Ferro Reports 2007 First-Quarter Results

CLEVELAND--Ferro Corporation announced today that sales for the quarter ended March 31, 2007, were $530 million, up 5 percent from $505 million recorded in the first quarter of 2006.

Income from continuing operations for the 2007 first quarter was $6.2 million, or $0.14 per diluted share, compared with $8.4 million, or $0.19 per diluted share, in the first quarter of 2006. Income from continuing operations declined primarily as a result of higher interest expense and restructuring charges. The 2007 first quarter income from continuing operations included net pre-tax expenses of $4.3 million primarily related to previously-announced manufacturing rationalization activities. In the first quarter of 2006, income before taxes was reduced by expenses of $4.8 million from activities primarily related to the accounting restatement that was concluded last year.

“Sales increased slightly and we maintained segment income levels during the first quarter of 2007, despite soft demand in several end-use markets,” said Chairman, President and Chief Executive Officer James F. Kirsch. “The strength of our worldwide business and the breadth of our products have supported the business despite weaker demand from certain U.S. markets. We are working hard to complement these strengths with improvements in our cost structure as we execute our restructuring programs, reduce our debt levels and focus on achieving operational excellence.”

Increased product pricing, including prices of precious metals and the effects of favorable foreign currency exchange rates, were the primary drivers of sales growth for the first quarter of 2007. Changes in exchange rates contributed approximately 4 percentage points to sales growth for the first quarter compared with the prior-year period. The positive impact of increased pricing was partially offset by volume declines during the quarter.

Gross margins were 20.2 percent of sales for the first quarter, compared with 21.3 percent of sales in the first quarter of 2006. The Company’s 2007 first quarter gross profit was reduced by costs totaling $2.2 million related to manufacturing rationalization activities. Gross margins were also negatively impacted by increased precious metal sales. Increases in precious metal costs are generally passed through to customers with minimal margin contribution.

Selling, general and administrative (SG&A) expense was $78.8 million in the first quarter of 2007, or 14.9 percent of sales. Included in the SG&A expense were charges totaling $0.5 million, primarily related to divestment activities and pension curtailments related to Ferro’s Niagara Falls facility. SG&A expense in the first quarter of 2006 was $79.1 million, or 15.7 percent of sales, including charges of $4.8 million related to the accounting restatement.

Interest expense for the 2007 first quarter was $17.4 million, compared with $13.3 million in the year-ago period. The 2007 interest expense included a non-cash $2.0 million write-off of unamortized fees and discounts associated with the Company’s term loans. The higher interest expense also reflects higher borrowing levels and higher interest rates on funds borrowed.

During the first quarter, the Company recorded a gain on sale of property of $1.9 million. This gain was a primary driver of the $1.3 million of miscellaneous income recorded during the period. In the first quarter of 2006, the Company recorded miscellaneous expense of $3.4 million, primarily driven by losses on mark-to-market supply contracts for natural gas.

The Company’s tax rate for the first quarter increased to 42.1 percent from 32.8 percent in 2006 first quarter. The higher rate was largely the result of an increase in the anticipated level of foreign current-year earnings to be repatriated. The Company expects its full-year 2007 effective tax rate will be approximately 36 percent.

Total debt on March 31, 2007 was $540.8 million, a decrease of $51.6 million from the end of 2006. The Company reduced its cash deposits for precious metal consignments to $0.4 million at the end of the first quarter from $70.1 million at the end of 2006. The Company had net proceeds of $71.7 million from its U.S. accounts receivable securitization program as of March 31, 2007, compared with $60.6 million at the end of 2006. It had $33.4 million in net proceeds from similar programs outside the U.S. at the end of the quarter, compared with $33.7 million at the end of 2006.

Segment Results

Sales in the Performance Coatings segment increased in both the tile and porcelain enamel product areas, compared with the prior-year quarter. Both the Performance Coatings and Color and Glass Performance Materials segments experienced strong growth in international sales, particularly in Europe. Sales in Electronic Materials also grew in the quarter, primarily driven by higher demand for conductive pastes used in solar cells, partially offset by weaker dielectric materials demand from supply chain inventory reductions by customers who manufacture capacitors. Sales in Specialty Plastics declined and sales in Polymer Additives were nearly flat compared with the first quarter of 2006, largely due to weaker demand in the U.S. housing and automotive markets.

