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Ferro Momentum Continues with Strong Growth in the Third Quarter

Company delivers fifth consecutive quarter of organic volume and sales growth, $0.27 per share in GAAP earnings, and $0.33 per share in adjusted EPS;

Company updates fiscal 2017 outlook

CLEVELAND--(BUSINESS WIRE)--Nov. 1, 2017-- Ferro Corporation (NYSE: FOE), a leading global provider of functional coatings and color solutions, today reported results for the third quarter ended September 30, 2017.

Third Quarter Financial and Operating Highlights *:

  • Net sales increased 21.3%, to $350.0 million
    • Organic sales rose 4.9% on a constant currency basis
  • Total volume grew 8.9% and organic volume grew 4.0%
  • Gross margin was 29.6%
    • Seventh consecutive quarter of adjusted gross margin of 30.0% or higher
  • Earnings per diluted share increased to $0.27 compared with a loss of $0.11
    • Adjusted earnings per diluted share increased 22.2% to $0.33
  • Net income attributable to Ferro Corporation common shareholders increased to $22.8 million compared with a loss of $8.9 million
  • Adjusted EBITDA grew 20.5% to $59.2 million

*Comparative information is relative to prior-year third quarter.

The results and guidance in this release, including in the highlights above, contain references to non-GAAP measures from continuing operations. Reconciliation of GAAP to non-GAAP results can be found at the end of this release.

Peter Thomas, Chairman, President and CEO, said, “Ferro delivered another quarter of strong financial results, with our fifth consecutive quarter of organic sales and volume growth.

“Our delivery of strong results over several quarters demonstrates the durability and scalability of our value creation business model and the growth-oriented culture we have developed at Ferro. With a keen focus on innovation and optimization, we continue to improve performance and productivity. We have invested in higher- value growth opportunities that position the Company for above-market gains, and we are expanding our role as an innovative technology partner to fulfill our customers’ current and future needs. Meanwhile, after 14 acquisitions over the past 33 months, we continue to improve operating leverage while growing revenue.

“Today, Ferro is a more focused and stronger company with consistently improving operating performance and operating cash flow. We are able to fund sustainable growth through innovative portfolio enhancements, new platforms that leverage our existing market positions, and strategic acquisitions. In this Dynamic Innovation and Optimization phase of our value creation strategy, we have moved to a self-renewing, higher growth model that is scaled to support reinvestment in core businesses and growth areas.

“We remain confident in our ability to continue delivering strong results and look forward to sharing our vision for the future at our November 9, 2017, investor day in Cleveland.”

2017 Consolidated Third Quarter Results from Continuing Operations

Third quarter net sales were $350.0 million, an increase of 21.3% from $288.5 million in the prior year quarter. On a constant currency basis, third quarter net sales increased 19.7% compared to the prior year quarter. Gross profit increased 16.4% to $103.6 million, from $89.0 million. Adjusted gross profit increased 18.0% to $105.0 million from $89.0 million, and the Company achieved an adjusted gross margin of 30.0% notwithstanding raw material headwinds. Ferro reported net income attributable to Ferro Corporation common shareholders in the third quarter of $22.8 million, or $0.27 per diluted share, compared with a net loss of $8.9 million, or $0.11 per diluted share in the prior year quarter. On an adjusted basis, earnings per diluted share from continuing operations were $0.33, an increase of 22.2% from $0.27 per diluted share in the prior year quarter.

Earnings Per Diluted Share

    Q3 2017     Q3 2016
GAAP $ 0.27 $(0.11 )
Adjusted (Non-GAAP) $ 0.33 $ 0.27

In the third quarter of 2017, organic net sales (which exclude acquisitions owned less than 12 months) increased 4.9% on a constant currency basis. This is the Company’s fifth consecutive quarter of organic sales growth.

Third Quarter Segment Results

All three of Ferro’s reporting segments delivered continued growth in the quarter.

  • Color Solutions increased sales by 42.8% to $93.2 million, grew gross profit to $31.0 million, and generated a gross profit margin of 33.3%.
  • Performance Colors & Glass increased sales by 19.2% to $110.6 million, grew gross profit to $37.9 million, and generated a gross profit margin of 34.3%.
  • Performance Coatings increased sales by 12.1% to $146.2 million, grew gross profit to $35.5 million, and generated a gross profit margin of 24.3%.

