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Ferro Grows Sales and Profitability in Third Quarter; Affirms 2016 Guidance
  • Third-quarter net sales increased by 3.3% to $289 million; up 5.7% on constant currency basis
  • Third-quarter diluted EPS from continuing operations increased to $0.24 from $0.17 in the third-quarter of 2015
  • Adjusted third-quarter diluted EPS from continuing operations increased to $0.27 from $0.24 in the third quarter of 2015

CLEVELAND--(BUSINESS WIRE)--Nov. 2, 2016-- Ferro Corporation (NYSE: FOE, the “Company”) today reported results for the third quarter ended September 30, 2016. Third-quarter income from continuing operations attributable to common shareholders was $0.24 per diluted share compared with $0.17 per diluted share in the third quarter of 2015. On an adjusted basis, earnings per diluted share from continuing operations were $0.27 compared with $0.24 in the third quarter of 2015. Adjusted earnings exclude charges relating to, among other items, restructuring activities, transaction-related expenses and gains and losses on asset sales. Please refer to the supplemental tables at the end of this release for additional information concerning adjusted financial results.

2016 Third-Quarter Results from Continuing Operations

Third-quarter 2016 net sales increased 3.3% to $289 million, compared with $279 million in the prior year quarter. Foreign currency translation reduced net sales by approximately $6 million. On a constant currency basis, net sales increased by 5.7%. Sales growth was driven by acquisitions, primarily in the Performance Coatings segment, and organic growth in the Pigments, Powders and Oxides segment. The organic growth was driven by strong sales volume growth and gross margin improvement in both the Pigments and Surface Technology product lines that comprise the majority of the Pigments, Powders and Oxides segment.

Reported Earnings from Continuing Operations: Third-quarter 2016 reported earnings per diluted share were $0.24 versus $0.17 in the same period last year. Results in the third quarter of 2016 benefited from higher sales and profitability in all three reporting segments. Results were particularly strong in the Pigments, Powders and Oxides segment where results benefited from higher volumes and improved gross margins. Higher gross profit was partially offset by increases in Selling, General and Administrative (“SG&A”) expenses, as well as interest expense and a higher effective tax rate.

The gross profit margin for the third quarter of 2016 increased by more than 320 basis points to 30.8%, while SG&A expenses increased by approximately $7 million to $56 million, primarily due to higher incentive and stock-based compensation and a decrease in pension income. Included in the third quarter of 2015 gross profit was a nonrecurring purchase accounting adjustment of approximately $6 million reflecting additional cost in the quarter related to the acquired Nubiola inventory. Other expenses were approximately $1 million higher in the third quarter of 2016 compared with the third quarter of 2015. The effective tax rate was 23.1% compared with 19.6% in the same period last year.

Income from continuing operations was $21 million in the third quarter of 2016, compared with $16 million in the same period last year. The Company recorded a net loss of $9 million for the third quarter of 2016 compared with a net loss of $4 million in the prior year same period. Both losses were primarily due to losses from discontinued operations of $29 million in the third quarter of 2016 and $19 million in the third quarter of 2015.

Adjusted Earnings from Continuing Operations: Third-quarter 2016 adjusted earnings per diluted share were $0.27 versus $0.24 in the same period last year. Results in the third quarter of 2016 benefited from a stronger adjusted gross profit margin. Higher gross profit was partially offset by increases in SG&A expense and interest expense and a higher effective tax rate.

The adjusted gross profit margin for the third quarter of 2016 increased to 30.8% from 27.5% in the third quarter of 2015. Adjusted SG&A expenses were approximately $8 million higher in the third quarter of 2016 compared with the prior-year period. Again, the increase in SG&A expense was primarily associated with higher incentive and stock-based compensation and a decrease in pension income.

In the third quarter of 2016, Adjusted Earnings before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”) was $49 million, equivalent to the prior year period.

Peter Thomas Comments on Results

“The Ferro team delivered another quarter of strong results, with increased sales and profitability,” said Peter Thomas, Chairman, President and Chief Executive Officer. “Our acquisitions are clearly creating value, as new businesses integrated in the past 12 months are making significant contributions to consolidated results. The Pigments, Powders and Oxides segment experienced a particularly strong quarter, with double-digit sales growth in both the Pigments and Surface Technology product lines. In our Performance Colors and Glass segment, performance was lifted by growing demand in Asia, which offset weaker demand for glass enamels used in the automotive industry. In the Performance Coatings segment, volume grew 27.3 percent in tile frits and glazes, while demand also increased for porcelain enamel products.”

Mr. Thomas continued, “During the quarter, we took a number of actions to sustain the momentum we’ve achieved with our growth strategy, and in October and November we announced three acquisitions, each of which aligns with and extends our existing markets and product portfolio. The acquisition of Cappelle Pigments, which has sales of approximately $70 million, is expected to close by year end and will enhance our pigments portfolio with high-performance specialty inorganic and organic pigments. The Delta Performance Products assets, which generate approximately $5 million in annual sales, adds to our technical capabilities in color manufacturing. And, our most recently announced acquisition of Electro-Science Laboratories, which has sales of approximately $40 million, extends our presence in the electronic packaging materials space and provides a very attractive platform for future growth in our Performance Colors and Glass business.