Total segment income for the first quarter of 2007 was $41.8 million, compared with the prior-year level of $42.1 million. The difference reflected higher segment income from the Color and Glass Performance Materials and Performance Coatings segments, offset by reduced segment income from Specialty Plastics and Polymer Additives, which experienced weaker demand from customers in the U.S. housing and automotive markets. Segment income was also lower in the Electronic Materials segment, primarily due to a combination of higher raw material costs, increased manufacturing costs and higher SG&A spending compared with the first quarter of 2006.

Outlook

The Company expects European and Asian demand for its products to remain relatively strong in the coming quarter. The current weakness in the U.S. housing and automotive markets is also expected to continue, which will affect the Company’s Specialty Plastics and Polymer Additives segments, as it did in the first quarter.

In February 2007, the Company discovered that some of the values shown on certificates of analysis provided to customers in the Specialty Plastics segment were inaccurate. These issues at our Evansville, Indiana, manufacturing facility have been thoroughly investigated and corrected. Corrective actions are expected to result in additional costs related to product reformulation, manufacturing and other expenses of approximately $1 million per quarter through 2007.

In April 2007, the Company took action to correct operational issues at its South Plainfield, New Jersey, electronic materials manufacturing location related to compliance to proper operating procedures and safety. Although these issues did not result in an increased level of accidents or injuries, additional training was required to improve our production capabilities and instill an improved commitment to safe practices at the site. Manufacturing operations were suspended while this training took place. The majority of manufacturing operations have now been resumed. As a result of this unanticipated interruption, the Company expects to incur a reduction of $3 million to $4 million in income before taxes during the second quarter of 2007.

About Ferro Corporation

Ferro Corporation (http://www.ferro.com) is a leading global supplier of technology-based performance materials for manufacturers. Ferro materials enhance the performance of products in a variety of end markets, including electronics, telecommunications, pharmaceuticals, building and renovation, appliances, automotive, household furnishings, and industrial products.

Headquartered in Cleveland, Ohio, the Company has approximately 6,700 employees globally and reported 2006 sales of $2.0 billion.

Ferro Corporation and Consolidated Subsidiaries
Condensed Consolidated Statements of Income (Unaudited)
		Three Months Ended March 31,
(Dollars in thousands, except per share amounts)		2007		Adjusted 2006
Net Sales		$529,705		$505,153
Cost of Sales		422,925		397,319
Gross Profit		106,780		107,834
Selling, General and Administrative Expenses		78,757		79,104
Restructuring Charges		1,531		-
Other Expense (Income):
Interest Expense		17,446		13,250
Other (Income) Expense, Net		(1,723)		2,977
Income Before Taxes		10,769		12,503
Income Tax Expense		4,534		4,107
Income from Continuing Operations		6,235		8,396
Loss On Disposal of Discontinued Operations, net		156		126
Net Income		6,079		8,270
Dividends on Preferred Stock		286		328
Net Income Available to Common Shareholders		$5,793		$7,942
Per Common Share Data:
Basic Earnings
From Continuing Operations		$0.14		$0.19
From Discontinued Operations		0.00		0.00
		$0.14		$0.19
Diluted Earnings
From Continuing Operations		$0.14		$0.19
From Discontinued Operations		0.00		0.00
		$0.14		$0.19
Cash Dividends Declared		$0.145		$0.145
Shares Outstanding:
Basic		42,707,946		42,337,283
Diluted		42,767,970		42,347,378
End of Period		43,362,594		42,672,310

Ferro Corporation and Consolidated Subsidiaries
Segment Net Sales and Segment Income (Unaudited)
(Dollars in thousands)		Three Months Ended March 31,
				Adjusted
		2007		2006
Segment Sales
Performance Coatings		$138,815		$126,109
Electronic Materials		112,944		107,366
Color and Glass Perf. Materials		105,700		94,612
Polymer Additives		82,513		82,723
Specialty Plastics		66,961		71,724
Other		22,772		22,619
Total		$529,705		$505,153
Segment Income
Performance Coatings		$10,683		$9,091
Electronic Materials		6,083		8,281
Color and Glass Perf. Materials		15,067		12,771
Polymer Additives		3,106		4,544
Specialty Plastics		3,139		5,791
Other		3,691		1,597
Total Segment Income		41,769		42,075
Unallocated expenses		(15,277)		(13,345)
Interest expense		(17,446)		(13,250)
Interest earned		965		744
Foreign currency		(511)		(321)
Miscellaneous, net		1,269		(3,400)
Income before taxes from continuing operations		$10,769		$12,503