Year-to-date net cash provided by operating activities improved to $34.7 million, compared with $6.7 million for the same period in the prior year. Ferro’s adjusted free cash flow from continuing operations was $35.0 million, compared with $35.7 million for the same period in the prior year. Adjusted free cash flow from continuing operations is defined as adjusted EBITDA from continuing operations less cash items used to operate the businesses, including cash taxes and interest, changes in working capital, capital expenditures and other cash items.

Acquisitions Update

On November 1, 2017, Ferro completed the previously announced acquisition of Endeka Group, a global producer of high-value coatings and key raw materials for the ceramic tile market, for approximately €64 million (approximately $74 million).

Outlook

Ferro is providing adjusted diluted EPS and adjusted EBITDA from operations guidance on a continuing operations basis. While it is likely that Ferro could incur charges for items excluded from adjusted diluted EPS and adjusted EBITDA from continuing operations such as mark-to-market adjustments of pension and other postretirement benefit obligations, restructuring and impairment charges, and legal and professional expenses related to certain business development activities, it is not possible, without unreasonable effort, to identify the amount or significance of these items or the potential for other transactions that may impact future GAAP net income and cash flow from operating activities. Management does not believe these items to be representative of underlying business performance. Management is unable to reconcile, without unreasonable effort, the Company's forecasted range of adjusted EPS and adjusted EBITDA from continuing operations to a comparable GAAP measure.

Ferro is updating its full-year 2017 guidance based on the Company’s year-to-date performance. Consistent with prior guidance, this guidance uses foreign exchange rates as of December 31, 2016.

  • Adjusted EPS of $1.26 - $1.29 per diluted share, up from $1.22 - $1.27 per diluted share
  • Adjusted EBITDA of $228 million - $231 million, up from $223 million - $228 million
  • Consolidated sales growth of 17.0% - 17.5%, up from 12.0% - 13.0%

Ferro’s outlook assumes an exchange rate of 1.05 USD/EUR for the remainder of 2017. If foreign exchange rates stay at the September 30, 2017 levels, Ferro estimates that this would provide an approximate one- to two-cent tailwind to the above-mentioned EPS outlook.

Constant Currency

Constant currency results reflect the remeasurement of 2016 reported and adjusted local currency results using 2017 exchange rates, which produces constant currency comparative figures to 2017 reported and adjusted results. These non-GAAP financial measures presented should not be considered as a substitute for the measures of financial performance prepared in accordance with GAAP.

Conference Call

Ferro will conduct an investor teleconference at 10:00 a.m. EDT Thursday, November 2, 2017. Investors can access this conference via the following:

  • Webcast can be accessed by clicking on the Investor Information link at the top of Ferro’s website at ferro.com.
  • Live telephone: Call 800-682-8593 within the U.S. or +1 303-223-2699 outside the U.S. Please join the call at least 10 minutes before the start time.
  • Webcast replay: Available on Ferro’s Investor website at ferro.com beginning at approximately 12:00 noon Eastern Time on November 2, 2017
  • Telephone replay: Call 800-633-8284 within the U.S. or +1 402-977-9140 outside the U.S. (for both U.S. and outside the U.S. access code is 21860597).
  • Presentation material & podcast: Earnings presentation material and podcasts can be accessed through the Investor Information portion of the Company’s Web site at ferro.com.