“In addition to the acquisitions, we added talented leaders to support our continued growth. Andrew Ross and Allen Spizzo were appointed to our Board of Directors, bringing extensive experience in growing specialty chemical and materials businesses. Ben Schlater was appointed Vice President and Chief Financial Officer. Joseph Vitale rejoined Ferro as Vice President of Corporate Development. And Kevin Cornelius Grant was named head of Investor Relations. These individuals join a team dedicated to driving Ferro’s strategy, continuing to deliver profitable results and creating value for our shareholders.

“Looking ahead to the fourth quarter, we expect some global economic headwinds in what is traditionally our softest quarter. We believe we have factored these into our planning and are affirming our 2016 adjusted earnings guidance.”

Outlook

As a result of the performance of the business, and global economics forecasts, Ferro is maintaining its full-year earnings outlook. The Company expects Adjusted EPS of $1.00 to $1.05 and Adjusted EBITDA of $190 to $195 million. The Company expects full-year 2016 free cash flow from continuing operations will be in a range of $70 - $80 million. Free cash flow from continuing operations is defined as adjusted EBITDA from continuing operations less cash items used to operate the business, including cash taxes and interest, investment in working capital, capital expenditures and other cash items.

Adjusted Guidance: Earnings, EBITDA, and Free Cash Flow from Continuing Operations

The Company’s guidance relating to adjusted earnings per diluted share, EBITDA and free cash flow from continuing operations exclude the impact of certain items, primarily associated with restructuring activities, transaction-related expenses, gains and losses on asset sales, and mark-to-market adjustments to the Company’s pension and postretirement benefit liabilities. The impact of adjusting for these items for the first nine months of 2016 was a benefit of approximately $9.0 million to pre-tax income, which resulted in an increase to GAAP earnings per diluted share from continuing operations of $0.06, from $0.77 to $0.83, as presented and reconciled in Table 6, as well as corresponding impacts to Adjusted EBITDA as presented and reconciled in Table 10, and Adjusted Free Cash Flow from Continuing Operations, as presented in Table 13. It is not possible at this time to identify the potential amount or significance of these items for the balance of the year, as they have not yet occurred. Therefore, the Company is unable to reconcile its full-year 2016 adjusted earnings per diluted share, and related EBITDA and free cash flow from continuing operations guidance.

Conference Call

The Company will host a conference call to discuss its third-quarter financial results and its current outlook for 2016 on Thursday, November 3, 2016, at 10:00 a.m. Eastern Time. To listen to the call, dial 888-222-3913 if calling from the United States or Canada, or dial 303-223-2686 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 through noon Eastern Time on November 10, 2016. 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 #21820061 to access the audio replay.

The conference call will also be broadcast live over the Internet and will be available for replay for 30 days. The live broadcast, replay and earnings presentation material can be accessed through the Investor Information portion of the Company’s Web site at www.ferro.com. A podcast of the conference call also will be available on the site.

About Ferro Corporation

Ferro Corporation (http://www.ferro.com) is a leading global functional coatings and color solutions company that supplies technology-based performance materials, including glass-based coatings, pigments and colors, and polishing materials. Ferro products are sold into the building and construction, automotive, appliances, electronics, household furnishings, and industrial products markets. Headquartered in Mayfield Heights, Ohio, the Company has approximately 4,990 employees globally and reported 2015 sales of $1.1 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:

  • Ferro's ability to complete acquisitions, effectively integrate the businesses and achieve the expected synergies (including the Electro-Science Laboratories, Cappelle Pigments, Delta, Pinturas Benicarló, Ferer, and Al Salomi transactions), as well as the acquisitions being accretive and Ferro achieving the expected returns on invested capital;
  • the exploration of strategic alternatives and the potential results therefrom;
  • Ferro’s ability to successfully implement and/or administer its cost-saving initiatives, including its restructuring programs, and to produce the desired results;
  • demand in the industries into which Ferro sells its products may be unpredictable, cyclical, or heavily influenced by consumer spending;
  • the effectiveness of the Company’s efforts to improve operating margins through sales growth, price increases, productivity gains, and improved purchasing techniques;
  • currency conversion rates and economic, social, political, and regulatory conditions around the world;
  • Ferro’s ability to successfully introduce new products or enter into new growth markets;
  • the impact of interruption, damage to, failure, or compromise of the Company’s information systems;
  • 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 availability of reliable sources of energy and raw materials at a reasonable cost;
  • increasingly aggressive domestic and foreign governmental regulations on hazardous materials and regulations affecting health, safety and the environment;
  • 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;
  • competitive factors, including intense price competition;
  • Ferro’s ability to protect its intellectual property or to successfully resolve claims of infringement brought against it;
  • the impact of operating hazards and investments made in order to meet stringent environmental, health and safety regulations;
  • management of Ferro’s general and administrative expenses;
  • Ferro’s multi-jurisdictional tax structure and its ability to reduce its effective tax rate, including the impact of the Company’s performance on its ability to utilize significant deferred tax assets;
  • the effectiveness of strategies to increase Ferro’s return on invested capital, and the short-term impact that acquisitions may have on return on invested capital;
  • 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;
  • implementation of new business processes and information systems, including the outsourcing of functions to third parties;
  • risks associated with the manufacture and sale of material into industries making products for sensitive applications;
  • 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 may not pay dividends on its common stock in the foreseeable future;
  • amount and timing of any repurchase of Ferro’s common stock; 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, 2015.

