Ferro Reports 2010 Second-Quarter Results

CLEVELAND--Ferro Corporation (the ā€œCompanyā€???) today announced net sales of $543 million for the three months ended June 30, 2010, an increase of 36 percent from net sales of $399 million in the second quarter of 2009.

“Our excellent second-quarter results demonstrate the progress we have made to reduce costs and grow our global business”

Income from continuing operations for the 2010 second quarter was $7.6 million, or $0.08 per diluted share, compared with a loss of $11.1 million, or $0.27 per diluted share, in the second quarter of 2009. The improvement was primarily the result of higher sales volume. Increased restructuring charges, higher selling, general and administrative expense and increased income tax expense partially offset the benefits of the higher sales volume. In the 2010 second quarter, the operating results included net pre-tax charges of $26.6 million. These charges included restructuring charges of $21.2 million partially offset by a net pre-tax gain of $7.8 million resulting from a business combination. The Company recorded other pre-tax charges of $13.2 million during the second quarter, primarily related to manufacturing rationalization and other expense reduction activities, and an increased environmental reserve. In the second quarter of 2009, the loss from continuing operations included net pre-tax charges of $6.4 million primarily related to manufacturing rationalization and other cost-reduction actions.

ā€œOur excellent second-quarter results demonstrate the progress we have made to reduce costs and grow our global business,ā€??? said Chairman, President and Chief Executive Officer James F. Kirsch. ā€œThe operating leverage that we have created through our manufacturing rationalization programs is delivering strong improvements in profitability. I am extremely proud of the achievements of Ferro employees around the world as they continue to demonstrate their commitment to winning. The Ferro organization is ready to pursue further opportunities for future growth.ā€???

2010 Second-Quarter Results

Net sales increased 36 percent compared with the second quarter of 2009 as customer demand continued to recover from the global economic downturn in 2009. In the second quarter of 2010, demand continued in a pattern of sequential growth that began in the second quarter of 2009. Compared with the 2009 second quarter, increased sales volume contributed 30 percentage points to the growth in sales while changes in product mix and price contributed 8 percentage points of sales growth. Changes in foreign currency exchange rates reduced sales growth by approximately 2 percentage points. Increased sales of precious metals, including changes in both price and volume, accounted for approximately 10 percentage points of the overall sales increase compared with the prior-year period.

Gross profit percentage increased to 22.5 percent of net sales for the quarter, compared with 16.3 percent of net sales in the second quarter of 2009. The increase was a result of a combination of higher sales volume, cost reductions achieved through restructuring initiatives and reduced staffing and benefits from changes in product pricing and mix. In the 2010 second quarter, gross profit was reduced by $2.5 million as a result of charges primarily for accelerated depreciation and other costs related to the Companyā€™s manufacturing rationalization programs.

Selling, general and administrative (ā€œSG&Aā€???) expense increased by $7.4 million compared with the second quarter of 2009. SG&A expense declined to 12.9 percent of sales in the 2010 second quarter compared with 15.6 percent in the prior-year period. The primary drivers of the increase in SG&A spending on a dollar basis were higher accruals for incentive compensation and higher special charges. Included in SG&A expense during the 2010 second quarter were charges of $5.6 million, including severance and other costs related to manufacturing rationalization initiatives and corporate development expenses. SG&A expense in the second quarter of 2009 included $3.0 million in charges, primarily related to expense reduction actions and manufacturing rationalization related charges.

Income increased in all segments except Pharmaceuticals compared with the prior-year period. Segment income increased in Electronic Materials due to increased demand for many of the unitā€™s products, particularly metal powders and silver and aluminum pastes used by manufacturers of solar cells. Segment income in Performance Coatings and Color and Glass Performance Materials improved due to higher sales volumes and reduced costs. Restructuring programs currently underway in France, Portugal and Australia are expected to further reduce costs in the Color and Glass Performance Materials operations during the remainder of 2010. Segment income also increased in Polymer Additives and Specialty Plastics due to a combination of higher sales volumes, reduced manufacturing costs and expense reductions.

Restructuring charges increased to $21 million in the second quarter of 2010. Employee severance charges, related to initiatives to close one manufacturing plant in France and two plants in the Netherlands, were the primary drivers of the restructuring charges in the quarter.

Interest expense declined in the 2010 second quarter to $14 million from $17 million in the second quarter of 2009. The primary driver of the decline in interest expense was a decline in average borrowing levels compared with the prior-year quarter. Lower average interest rates also contributed to the decline in interest expense. Included in the second quarter interest expense was a non-cash write-off of $1.5 million in unamortized fees related to a $50 million pay down of the Companyā€™s term loan debt.

Total debt on June 30, 2010 was $353 million, a decrease of $71 million from December 31, 2009. In addition, at the end of the 2010 second quarter the Company had net proceeds of $2.6 million from international receivables factoring programs. Net proceeds from international receivables factoring on December 31, 2009 were $10.3 million.