About Ferro Corporation

Ferro Corporation (www.ferro.com) is a leading global supplier of technology-based functional coatings and color solutions. Ferro supplies functional coatings for glass, metal, ceramic and other substrates and color solutions in the form of specialty pigments and colorants for a broad range of industries and applications. Ferro products are sold into the building and construction, automotive, electronics, industrial products, household furnishings and appliance markets. The Company’s reportable segments include: Performance Coatings (metal and ceramic coatings), Performance Colors and Glass (glass coatings), and Color Solutions. Headquartered in Mayfield Heights, Ohio, the Company has approximately 5,330 associates globally and reported 2016 sales of $1.15 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;
  • Ferro’s ability to successfully implement and/or administer its optimization initiatives, including its investment and restructuring programs, and to produce the desired results;
  • currency conversion rates and economic, social, political, and regulatory conditions in the U.S. and around the world;
  • Ferro’s ability to identify suitable acquisition candidates, complete acquisitions, effectively integrate the businesses and achieve the expected synergies (including, but not limited to, the Endeka Group, Gardenia Quimica, Dip-Tech, Smalti per Cermaiche, Cappelle Pigments, Electro-Science Laboratories, Delta Performance Products, Pinturas Benicarló, Ferer, Al Salomi, Nubiola and Vetriceramici transactions), as well as the acquisitions being accretive and Ferro achieving the expected returns on invested capital;
  • the effectiveness of the Company’s efforts to improve operating margins through sales growth, price increases, productivity gains, and improved purchasing techniques;
  • Ferro’s ability to successfully 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;
  • competitive factors, including intense price competition;
  • Ferro’s ability to protect its intellectual property, including trade secrets, or to successfully resolve claims of infringement brought against it;
  • sale of products and materials into highly regulated industries;
  • the impact of operating hazards and investments made in order to meet stringent environmental, health and safety regulations;
  • limited or no redundancy for certain of the Company’s manufacturing facilities and possible interruption of operations at those facilities;
  • 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 year ended December 31, 2016.

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,
2017 2016 2017 2016
 
Net sales $ 350,012 $ 288,527 $ 1,019,199 $ 863,955
Cost of sales   246,396     199,546     708,447     592,372  
Gross profit 103,616 88,981 310,752 271,583
Selling, general and administrative expenses 65,485 55,588 186,957 166,105
Restructuring and impairment charges 1,471 26 7,713 1,694
Other expense (income):
Interest expense 7,248 5,304 19,921 15,579
Interest earned (201 ) (214 ) (556 ) (414 )
Foreign currency losses, net 1,021 867 5,575 2,867
Loss on extinguishment of debt - - 3,905 -
Miscellaneous (income) expense, net   (1,726 )   705     (2,264 )   (2,079 )
Income before income taxes 30,318 26,705 89,501 87,831
Income tax expense   7,353     6,157     23,186     22,659  
Income from continuing operations 22,965 20,548 66,315 65,172
Loss from discontinued operations, net of income taxes   -     (29,222 )   -     (64,464 )
Net income (loss) 22,965 (8,674 ) 66,315 708
Less: Net income attributable to noncontrolling interests   148     210     575     589  
Net income (loss) attributable to Ferro Corporation common shareholders $ 22,817   $ (8,884 ) $ 65,740   $ 119  
 
Earnings (loss) per share attributable to Ferro Corporation common shareholders:
Basic earnings (loss):
Continuing operations $ 0.27 $ 0.24 $ 0.79 $ 0.78
Discontinued operations   -     (0.35 )   -     (0.77 )
$ 0.27   $ (0.11 ) $ 0.79   $ 0.01  
 
Diluted earnings (loss):
Continuing operations $ 0.27 $ 0.24 $ 0.77 $ 0.77
Discontinued operations   -     (0.35 )   -     (0.77 )
$ 0.27   $ (0.11 ) $ 0.77   $ -  
Shares outstanding:
Weighted-average basic shares 83,735 83,268 83,646 83,263
Weighted-average diluted shares 85,450 84,476 85,174 84,239
End-of-period basic shares 83,798 83,386 83,798 83,386
 
       
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,
2017 2016 2017 2016
Segment Net Sales
Performance Coatings $ 146,238 $ 130,453 $ 424,549 $ 399,166
Performance Colors and Glass 110,578 92,793 320,733 276,896
Color Solutions   93,196     65,281     273,917     187,893  
Total segment net sales $ 350,012 $ 288,527 $ 1,019,199 $ 863,955
 
Segment Gross Profit
Performance Coatings $ 35,470 $ 33,636 $ 109,205 $ 104,985
Performance Colors and Glass 37,880 32,282 115,385 100,825
Color Solutions 31,044 23,178 87,642 65,868
Other costs of sales   (778 )   (115 )   (1,480 )   (95 )
Total gross profit $ 103,616 $ 88,981 $ 310,752 $ 271,583
 
Selling, general and administrative expenses
Strategic services $ 34,408 $ 29,385 $ 99,081 $ 86,801
Functional services 25,930 22,608 73,043 66,726
Incentive compensation 3,637 2,153 7,932 7,299
Stock-based compensation   1,510     1,442     6,901     5,279  
Total selling, general and administrative expenses $ 65,485 $ 55,588 $ 186,957 $ 166,105
 