       
Table 1
Ferro Corporation and Subsidiaries
Condensed Consolidated Statements of Operations (unaudited)
 
(In thousands, except per share amounts) Three Months Ended Nine Months Ended
September 30, September 30,
2016 2015 2016 2015
 
Net sales $ 288,527 $ 279,365 $ 863,955 $ 810,351
Cost of sales   199,546   202,337   592,372   585,048
Gross profit 88,981 77,028 271,583 225,303
Selling, general and administrative expenses 55,588 48,417 166,105 150,568
Restructuring and impairment charges 26 3,844 1,694 5,469
Other expense (income):
Interest expense 5,304 3,877 15,579 10,137
Interest earned (214) (97) (414) (191)
Foreign currency losses, net 867 1,203 2,867 5,758
Miscellaneous expense (income), net   705   467   (2,079)   705
Income before income taxes 26,705 19,317 87,831 52,857
Income tax expense   6,157   3,792   22,659   11,930
Income from continuing operations 20,548 15,525 65,172 40,927
(Loss) from discontinued operations, net of income taxes   (29,222)   (19,086)   (64,464)   (28,688)
Net (loss) income (8,674) (3,561) 708 12,239
Less: Net income (loss) attributable to noncontrolling interests   210   498   589   (1,271)
Net (loss) income attributable to Ferro Corporation common shareholders $ (8,884) $ (4,059) $ 119 $ 13,510
 
Earnings (loss) per share attributable to Ferro Corporation common shareholders:
Basic earnings (loss):
Continuing operations $ 0.24 $ 0.17 $ 0.78 $ 0.48
Discontinued operations   (0.35)   (0.22)   (0.77)   (0.33)
$ (0.11) $ (0.05) $ 0.01 $ 0.15
 
Diluted earnings (loss):
Continuing operations $ 0.24 $ 0.17 $ 0.77 $ 0.48
Discontinued operations   (0.35)   (0.22)   (0.77)   (0.32)
$ (0.11) $ (0.05) $ - $ 0.16
Shares outstanding:
Weighted-average basic shares 83,268 87,130 83,263 87,169
Weighted-average diluted shares 84,476 88,400 84,239 88,413
End-of-period basic shares 83,386 86,700 83,386 86,700
       
Table 2
Ferro Corporation and Subsidiaries
Segment Net Sales and Gross Profit (unaudited)
 
(Dollars in thousands) Three Months Ended Nine Months Ended
September 30, September 30,
2016 2015 2016 2015
Segment Net Sales
Performance Coatings $ 130,453 $ 128,745 $ 399,166 $ 404,991
Performance Colors and Glass 92,793 92,168 276,896 290,361
Pigments, Powders and Oxides   65,281   58,452   187,893   114,999
Total segment net sales $ 288,527 $ 279,365 $ 863,955 $ 810,351
 
Segment Gross Profit
Performance Coatings $ 33,636 $ 32,107 $ 104,985 $ 96,126
Performance Colors and Glass 32,282 31,662 100,825 99,540
Pigments, Powders and Oxides 23,178 13,179 65,868 30,325
Other costs of sales   (115)   80   (95)   (688)
Total gross profit $ 88,981 $ 77,028 $ 271,583 $ 225,303
 
Selling, general and administrative expenses
Strategic services $ 29,385 $ 27,319 $ 86,801 $ 79,301
Functional services 22,608 20,687 66,726 61,152
Incentive compensation 2,153 940 7,299 2,664
Stock-based compensation   1,442   (529)   5,279   7,451
Total selling, general and administrative expenses $ 55,588 $ 48,417 $ 166,105 $ 150,568
 
Restructuring and impairment charges 26 3,844 1,694 5,469
Other expense, net   6,662   5,450   15,953   16,409
Income before income taxes $ 26,705 $ 19,317 $ 87,831 $ 52,857
     
Table 3
Ferro Corporation and Subsidiaries
Condensed Consolidated Balance Sheets (unaudited)
 
(Dollars in thousands) September 30, December 31,
2016 2015
ASSETS
Current assets
Cash and cash equivalents $ 40,556 $ 58,380
Accounts receivable, net 282,827 231,970
Inventories 211,261 184,854
Deferred income taxes - 12,088
Other receivables 36,360 34,088
Other current assets 8,013 15,695
Current assets held-for-sale   -   16,215
Total current assets 579,017 553,290
Other assets
Property, plant and equipment, net 249,497 260,429
Goodwill 142,880 145,669
Intangible assets, net 112,021 106,633
Deferred income taxes 99,326 87,385
Other non-current assets 50,247 48,767
Non-current assets held-for-sale   -   23,178
Total assets $ 1,232,988 $ 1,225,351
 
