0.01 $0.04 $0.26 $0.29 1 2012 tax rate of 32%, consistent with the Company's expectation for future effective tax rates, excluding discrete items. The Company's expected future effective tax rate is lower than the U.S. statutory rate because of expected earnings in foreign jurisdictions with lower tax rates. It should be noted that adjusted earnings is a financial measure not required by, or presented in accordance with, accounting principles generally accepted in the United States (U.S. GAAP). The adjusted earnings presented here exclude certain special charges including restructuring and impairment charges, charges related to debt refinancing, and other charges that are not related to production of products for sale. 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. In addition, these measures are used in the calculation of certain incentive compensation programs for selected employees. Ferro Corporation and 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 March 31, 2012 2011 Electronic Materials $38,024 $80,183 Performance Coatings 152,514 136,700 Color and Glass Perf. Materials 92,585 91,911 Polymer Additives 87,724 85,862 Specialty Plastics 47,056 42,629 Pharmaceuticals 5,965 5,666 Total segment sales excluding precious metals 423,868 442,951 Sales of precious metals 42,522 130,058 Total net sales $466,390 $573,009 It should be noted that segment net 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. 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. Ferro Corporation and Subsidiaries Supplemental Information Prior-Period Segment Income (Loss), As Adjusted for a Change in Methodology Related to the Allocation of Corporate Expenses (Unaudited) Three months ended (Dollars in thousands) December 31, 2011 September 30, 2011 June 30, 2011 March 31, 2011 Segment Income (Loss) Electronic Materials $(1,594) $16,463 $22,406 $30,748 Performance Coatings 6,120 11,069 10,497 6,347 Color and Glass Perf. Materials 1,539 8,365 10,670 9,098 Polymer Additives 437 4,252 4,515 6,580 Specialty Plastics 2,012 2,717 2,827 1,872 Pharmaceuticals 219 1,254 945 1,326 Total Segment Income 8,733 44,120 51,860 55,971 Unallocated corporate expenses 10,939 7,837 11,061 12,463 Restructuring and impairment charges 12,986 869 1,545 1,630 Interest expense 7,201 7,030 7,352 6,826 Other expense, net 2,696 1,740 820 1,754 Income (loss) before income taxes $(25,085) $26,641 $31,082 $33,298 Three months ended (Dollars in thousands) December 31, 2010 September 30, 2010 June 30, 2010 March 31, 2010 Segment Income Electronic Materials $34,849 $31,052 $37,535 $28,573 Performance Coatings 1,837 9,100 12,729 7,737 Color and Glass Perf. Materials 3,387 7,635 8,876 6,134 Polymer Additives 3,911 6,325 2,324 3,467 Specialty Plastics 2,199 4,712 4,100 2,402 Pharmaceuticals 1,372 1,490 723 1,115 Total Segment Income 47,555 60,314 66,287 49,428 Unallocated corporate expenses 16,550 14,853 13,809 13,442 Restructuring and impairment charges 19,625 9,570 21,205 13,332 Interest expense 7,372 10,519 13,766 12,911 Other expense, net 7,932 26,996 (4,006) 1,966 Income (loss) before income taxes $(3,925) $(1,624) $21,513 $7,777 SOURCE: Ferro Corporation Ferro Corporation Investor Contact: David Longfellow, Director, Investor Relations, 216-875-5488 E-mail: david.longfellow@ferro.com or Media Contact: Mary Abood Director, Corporate Communications, 216-875-5401 E-mail: mary.abood@ferro.com