Restructuring and impairment charges 1,471 26 7,713 1,694
Other expense, net   6,342     6,662     26,581     15,953  
Income before income taxes $ 30,318   $ 26,705   $ 89,501   $ 87,831  
 
   
Table 3
Ferro Corporation and Subsidiaries
Condensed Consolidated Balance Sheets (unaudited)
 
(Dollars in thousands) September 30, December 31,
2017 2016
ASSETS
Current assets
Cash and cash equivalents $ 52,211 $ 45,582
Accounts receivable, net 337,887 259,687
Inventories 286,848 229,847
Other receivables 50,057 37,814
Other current assets   19,533   9,087
Total current assets 746,536 582,017
Other assets
Property, plant and equipment, net 288,774 262,026
Goodwill 197,819 148,296
Intangible assets, net 190,985 137,850
Deferred income taxes 106,081 106,454
Other non-current assets   45,472   47,126
Total assets $ 1,575,667 $ 1,283,769
 
LIABILITIES AND EQUITY
Current liabilities
Loans payable and current portion of long-term debt $ 18,477 $ 17,310
Accounts payable 155,542 127,655
Accrued payrolls 40,950 35,859
Accrued expenses and other current liabilities   85,927   65,203
Total current liabilities 300,896 246,027
Other liabilities
Long-term debt, less current portion 673,464 557,175
Postretirement and pension liabilities 170,199 162,941
Other non-current liabilities   83,995   62,594
Total liabilities 1,228,554 1,028,737
Equity
Total Ferro Corporation shareholders’ equity 336,653 247,113
Noncontrolling interests   10,460   7,919
Total liabilities and equity $ 1,575,667 $ 1,283,769
 
       
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,
2017 2016 2017 2016
Cash flows from operating activities
Net income $ 22,965 $ (8,674 ) $ 66,315 $ 708
(Gain) loss on sale of assets and business (2,499 ) 315 (1,214 ) (3,459 )
Depreciation and amortization 12,884 11,670 36,040 33,599
Interest amortization 943 347 2,375 991
Restructuring and impairment (245 ) 13,522 3,629 37,173
Loss on extinguishment of debt - - 3,905 -
Accounts receivable 3,231 (2,683 ) (44,952 ) (44,370 )
Inventories (2,720 ) (2,758 ) (31,379 ) (20,453 )
Accounts payable (13,541 ) (6,435 ) 581 (3,209 )
Other current assets and liabilities, net (6,544 ) 6,511 (11,655 ) 9,479
Other adjustments, net   5,512     (3,098 )   11,046     (3,717 )
Net cash provided by operating activities 19,986 8,717 34,691 6,742
Cash flows from investing activities
Capital expenditures for property, plant and equipment and other long lived assets (13,240 ) (4,173 ) (30,134 ) (18,217 )
Proceeds from sale of assets - 1 - 3,598
Proceeds from sale of equity method investment 2,268 - 2,268 -
Business acquisitions, net of cash acquired (57,178 ) (4,778 ) (71,930 ) (11,417 )
Other investing   406     -     551     -  
Net cash used in investing activities (67,744 ) (8,950 ) (99,245 ) (26,036 )
Cash flows from financing activities
Net (repayments) borrowings under loans payable (5,158 ) (425 ) (10,803 ) 2,606
Proceeds from revolving credit facility, maturing 2019 - 49,390 15,628 212,906
Principal payments on revolving credit facility, maturing 2019 - (56,990 ) (327,183 ) (149,696 )
Principal payments on term loan facility, maturing 2021 - (750 ) (243,250 ) (52,250 )
Principal payments on term loan facility, maturing 2024 (1,636 ) - (3,232 ) -
Proceeds from term loan facility, maturing 2024 - - 623,827 -
Proceeds from revolving credit facility, maturing 2022 69,787 - 69,787 -
Principal payments on revolving credit facility, maturing 2022 (42,400 ) - (42,400 ) -
Principal payments on other long-term debt (2,978 ) - (2,978 ) -
Proceeds from other long-term debt 2,700 - 2,700 -
Payment of debt issuance costs - (360 ) (12,927 ) (661 )
Acquisition related contingent consideration payment (1,315 ) - (1,315 ) -
Purchase of treasury stock - - - (11,429 )
Other financing activities   1,112     205     182     416  
Net cash provided by (used in) financing activities 20,112 (8,930 ) 68,036 1,892
Effect of exchange rate changes on cash and cash equivalents   991     303     3,147     (422 )
(Decrease) increase in cash and cash equivalents (26,655 ) (8,860 ) 6,629 (17,824 )
Cash and cash equivalents at beginning of period   78,866     49,416     45,582     58,380  
Cash and cash equivalents at end of period $ 52,211   $ 40,556   $ 52,211   $ 40,556  
Cash paid during the period for:
Interest $ 5,880 $ 5,749 $ 20,594 $ 15,032
Income taxes $ 7,106 $ 5,497 $ 16,619 $ 12,929
 