LIABILITIES AND EQUITY
Current liabilities
Loans payable and current portion of long-term debt $ 10,221 $ 7,446
Accounts payable 123,325 120,380
Accrued payrolls 32,255 28,584
Accrued expenses and other current liabilities 60,708 54,664
Current liabilities held-for-sale   -   7,156
Total current liabilities 226,509 218,230
Other liabilities
Long-term debt, less current portion 477,100 466,108
Postretirement and pension liabilities 147,682 148,249
Other non-current liabilities 65,533 66,990
Non-current liabilities held-for-sale   -   1,493
Total liabilities 916,824 901,070
Equity
Total Ferro Corporation shareholders’ equity 308,394 316,459
Noncontrolling interests   7,770   7,822
Total liabilities and equity $ 1,232,988 $ 1,225,351
       
Table 4
Ferro Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
 
(Dollars in thousands) Three Months Ended Nine Months Ended
September 30, September 30,
2016 2015 2016 2015
Cash flows from operating activities
Net income $ (8,674) $ (3,561) $ 708 $ 12,239
Loss (gain) on sale of assets and business 315 300 (3,459) 1,288
Depreciation and amortization 11,670 15,856 33,599 32,002
Interest amortization 347 289 991 875
Restructuring and impairment 13,522 11,314 37,173 11,282
Devaluation of Venezuela - - - 3,343
Accounts receivable (2,683) 14,735 (44,370) (3,022)
Inventories (2,758) (2,379) (20,453) (1,226)
Accounts payable (6,435) (8,134) (3,209) (9,645)
Other current assets and liabilities, net 6,511 15,029 9,479 (5,757)
Other adjustments, net   (3,098)   (15,885)   (3,717)   (9,881)
Net cash provided by operating activities 8,717 27,564 6,742 31,498
 
Cash flows from investing activities
Capital expenditures for property, plant and equipment and other long lived assets (4,173) (9,697) (18,217) (36,251)
Proceeds from sale of assets 1 19 3,598 144
Business acquisitions, net of cash acquired   (4,778)   (161,518)   (11,417)   (166,997)
Net cash (used in) investing activities (8,950) (171,196) (26,036) (203,104)
 
Cash flows from financing activities
Net (repayments) borrowings under loans payable (425) 2,722 2,606 1,791
Proceeds from revolving credit facility 49,390 41,773 212,906 146,773
Principal payments on revolving credit facility (56,990) (30,737) (149,696) (30,737)
Principal payments on term loan facility (750) (750) (52,250) (2,250)
Payment of debt issuance costs (360) - (661) -
Purchase of treasury stock - (6,998) (11,429) (6,998)
Other financing activities   205   (979)   416   (1,160)
Net cash (used in) provided by financing activities (8,930) 5,031 1,892 107,419
Effect of exchange rate changes on cash and cash equivalents   303   (3,319)   (422)   (6,820)
(Decrease) in cash and cash equivalents (8,860) (141,920) (17,824) (71,007)
Cash and cash equivalents at beginning of period   49,416   211,413   58,380   140,500
Cash and cash equivalents at end of period $ 40,556 $ 69,493 $ 40,556 $ 69,493
 
Cash paid during the period for:
Interest $ 5,749 $ 4,096 $ 15,032 $ 11,141
Income taxes $ 5,497 $ 8,022 $ 12,929 $ 17,504
             
Table 5
Ferro Corporation and Subsidiaries
Supplemental Information
Reconciliation of Reported Income to Adjusted Income
For the Three Months Ended September 30 (unaudited)
Net (loss)
Selling Restructuring income Diluted
(Dollars in general and and Other attributable (loss)
thousands, except Cost of administrative impairment expense, Income tax to common earnings
per share amounts) sales expenses charges net

expense3

shareholders per share
                                       
2016
 
As reported $ 199,546 $ 55,588 $ 26 $ 6,662 $ 6,157 $ (8,884) $ (0.11)
Special items:
Restructuring - - (26) - 7 19 -
Other1 - (4,098) - - 1,493 2,605 0.03
Discontinued operations   -     -   -   -   -   29,222   0.35
Total special items4   -   (4,098)   (26)   -   1,500   31,846   0.38
As adjusted $ 199,546 $ 51,490 $ - $ 6,662 $ 7,657 $ 22,962 $ 0.27
 
                                       
2015
 
As reported $ 202,337 $ 48,417 $ 3,844 $ 5,450 $ 3,792 $ (4,059) $ (0.05)
Special items:
Restructuring - - (3,844) - 1,370 2,474 0.03
Other2 284 (4,845) - - 727 3,834 0.04
Discontinued operations     -   -   -   -   -   19,086   0.22
Total special items4   284   (4,845)   (3,844)   -   2,097   25,394   0.29
As adjusted $ 202,621 $ 43,572 $ - $ 5,450 $ 5,889 $ 21,335 $ 0.24
(1)   The adjustments to “Selling general and administrative expenses” primarily include legal, professional and other expenses related to certain business development activities.
(2) The adjustments to “Selling general and administrative expenses” primarily include legal, professional and other expenses related to certain business development activities as well as fees associated with certain reorganization projects.
(3) The tax rate reflects the reported tax rate, adjusted for non-GAAP adjustments being tax effected at the respective statutory rate where the item originated.
(4) Due to rounding, total earnings per share related to special items does not always add to the total adjusted earnings per share.