During the second quarter, cash deposits related to precious metals declined to $56 million from $107 million on March 31, 2010, primarily as a result of reduced collateral requirements from participants in the Companyā€™s precious metal leasing program.

Agreement to Acquire Assets in Egypt

The Company has signed an agreement to purchase a newly constructed manufacturing plant for frits and glazes in Fayoum, Egypt. The acquisition will allow the Company to cost-effectively serve the growing tile manufacturing market in Egypt, the Middle East and North Africa. The closing of the transaction is subject to governmental approvals and the satisfaction or waiver of other customary closing conditions. Closing is expected in the 2010 third quarter.

2010 Outlook Update

Customer demand is expected to follow historical seasonal trends during 2010, with higher sales and profitability in the first half of the year compared with the second half. Reductions in the Companyā€™s cost structure that were accomplished in 2009 are expected to provide improved profitability in 2010. In addition, the Company continues to execute additional manufacturing rationalization and expense reduction initiatives during 2010, including plant closings and staffing reductions.

The Companyā€™s current outlook for 2010 assumes that worldwide real GDP growth will recover to greater than 2% and that there will not be a return to recessionary conditions in the Companyā€™s major regional markets in the United States, Europe and Asia.

Based on these assumptions and the first half results, the Company has increased its estimates for 2010 financial performance. The Company currently estimates full-year 2010 net sales will increase between 15 and 20 percent compared with 2009, to between $1.9 billion and $2.0 billion. Adjusted EBITDA is expected to be in the range of $240 million to $255 million in 2010, compared with a previous outlook of $190 million to $210 million. Both sales and adjusted EBITDA are expected to be higher in the first half of 2010 than the second half of the year, consistent with the Companyā€™s normal seasonal trends.

Additional assumptions in the Companyā€™s outlook for 2010 include:

Capital expenditures of approximately $60 million;
Completion of currently planned restructuring projects by the end of 2010;
Pension expense of approximately $24 million and cash contributions to the Companyā€™s worldwide pension plans of approximately $25 million;
Depreciation and amortization of $80 million to $85 million, excluding accelerated depreciation associated with manufacturing rationalization projects; and
Interest expense of approximately $48 million, assuming no further return of cash collateral for precious metal leases.

Ferro expects to update its annual sales and adjusted EBITDA estimates in the third quarter earnings release to reflect regional economic conditions, progress on the Companyā€™s manufacturing rationalization programs, and updated customer demand forecasts.

Non-GAAP Measures

Adjusted EBITDA is equal to income (loss) before taxes, plus interest expense, depreciation and amortization, restructuring, impairment and other special charges.

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). The measure is presented here because it provides additional information in a manner that is commonly used by investors and reported by third-party analysts. The amount and timing of restructuring, impairment and other special charges are difficult to forecast due to the number of restructuring and other cost-reduction projects currently underway within the Company and the uncertainty of factors that determine future charges, which make a detailed reconciliation to the most directly comparable U.S. GAAP measure impractical.

Conference Call

The Company will host a conference call to discuss its 2010 second-quarter results, update its 2010 outlook, and its outlook for general business conditions on Tuesday, July 27, 2010, at 10:00 a.m. Eastern time. To participate in the call, dial 888-603-7018 if calling from the United States or Canada, or dial 210-234-0120 if calling from outside North America. When prompted, refer to the pass code, FOE, and the conference leader, David Longfellow. Please call approximately 10 minutes before the conference call is scheduled to begin.

An audio replay of the call will be available from noon Eastern time on July 27^th through 9 p.m. Eastern time on August 2^nd. To access the replay, dial 866-511-5160 if calling from the United States or Canada, or dial 203-369-1959 if calling from outside North America.

The conference call also will be broadcast live over the Internet and will be available for replay through the end of the second quarter. The live broadcast and replay can be accessed through the Investor Information portion of the Companyā€™s Web site at www.ferro.com. A podcast of the conference call will also be available on the Companyā€™s Web site.

About Ferro Corporation

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

Headquartered in Cleveland, Ohio, the Company has approximately 5,200 employees globally and reported 2009 sales of $1.7Ā billion.