             
Table 5
Ferro Corporation and Subsidiaries
Supplemental Information
Reconciliation of Reported Income to Adjusted Income
For the Three Months Ended September 30 (unaudited)
 
(Dollars in thousands, except per share amounts)

Cost of
sales

Selling
general and
administrative
expenses

Restructuring
and
impairment
charges

Other
expense,
net

Income tax
expense3

Net income
attributable
to common
shareholders

Diluted
earnings
per share

                                       
2017  
 
As reported $ 246,396 $ 65,485 $ 1,471 $ 6,342 $ 7,353 $ 22,817 $ 0.27
Special items:
Restructuring - - (1,471 ) - 342 1,129 0.01
Other1   (1,365 )     (6,853 )   -     2,272   2,042   3,904     0.05  
Total special items4   (1,365 )   (6,853 )   (1,471 )   2,272   2,384   5,033     0.06  
As adjusted $ 245,031   $ 58,632   $ -   $ 8,614 $ 9,737 $ 27,850   $ 0.33  
 
                                       
2016  
 
As reported $ 199,546 $ 55,588 $ 26 $ 6,662 $ 6,157 $ (8,884 ) $ (0.11 )
Special items:
Restructuring - - (26 ) - 7 19 -
Other2 - (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  
(1)   The adjustments to “Cost of Sales” primarily include the amortization of purchase accounting adjustments related to our recent acquisitions, and other acquisition costs. The adjustments to “Selling, general and administrative expenses” primarily include legal, professional and other expenses related to certain business development activities. The adjustments to “Other expense, net” primarily relate to a gain on purchase of an equity method investment.
(2) The adjustments to “Selling, general and administrative expenses” primarily include legal, professional and other expenses related to certain business development activities.
(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, certain purchase accounting adjustments 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)
 
(Dollars in thousands, except per share amounts)

Cost of
sales

Selling
general and
administrative
expenses

Restructuring
and
impairment
charges

Other
expense,
net

Income
tax
expense3

Net income
attributable
to common
shareholders

Diluted
earnings
per share

                                       
2017
 
As reported $ 708,447 $ 186,957 $ 7,713 $ 26,581 $ 23,186 $ 65,740 $ 0.77
Special items:
Restructuring - - (7,713 ) - 1,938 5,775 0.07
Other1   (5,633 )   (14,426 )   -     (3,061 )   8,984   14,136   0.17
Total special items4   (5,633 )   (14,426 )   (7,713 )   (3,061 )   10,922   19,911   0.24
As adjusted $ 702,814   $ 172,531   $ -   $ 23,520   $ 34,108 $ 85,651 $ 1.01
 
                                       
2016
 
As reported $ 592,372 $ 166,105 $ 1,694 $ 15,953 $ 22,659 $ 119 $ -
Special items:
Restructuring - - (1,694 ) - 522 1,172 0.01
Other2 - (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
(1)   The adjustments to “Cost of Sales” primarily include the amortization of purchase accounting adjustments related to our recent acquisitions, and other acquisition costs. The adjustments to “Selling, general and administrative expenses” primarily include legal, professional and other expenses related to certain business development activities. The adjustments to “Other expense, net” primarily relate to the FX loss incurred on our Euro-denominated term loan, a loss on an equity method investment, the loss/gain on an asset sale, debt extinguishment costs, a reduction of a contingent liability in Argentina and a gain on purchase of an equity method investment.
(2) The adjustments to “Selling, general and administrative expenses” primarily include legal, professional and other expenses related to certain business development activities. The adjustments to “Other expense, net” primarily relate to the gain on an asset sale that was recognized, and the finalization of the purchase price for the acquisition of Vetriceramici.
(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, gain on sale of assets, debt extinguishment costs, certain purchase accounting adjustments 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,
2017 2016 2017 2016
 