It should be noted that adjusted income, earnings per share and other adjusted items referred to above are financial measures not required by, or presented in accordance with, accounting principles generally accepted in the United States (U.S. GAAP). These non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, the financial measures prepared in accordance with U.S. GAAP and a reconciliation of these financial measures to the most comparable U.S. GAAP financial measures is presented. The adjusted income, earnings per share and other adjusted items presented above exclude certain special items including restructuring charges, certain business development activities, gains on sale of assets, and discontinued operations. We believe this data provides investors with additional information on the underlying operations and trends of the business and enables period-to-period comparability of financial performance.

             
Table 6
Ferro Corporation and Subsidiaries
Supplemental Information
Reconciliation of Reported Income to Adjusted Income
For the Nine Months Ended September 30 (unaudited)
 
Net (loss)
Selling Restructuring Other income Diluted
(Dollars in general and and expense Income attributable earnings
thousands, except Cost of administrative impairment (income), tax to common (loss) per
per share amounts) sales expenses charges net

expense3

shareholders share
                                       
2016
 
As reported $ 592,372 $ 166,105 $ 1,694 $ 15,953 $ 22,659 $ 119 $ -
Special items:
Restructuring - - (1,694) - 522 1,172 0.01
Other1 - (10,339) - 3,065 2,760 4,514 0.05
Discontinued operations   -   -   -   -   -   64,464   0.77
Total special items4   -   (10,339)   (1,694)   3,065   3,282   70,150   0.83
As adjusted $ 592,372 $ 155,766 $ - $ 19,018 $ 25,941 $ 70,269 $ 0.83
 
                                       
2015
 
As reported $ 585,048 $ 150,568 $ 5,469 $ 16,409 $ 11,930 $ 13,510 $ 0.16
Special items:
Restructuring - - (5,469) - 1,855 3,614 0.04
Other2 (2,470) (11,242) - (4,763) 4,661 13,814 0.16
Discontinued operations - - - - - 28,688 0.32
Noncontrolling interest   -   -   -   -   -   (1,453)   (0.02)
Total special items4   (2,470)   (11,242)   (5,469)   (4,763)   6,516   44,663   0.50
As adjusted $ 582,578 $ 139,326 $ - $ 11,646 $ 18,446 $ 58,173 $ 0.66
(1)   The adjustments to “Selling general and administrative expenses” include legal, professional and other expenses related to certain business development activities as well as fees associated with certain reorganization projects; and, the adjustment to “Other expense (income), net” primarily relates to the gain on an asset sale that was recognized during the first quarter and to a change on the finalization of the purchase price for the acquisition of Vetriceramici.
(2) The adjustments to “Cost of sales” relate to impacts of currency-related items in Venezuela; the adjustments to “Selling general and administrative expenses” primarily include legal, professional and other expenses related to certain business development activities as well as fees associated with certain reorganization projects; and, the adjustments to “Other expense (income), net” primarily relate to impacts of currency-related items in Venezuela and the impact of the loss on a foreign currency contract associated with the purchase of Nubiola.
(3) The tax rate reflects the reported tax rate, adjusted for non-GAAP adjustments being tax effected at the respective statutory rate where the item originated.
(4) Due to rounding, total earnings per share related to special items does not always add to the total adjusted earnings per share.

It should be noted that adjusted income, earnings per share and other adjusted items referred to above are financial measures not required by, or presented in accordance with, accounting principles generally accepted in the United States (U.S. GAAP). These non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, the financial measures prepared in accordance with U.S. GAAP and a reconciliation of these financial measures to the most comparable U.S. GAAP financial measures is presented. The adjusted income, earnings per share and other adjusted items presented above exclude certain special items including restructuring charges, certain business development activities, gains on sale of assets, the overall financial impact of currency related items in Venezuela and discontinued operations. We believe this data provides investors with additional information on the underlying operations and trends of the business and enables period-to-period comparability of financial performance.

       
Table 7
Ferro Corporation and Subsidiaries
Supplemental Information
Reconciliation of Adjusted Gross Profit (unaudited)
 
(Dollars in thousands) Three Months Ended Nine Months Ended
September 30, September 30,
2016 2015 2016 2015
 
Performance Coatings $ 130,453 $ 128,745 $ 399,166 $ 404,991
Performance Colors and Glass 92,793 92,168 276,896 290,361
Pigments, Powders and Oxides   65,281     58,452     187,893     114,999  
Total net sales $ 288,527   $ 279,365   $ 863,955   $ 810,351  
 
Total net sales $ 288,527 $ 279,365 $ 863,955 $ 810,351
Adjusted cost of sales1   199,546     202,621     592,372     582,578  
Adjusted gross profit $ 88,981   $ 76,744   $ 271,583   $ 227,773  
Adjusted gross profit percentage 30.8 % 27.5 % 31.4 % 28.1 %
(1)   Refer to table 5 and table 6 for the reconciliation of cost of sales to adjusted cost of sales for the three and nine months ended September 30, 2016 and 2015, respectively.