Ferro Corporation and Consolidated Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in thousands)		Three Months Ended March 31,		Adjusted Year Ended December 31,
		2007		2006
Assets		(Unaudited)		(Audited)
Current Assets:
Cash and Cash Equivalents		$17,541		$16,985
Accounts and Trade Notes Receivable, net		235,872		220,899
Inventories		290,548		269,234
Other Current Assets		59,305		124,324
Total Current Assets		603,266		631,442
Property, Plant & Equipment, net		526,786		526,802
Intangibles, net		406,148		406,340
Miscellaneous Other Assets		193,488		177,018
Total Assets		$1,729,688		$1,741,602
Liabilities and Shareholders' Equity
Current Liabilities:
Notes and Loans Payable		$5,956		$10,764
Accounts Payable		250,036		237,018
Other Current Liabilities		119,267		133,265
Total Current Liabilities		375,259		381,047
Long-Term Debt, less current portion		534,819		581,654
Other Non-Current Liabilities		266,097		227,063
Total Liabilities		1,176,175		1,189,764
Series A Convertible Preferred Stock		16,118		16,787
Shareholders' Equity		537,395		535,051
Total Liabilities and Shareholders' Equity		$1,729,688		$1,741,602

Ferro Corporation and Consolidated Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
		Three Months Ended March 31,		Adjusted Three Months Ended March 31,
(Dollars in thousands)		2007		2006
Cash flows from Operating Activities
Net Income		$6,079		$8,270
Depreciation and amortization		21,779		17,992
Precious metal deposits		69,673		(60,000)
Changes in other current assets and liabilities, net		(30,765)		(47,392)
Other adjustments, net		(2,977)		2,651
Net cash provided by (used for) continuing operations		63,789		(78,479)
Net cash used for discontinued operations		12		(208)
Net cash provided by operating activities		63,801		(78,687)
Cash flows from investing activities
Capital expenditures for property, plant and equipment		(12,811)		(8,247)
Proceeds from sale of assets and businesses		1,964		835
Other investing activities		158		(246)
Net cash used for investing activities		(10,689)		(7,658)
Cash flow from financing activities
Net (repayments) borrowings under term loan and revolving credit facilities		(5,983)		341
Proceeds from revolving credit facility		190,034		276,400
Proceeds from term loan facility		55,000		-
Principal payments on revolving credit facility		(290,601)		(181,400)
Debt issue costs paid		-		(4,750)
Proceeds from exercise of stock options		6,128		2,126
Cash dividends paid		(6,529)		(6,466)
Other financing activities		(863)		(1,099)
Net cash (used for) provided by financing activities		(52,814)		85,152
Effect of exchange rate changes on cash		258		317
Increase (Decrease) in cash and cash equivalents		556		(876)
Cash and cash equivalents at beginning of period		16,985		17,413
Cash and cash equivalents at end of period		$17,541		$16,537
Cash paid during the period for:
Interest		$20,173		$14,096
Income taxes		$3,698		$1,545

Ferro Corporation and Consolidated Subsidiaries
Supplemental Information
Segment Net Sales Excluding Precious Metals and
Reconciliation of Sales Excluding Precious Metals to Net Sales (Unaudited)
(Dollars in thousands)		Three Months Ended March 31,
		2007		2006
Segment Net Sales excluding Precious Metals
Performance Coatings		$138,815		$126,109
Electronic Materials		63,667		64,899
Color and Glass Perf. Materials		97,236		88,780
Polymer Additives		82,513		82,723
Specialty Plastics		66,961		71,724
Other		22,772		22,619
Total Sales, Excluding Precious Metals		471,964		456,854
Sales of precious metals		57,741		48,299
Net Sales		$529,705		$505,153

It should be noted that segment sales excluding precious metals is a financial measure not required by, or presented in accordance with, accounting principles generally accepted in the United States (U.S. GAAP). The sales are presented here to exclude the impact of volatile precious metal raw material costs. The precious metal raw material costs are generally passed through directly to customers with minimal margin. We believe this data provides investors with additional information on the underlying operations of the business and enables period-to-period comparability of financial performance. In addition, these measures are used in the calculation of certain incentive compensation programs for selected employees.