Performance Coatings $ 146,238 $ 130,453 $ 424,549 $ 399,166
Performance Colors and Glass 110,578 92,793 320,733 276,896
Color Solutions   93,196     65,281     273,917     187,893  
Total net sales $ 350,012   $ 288,527   $ 1,019,199   $ 863,955  
 
Total net sales $ 350,012 $ 288,527 $ 1,019,199 $ 863,955
Adjusted cost of sales1   245,031     199,546     702,814     592,372  
Adjusted gross profit $ 104,981   $ 88,981   $ 316,385   $ 271,583  
Adjusted gross profit percentage 30.0 % 30.8 % 31.0 % 31.4 %
(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, 2017 and 2016, 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 exclude certain items, primarily comprised of the amortization of purchase accounting adjustments related to our recent acquisitions, and other acquisition costs. 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

2017 vs

2016

20161

2017

Adjusted 2016

Segment net sales
Performance Coatings $ 130,453 $ 131,496 $ 146,238 $ 14,742
Performance Colors and Glass 92,793 94,793 110,578 15,785
Color Solutions   65,281     66,141     93,196     27,055  
Total segment net sales $ 288,527   $ 292,430   $ 350,012   $ 57,582  
 
Segment adjusted gross profit
Performance Coatings $ 33,636 $ 34,333 $ 35,866 $ 1,533
Performance Colors and Glass 32,282 32,926 38,633 5,707
Color Solutions 23,178 23,403 31,044 7,641
Other costs of sales   (115 )   (121 )   (562 )   (441 )
Total adjusted gross profit2 $ 88,981   $ 90,541   $ 104,981   $ 14,440  
 
Adjusted selling, general and administrative expenses
Strategic services $ 29,385 $ 30,072 $ 33,674 $ 3,602
Functional services 18,510 18,628 19,811 1,183
Incentive compensation 2,153 2,196 3,637 1,441
Stock-based compensation   1,442     1,442     1,510     68  
Total adjusted selling, general and administrative expenses3 $ 51,490   $ 52,338   $ 58,632   $ 6,294  
 
Adjusted operating profit $ 37,491 $ 38,203 $ 46,349 $ 8,146
Adjusted operating profit as a % of net sales 13.0 % 13.1 % 13.2 %
(1)   Reflects the remeasurement of 2016 reported and adjusted local currency results using 2017 exchange rates, resulting in constant currency comparative figures to 2017 reported and adjusted results. See Table 5 for non-GAAP adjustments applicable to the three month period.
(2) Refer to Table 7 for the reconciliation of adjusted gross profit for the three months ended September 30, 2017 and 2016, 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, 2017 and 2016, respectively.

It should be noted that adjusted 2016 results is a financial measure not required by, or presented in accordance with, accounting principles generally accepted in the United States (U.S. GAAP). This non-GAAP financial measure 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 this financial measure to the most comparable U.S. GAAP financial measures is presented. 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 2017 vs
2016

20161

2017   Adjusted 2016
Segment net sales
Performance Coatings $ 399,166 $ 390,315 $ 424,549 $ 34,234
Performance Colors and Glass 276,896 275,791 320,733 44,942
Color Solutions   187,893     187,576     273,917     86,341  
Total segment net sales $ 863,955   $ 853,682   $ 1,019,199   $ 165,517  
 
Segment adjusted gross profit
Performance Coatings $ 104,985 $ 102,979 $ 110,244 $ 7,265
Performance Colors and Glass 100,825 100,337 116,923 16,586
Color Solutions 65,868 65,723 90,306 24,583
Other costs of sales   (95 )   (103 )   (1,088 )   (985 )
Total adjusted gross profit2 $ 271,583   $ 268,936   $ 316,385   $ 47,449  
 
Adjusted selling, general and administrative expenses
Strategic services $ 86,801 $ 86,006 $ 97,974 $ 11,968
Functional services 56,387 56,135 59,724 3,589
Incentive compensation 7,299 7,280 7,932 652
Stock-based compensation   5,279     5,279     6,901     1,622  
Total adjusted selling, general and administrative expenses3 $ 155,766   $ 154,700   $ 172,531   $ 17,831  
 