It should be noted that adjusted cost of sales and adjusted gross profit are financial measures not required by, or presented in accordance with, accounting principles generally accepted in the United States (U.S. GAAP). These non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, the financial measures prepared in accordance with U.S. GAAP and a reconciliation of these financial measures to the most comparable U.S. GAAP financial measures is presented. Adjusted gross profit and adjusted cost of sales excludes certain items, primarily comprised of the impact of currency-related items in Venezuela in the nine months ended September 30, 2015. We believe this data provides investors with additional information on the underlying operations and trends of the business and enables period-to-period comparability of financial performance.

       
Table 8
Ferro Corporation and Subsidiaries
Supplemental Information
Constant Currency Schedule of Adjusted Operating Profit (unaudited)
 
Three Months Ended
(Dollars in thousands) September 30,
Adjusted

2016 vs

2015

2015(1)

2016

Adjusted 2015

Segment net sales
Performance Coatings $ 128,745 $ 122,967 $ 130,453 $ 7,486
Performance Colors and Glass 92,168 91,635 92,793 1,158
Pigments, Powders and Oxides   58,452   58,353   65,281   6,928
Total segment net sales $ 279,365 $ 272,955 $ 288,527 $ 15,572
 
Segment adjusted gross profit
Performance Coatings $ 32,107 $ 30,714 $ 33,636 $ 2,922
Performance Colors and Glass 31,662 31,437 32,282 845
Pigments, Powders and Oxides 13,179 13,186 23,178 9,992
Other costs of sales   (204)   (204)   (115)   89
Total adjusted gross profit(2) $ 76,744 $ 75,133 $ 88,981 $ 13,848
 
Adjusted selling, general and administrative expenses
Strategic services $ 27,319 $ 26,998 $ 29,385 $ 2,387
Functional services 15,842 15,533 18,510 2,977
Incentive compensation 940 917 2,153 1,236
Stock-based compensation   (529)   (529)   1,442   1,971
Total adjusted selling, general and administrative expenses(3) $ 43,572 $ 42,919 $ 51,490 $ 8,571
 
Adjusted operating profit $ 33,172 $ 32,214 $ 37,491 $ 5,277
Adjusted operating profit as a % of net sales 11.9% 11.8% 13.0%
(1)   Reflects the remeasurement of 2015 reported and adjusted local currency results using 2016 exchange rates, resulting in constant currency comparative figures to 2016 reported and adjusted results. See table 5 for non-GAAP adjustments applicable to the three-month comparative periods, respectively.
(2) Refer to table 7 for the reconciliation of gross profit to adjusted gross profit for the three months ended September 30, 2016 and 2015, respectively.
(3) Refer to table 5 for the reconciliation of SG&A expenses to adjusted SG&A expenses for the three months ended September 30, 2016 and 2015, respectively.

It should be noted that the adjusted 2015 results is a financial measure not required by, or presented in accordance with, accounting principles generally accepted in the United States (U.S. GAAP). These non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, the financial measures prepared in accordance with U.S. GAAP and a reconciliation of these financial measures to the most comparable U.S. GAAP financial measures is presented. Adjusted 2015 results are remeasured using the respective 2016 exchange rates. We believe this data provides investors with additional information on the underlying operations and trends of the business and enables period-to-period comparability of financial performance.

       
Table 9
Ferro Corporation and Subsidiaries
Supplemental Information
Constant Currency Schedule of Adjusted Operating Profit (unaudited)
 
Nine Months Ended
(Dollars in thousands) September 30,
Adjusted 2016 vs
2015

2015(1)

2016 Adjusted 2015
Segment net sales
Performance Coatings $ 404,991 $ 376,671 $ 399,166 $ 22,495
Performance Colors and Glass 290,361 286,475 276,896 (9,579)
Pigments, Powders and Oxides   114,999   114,509   187,893   73,384
Total segment net sales $ 810,351 $ 777,655 $ 863,955 $ 86,300
 
Segment adjusted gross profit
Performance Coatings $ 98,764 $ 93,082 $ 104,985 $ 11,903
Performance Colors and Glass 99,540 98,272 100,825 2,553
Pigments, Powders and Oxides 30,325 30,225 65,868 35,643
Other costs of sales   (856)   (856)   (95)   761
Total adjusted gross profit(2) $ 227,773 $ 220,723 $ 271,583 $ 50,860
 
Adjusted selling, general and administrative expenses
Strategic services $ 79,301 $ 77,563 $ 86,801 $ 9,238
Functional services 49,910 48,447 56,387 7,940
Incentive compensation 2,664 2,517 7,299 4,782
Stock-based compensation   7,451   7,451   5,279   (2,172)
Total adjusted selling, general and administrative expenses(3) $ 139,326 $ 135,978 $ 155,766 $ 19,788
 
Adjusted operating profit $ 88,447 $ 84,745 $ 115,817 $ 31,072
Adjusted operating profit as a % of net sales 10.9% 10.9% 13.4%
(1)   Reflects the remeasurement of 2015 reported and adjusted local currency results using 2016 exchange rates, resulting in constant currency comparative figures to 2016 reported and adjusted results. See table 6 for non-GAAP adjustments applicable to the nine-month comparative periods, respectively.
(2) Refer to table 7 for the reconciliation of gross profit to adjusted gross profit for the nine months ended September 30, 2016 and 2015, respectively.
(3) Refer to table 6 for the reconciliation of SG&A expenses to adjusted SG&A expenses for the nine months ended September 30, 2016 and 2015, respectively.