Adjusted operating profit $ 115,817 $ 114,236 $ 143,854 $ 29,618
Adjusted operating profit as a % of net sales 13.4 % 13.4 % 14.1 %
(1)   Reflects the remeasurement of 2016 reported and adjusted local currency results using 2017 exchange rates, resulting in constant currency comparative figures to 2017 reported and adjusted results. See Table 6 for non-GAAP adjustments applicable to the nine month period.
(2) Refer to Table 7 for the reconciliation of adjusted gross profit for the nine months ended September 30, 2017 and 2016, 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, 2017 and 2016, respectively.

It should be noted that adjusted 2016 results is a financial measure not required by, or presented in accordance with, accounting principles generally accepted in the United States (U.S. GAAP). This non-GAAP financial measure 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 this financial measure to the most comparable U.S. GAAP financial measures is presented. 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 (loss) attributable to Ferro Corporation
common shareholders to Adjusted EBITDA (unaudited)
 
(Dollars in thousands) Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
 
Net income (loss) attributable to Ferro Corporation common shareholders $ 22,817 $ (8,884 ) $ 65,740 $ 119
Net income attributable to noncontrolling interests 148 210 575 589
Loss from discontinued operations, net of income taxes - 29,222 - 64,464
Restructuring and impairment charges 1,471 26 7,713 1,694
Other (income) expense, net (906 ) 1,358 6,660 374
Interest expense 7,248 5,304 19,921 15,579
Income tax expense 7,353 6,157 23,186 22,659
Depreciation and amortization 13,827 12,017 38,415 34,590
Less: interest amortization expense and other (943 ) (347 ) (2,375 ) (991 )
Cost of sales adjustments1 1,365 - 5,633 -
SG&A adjustments1   6,853       4,098       14,426       10,339    
Adjusted EBITDA $ 59,233     $ 49,161     $ 179,894     $ 149,416    
 
Net sales $ 350,012 $ 288,527 $ 1,019,199 $ 863,955
Adjusted EBITDA as a % of net sales 16.9

%

 

17.0

%

 

17.7

%

 

17.3

%

 

(1)   For details of 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, 2017 and 2016, 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). This non-GAAP financial measure 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 this financial measure to the most comparable U.S. GAAP financial measures is presented. Adjusted EBITDA is net income (loss) attributable to Ferro Corporation common shareholders before the effects of net income attributable to noncontrolling interests, 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,
2017 2016
 
Gross profit $ 390,386 $ 351,217
Selling, general and administrative expenses 262,554   241,702  
Total operating profit 127,832 109,515
Non-GAAP adjustments1 52,677   42,688  
Adjusted operating profit before tax 180,509 152,203
Less: Tax expense2   (49,640 )   (40,182 )
Adjusted net operating profit after tax (NOPAT) $ 130,869   $ 112,021  
 
Recent acquisitions3 NOPAT gain   10,219     2,535  
Adjusted net operating profit after tax excluding recent acquisitions $ 120,650   $ 109,486  
 
Equity 347,113 255,032
Debt 691,941 574,485
Off balance sheet precious metal leases 36,319 28,743
Postretirement and pension liabilities 170,199 162,941
Environmental liabilities 11,920 15,531
Cash   (52,211 )   (45,582 )
Invested capital $ 1,205,281   $ 991,150  
 
Return on invested capital 10.9 % 11.3 %
 
Less: recent acquisitions3 invested capital   233,119     143,047  
Invested capital excluding recent acquisitions $ 972,162   $ 848,103  
 
Return on invested capital excluding recent acquisitions 12.4 % 12.9 %
(1)   The “Non-GAAP adjustments” include non-GAAP adjustments to cost of sales and non-GAAP adjustments to SG&A for the rolling twelve months ended September 30, 2017 and December 31, 2016. The “Non-GAAP adjustments” also includes precious metal lease fees which were $1.0 million and $0.8 million for the rolling twelve months ended September 30, 2017 and December 31, 2016, respectively.
(2) Operating profit for 2017 and 2016 is tax effected at 27.5% and 26.4%, respectively.
(3) For the rolling twelve months ended September 30, 2017, the recent acquisitions include ESL, Cappelle, SPC, Dip-Tech and Gardenia. For the rolling twelve months ended December 31, 2016, the recent acquisitions include Ferer, Pinturas, Delta Performance Products, ESL and Cappelle. Acquisitions are removed from being included in the recent acquisitions line item after the acquisitions are included in the Company for a full year.