It should be noted that the adjusted 2015 results is a financial measure not required by, or presented in accordance with, accounting principles generally accepted in the United States (U.S. GAAP). These non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, the financial measures prepared in accordance with U.S. GAAP and a reconciliation of these financial measures to the most comparable U.S. GAAP financial measures is presented. Adjusted 2015 results are remeasured using the respective 2016 exchange rates. We believe this data provides investors with additional information on the underlying operations and trends of the business and enables period-to-period comparability of financial performance.

       
Table 10
Ferro Corporation and Subsidiaries
Supplemental Information
Reconciliation of Net income attributable to Ferro Corporation
common shareholders to Adjusted EBITDA (unaudited)
 
(Dollars in thousands) Three Months Ended Nine Months Ended
September 30, September 30,
2016 2015 2016 2015
 
Net (loss) income attributable to Ferro Corporation common shareholders $ (8,884) $ (4,059) $ 119 $ 13,510
Net income (loss) attributable to noncontrolling interests 210 498 589 (1,271)
Loss from discontinued operations, net of income taxes 29,222 19,086 64,464 28,688
Restructuring and impairment charges 26 3,844 1,694 5,469
Other expense, net 1,358 1,573 374 6,272
Interest expense 5,304 3,877 15,579 10,137
Income tax expense 6,157 3,792 22,659 11,930
Depreciation and amortization 12,017 16,145 34,590 32,877
Less: interest amortization expense and other (347) (289) (991) (875)
Cost of sales adjustments(1) - (284) - 2,470
SG&A adjustments(1)   4,098     4,845     10,339     11,242  
Adjusted EBITDA $ 49,161   $ 49,028   $ 149,416   $ 120,449  
 
Net sales $ 288,527 $ 279,365 $ 863,955 $ 810,351
Adjusted EBITDA as a % of net sales 17.0 % 17.5 % 17.3 % 14.9 %
(1)   For details on Non-GAAP adjustments, refer to table 5 and table 6 for the reconciliation of cost of sales to adjusted cost of sales and SG&A to adjusted SG&A for the three and nine months ended September 30, 2016 and 2015, respectively.

It should be noted that adjusted EBITDA is a financial measure not required by, or presented in accordance with, accounting principles generally accepted in the United States (U.S. GAAP). These non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, the financial measures prepared in accordance with U.S. GAAP and a reconciliation of these financial measures to the most comparable U.S. GAAP financial measures is presented. Adjusted EBITDA is net income attributable to Ferro Corporation common shareholders before the effects of net income (loss) attributable to noncontrolling interest, discontinued operations, restructuring and impairment charges, other (income) expense, net, interest expense, income tax expense, depreciation and amortization, non-GAAP adjustments to cost of sales and non-GAAP adjustments to SG&A. We believe this data provides investors with additional information on the underlying operations and trends of the business and enables period-to-period comparability of financial performance.

   
Table 11
Ferro Corporation and Subsidiaries
Supplemental Information
Return on Invested Capital
For the Rolling Twelve Months Ended (unaudited)
 
(Dollars in thousands) September 30, December 31,
2016 2015
 
Gross profit $ 347,960 $ 301,680
Selling, general and administrative expenses 232,436 216,899
Total operating profit 115,524 84,781
Non-GAAP adjustments1 26,193 29,539
Adjusted operating profit before tax 141,717 114,320
Less: Tax expense2   (36,846)   (29,723)
Net adjusted operating profit after tax $ 104,871 $ 84,597
 
Recent acquisitions3 NOPAT gain   23,554   11,083
Net adjusted operating profit after tax excluding recent acquisitions $ 81,316 $ 73,514
 
Equity 316,164 324,281
Equity - discontinued operations - (30,744)
Debt 487,321 473,554
Off balance sheet precious metal leases 26,790 20,464
Postretirement and pension liabilities 147,682 148,249
Environmental liabilities 15,667 13,824
Release of valuation allowance - (63,289)
Cash   (40,556)   (58,380)
Invested capital $ 953,068 $ 827,959
 
Return on invested capital 11.0% 10.2%
 
Less: recent acquisitions invested capital   239,368   292,543
Invested capital excluding recent acquisitions $ 713,700 $ 535,416
 
Return on invested capital excluding recent acquisitions 11.4% 13.7%
(1)   Primarily includes adjustments for the annual remeasurement of our pension and other postretirement benefit plans, certain business development activities, currency-related items in Venezuela and costs associated with certain reorganization projects.
(2) Operating profit is tax effected at 26.0%, as this represents a normalized tax rate reflecting our current mix of business. This tax rate deviates from our full year 2016 estimate and 2015 due to certain discrete items that would not be considered normalized, as well as certain tax planning opportunities to be implemented.
(3) For the rolling twelve months ended September 30, 2016, the recent acquisitions include Nubiola, Al Salomi, Ferer, Pinturas and Delta Performance Products. For the rolling twelve months ended December 31, 2015, the recent acquisitions include Vetriceramici, Nubiola and Al Salomi. Acquisitions are removed from being included in the recent acquisitions line item the first quarter after the operations of the acquisitions are included in the Company for a full year.

It should be noted that net adjusted operating profit after tax and return on invested capital are financial measures not required by, or presented in accordance with, accounting principles generally accepted in the United States (U.S. GAAP). These non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, the financial measures prepared in accordance with U.S. GAAP and a reconciliation of these financial measures to the most comparable U.S. GAAP financial measures is presented. Net adjusted operating profit after tax is operating profit before the effects of discontinued operations, non-GAAP adjustments to cost of sales and non-GAAP adjustments to SG&A tax effected. We believe this data provides investors with additional information on the underlying operations and trends 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.

       
Table 12
Ferro Corporation and Subsidiaries
Supplemental Information
Change in Net Debt (unaudited)
 
(Dollars in thousands) Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2016 2015 2016 2015
Beginning of period
Total debt $ 495,887 $ 408,657 (1) $ 473,554 $ 306,667 (1)
Cash   49,416   211,413   58,380   140,500
Net Debt 446,471 197,244 415,174 166,167
 
End of period
Total debt 487,321 421,544 (1) 487,321 421,544 (1)
Cash   40,556   69,493   40,556   69,493
Net Debt 446,765 352,051 446,765 352,051
               
Period change in net debt $ (294) $ (154,807) $ (31,591) $ (185,884)
(1)   Reflects adjustment for debt issuance costs for term loan that are now presented in the balance sheet as a reduction of the related debt liability rather than an asset. This change was due to ASU 2015-03 which was adopted by the Company as of December 31, 2015. The adoption resulted in the reclassification of unamortized debt issuance costs related to the term loan from other non-current assets to a reduction in long-term debt, less current portion of $5.3 million as of December 31, 2014, $5.0 million as of June 30, 2015 and $4.7 million as of September 30, 2015.
       
Table 13
Ferro Corporation and Subsidiaries
Supplemental Information
Adjusted Free Cash Flow from Continuing Operations (unaudited)
 
(Dollars in thousands) Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2016   2015   2016   2015
As Adjusted
 
Adjusted EBITDA(1) $ 49,161 $ 49,028 $ 149,416 $ 120,449
Capital expenditures (4,074) (5,899) (17,296) (14,127)
Working capital (10,775) 5,062 (62,292) (21,284)
Cash income taxes (5,497) (8,022) (12,929) (17,504)
Cash interest (5,749) (4,096) (15,032) (11,141)
Pension (423) (1,080) (2,921) (2,824)
Incentive compensation payments - - (8,802) (14,584)
Other   2,434   (1,913)   4,992   (2,907)
Free Cash Flow from Continuing Operations $ 25,077 $ 33,080 $ 35,136 $ 36,078
 
Discontinued operations (16,805) (10,235) (32,534) (28,372)
Restructuring/Other (129) (4,324) (2,205) (8,881)
(Outflows) from M&A activity (8,437) (166,330) (20,559) (177,711)
Stock repurchase - (6,998) (11,429) (6,998)
               
Change in Net Debt $ (294) $ (154,807) $ (31,591) $ (185,884)
(1)   See table 10 for the reconciliation of net income attributable to Ferro Corporation common shareholders to adjusted EBITDA.

It should be noted that adjusted EBITDA and free cash flow from continuing operations are financial measures not required by, or presented in accordance with, accounting principles generally accepted in the United States (U.S. GAAP). These non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, the financial measures prepared in accordance with U.S. GAAP and a reconciliation of these financial measures to the most comparable U.S. GAAP financial measures is presented. Adjusted EBITDA is net income before the effects of income (loss) attributable to noncontrolling interest, discontinued operations, restructuring and impairment charges, other (income) expense net, interest expense, income tax expense, depreciation and amortization, non-GAAP adjustments to cost of sales, and non-GAAP adjustments to SG&A. Free cash flow from Continuing Operations is adjusted EBITDA less capital expenditures, working capital, cash income taxes, cash interest, pension contributions, incentive compensation payments, and other continuing operating cash items. We believe this data provides investors with additional information on the underlying operations and trends 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.

Source: Ferro Corporation

Ferro Corporation
Investor Contact:
Kevin Cornelius Grant, 216-875-5451
Manager, Investor Relations
kevincornelius.grant@ferro.com
or
Media Contact:
Mary Abood, 216-875-5401
Director, Corporate Communications
mary.abood@ferro.com