It should be noted that adjusted net 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. Adjusted net operating profit after tax is operating profit from continuing operations, adjusted for 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,
2017 2016 2017 2016
Beginning of period
Gross debt $ 668,993 $ 500,039 $ 578,205 $ 478,087
Cash   78,866     49,416     45,582     58,380  
Debt, net of cash 590,127 450,623 532,623 419,707
 
Unamortized debt issuance costs   8,079     4,152     3,720     4,533  
Debt, net of cash and unamortized debt issuance costs 582,048 446,471 528,903 415,174
 
End of period
Gross debt 699,684 491,243 699,684 491,243
Cash   52,211     40,556     52,211     40,556  
Debt, net of cash 647,473 450,687 647,473 450,687
 
Unamortized debt issuance costs   7,743     3,922     7,743     3,922  
Debt, net of cash and unamortized debt issuance costs 639,730 446,765 639,730 446,765
 
Change from FX on Euro term loan debt (9,646 ) - (28,878 ) -
Assumption of debt from acquisitions - - (7,975 ) -
 
Period (increase) in debt, net of cash, unamortized debt issuance costs, FX, and assumption of debt from acquisitions $ (47,700 ) $ (64 ) $ (77,997 ) $ (30,980 )
 
Period (increase) in debt, net of cash and unamortized debt issuance costs $ (57,682 ) $ (294 ) $ (110,827 ) $ (31,591 )

We believe that given the significant cash and cash equivalents on the balance sheet that the change in net cash against outstanding debt, net debt, between periods is a meaningful measure.

       
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,
2017   2016   2017   2016
As Adjusted
 
Adjusted EBITDA1 $ 59,233 $ 49,161 $ 179,894 $ 149,416
Capital expenditures (10,775 ) (4,074 ) (22,259 ) (17,296 )
Working capital (13,030 ) (10,775 ) (75,750 ) (62,292 )
Cash income taxes (7,106 ) (5,497 ) (16,619 ) (12,929 )
Cash interest (5,880 ) (5,749 ) (20,594 ) (15,032 )
Pension (600 ) (423 ) (2,039 ) (2,921 )
Incentive compensation payments - - (12,224 ) (8,802 )
Other   (47 )   2,664     4,636     5,603  
Free Cash Flow from Continuing Operations $ 21,795 $ 25,307 $ 35,045 $ 35,747
 
Discontinued operations - (16,805 ) - (32,534 )
Restructuring/Other (6,726 ) (129 ) (16,333 ) (2,205 )
Outflows from M&A activity (62,769 ) (8,437 ) (83,782 ) (20,559 )
Debt issuance costs - - (12,927 ) -
Stock repurchase - - - (11,429 )
               
Period (increase) in debt, net of cash, unamortized debt issuance costs, FX, and assumption of debt from acquisitions2 $ (47,700 ) $ (64 ) $ (77,997 ) $ (30,980 )
 
Change in unamortized debt issuance costs (336 ) (230 ) 4,023 (611 )
Change from FX on Euro term loan debt (9,646 ) - (28,878 ) -
Assumption of debt from acquisitions - - (7,975 ) -
               
Period (increase) in debt, net of cash and unamortized debt issuance costs $ (57,682 ) $ (294 ) $ (110,827 ) $ (31,591 )
(1)   See Table 10 for the reconciliation of net income (loss) attributable to Ferro Corporation common shareholders to adjusted EBITDA.
(2) See Table 12 for the reconciliation of period (decrease) in debt, net of cash, unamortized debt issuance costs, FX and assumption of debt from acquisitions.

It should be noted that adjusted EBITDA and adjusted 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 (loss) attributable to Ferro Corporation common shareholders before the effects of income 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. Adjusted Free Cash Flow from Continuing Operations is adjusted EBITDA less capital expenditures, changes in working capital, cash income taxes, cash interest, pension contributions, incentive compensation payments, and other continuing operations 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
Head of Investor Relations
kevincornelius.grant@ferro.com
or
Media Contact:
Mary Abood, 216-875-5401
Director, Corporate Communications
mary.abood@ferro.com