Cautionary Note on Forward-Looking Statements

Certain statements in this press release may constitute ā€œforward-looking statementsā€??? within the meaning of Federal securities laws. These statements are subject to a variety of uncertainties, unknown risks and other factors concerning the Companyā€™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 Companyā€™s future financial performance include the following:

Demand in the industries into which the Company sells its products may be unpredictable, cyclical or heavily influenced by consumer spending;
The effectiveness of the Companyā€™s efforts to improve operating margins through sales growth, price increases, productivity gains, and improved purchasing techniques;
The Companyā€™s ability to successfully implement and/or administer its restructuring programs;
The Companyā€™s ability to access capital markets, borrowings, or financial transactions;
The Companyā€™s borrowing costs could be affected adversely by interest rate increases;
The availability of reliable sources of energy and raw materials at a reasonable cost;
Competitive factors, including intense price competition;
Currency conversion rates and changing global economic, social and political conditions;
The impact of future financial performance on the Companyā€™s ability to utilize its significant deferred tax assets;
Liens on Ferro assets by lenders could affect the Companyā€™s ability to dispose of property and businesses;
Restrictive covenants in the Companyā€™s credit facilities could affect strategic initiatives and its liquidity;
Increasingly aggressive domestic and foreign governmental regulations on hazardous materials and regulations affecting health, safety and the environment;
The Companyā€™s ability to successfully introduce new products;
Stringent labor and employment laws and relationships with employees;
The Companyā€™s ability to fund employee benefit costs, especially post-retirement costs;
Risks and uncertainties associated with intangible assets;
Potential limitations on the use of operating loss carryforwards and other tax attributes due to significant changes in the ownership of Ferroā€™s common stock;
The Companyā€™s presence in the Asia-Pacific region where it can be difficult to compete lawfully;
The identification of any material weaknesses in internal controls in the future could affect the Companyā€™s ability to ensure timely and reliable financial reports;
Uncertainties regarding the resolution of pending and future litigation and other claims;
The Companyā€™s inability to pay dividends on our common stock in the foreseeable future; and
Other factors affecting the business beyond the Companyā€™s 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 managementā€™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 Ferroā€™s Annual Report on Form 10-K for the period ended December 31, 2009.

Ā
Ferro Corporation and Consolidated Subsidiaries Condensed Consolidated Statements of Operations (Unaudited)
Ā
	Ā	Three Months Ended June 30,					Ā	Six Months Ended June 30,
(Dollars in thousands, except per share amounts)		2010		Ā	2009			2010		Ā	2009
											Ā
Net sales		$543,485			$399,277			$1,036,350			$757,086
Cost of sales		421,155	Ā		334,048	Ā		807,086	Ā		636,611	Ā
Gross profit		122,330			65,229			229,264			120,475
											Ā
Selling, general and administrative expenses		69,852			62,480			140,800			130,608
Impairment charges		0			0			2,202			0
												Ā
Restructuring charges		21,205			(309	)		32,335			1,089
Other expense (income):
Interest expense		13,766			17,190			26,677			28,364
Interest earned		(133	)		(205	)		(464	)		(473	)
Foreign currency (gains) losses, net		(302	)		1,100			3,246			2,929
Miscellaneous (income) expense, net		(3,571	)		321	Ā		(4,822	)		854	Ā
Income (loss) before income taxes		21,513			(15,348	)		29,290			(42,896	)
Income tax expense (benefit)		13,919	Ā		(4,276	)		22,508	Ā		(12,095	)
Income (loss) from continuing operations		7,594			(11,072	)		6,782			(30,801	)
Loss on disposal of disc. operations, net of income taxes		0	Ā		(116	)		0	Ā		(358	)
Net Income (loss)		7,594			(11,188	)		6,782			(31,159	)
Less: Net income (loss) attributable to noncontrolling interests		494	Ā		620	Ā		(250	)		984	Ā
Net income (loss) attributable to Ferro Corporation		7,100			(11,808	)		7,032			(32,143	)
Dividends on preferred stock		(165	)		(199	)		(330	)		(370	)
Net income (loss) attributable to Ferro Corporation shareholders		$6,935	Ā		($12,007	)		$6,702	Ā		($32,513	)
											Ā
Per common share data:
Basic earnings (loss) attributable to Ferro Corporation common shareholders:
From continuing operations		$0.08			($0.27	)		$0.08			($0.72	)
From discontinued operations		0.00	Ā		0.00	Ā		0.00	Ā		(0.01	)
		$0.08	Ā		($0.27	)		$0.08	Ā		($0.73	)
Diluted earnings (loss) attributable to Ferro Corporation common shareholders:
From continuing operations		$0.08			($0.27	)		$0.08			($0.72	)
From discontinued operations		0.00	Ā		0.00	Ā		0.00	Ā		(0.01	)
		$0.08	Ā		($0.27	)		$0.08	Ā		($0.73	)
											Ā
Cash dividends declared		$0.00	Ā		$0.00	Ā		$0.00	Ā		$0.01	Ā
											Ā
Shares outstanding:
Basic		85,782,929			44,701,407			85,809,269			44,533,474
Diluted		86,429,165			44,701,407			86,430,832			44,533,474
End of Period		85,784,262			44,715,684			85,784,262			44,715,684

Ā
Ferro Corporation and Consolidated Subsidiaries Segment Net Sales and Segment Income (Unaudited)
Ā
(Dollars in thousands)	Ā	Three Months Ended June 30,					Ā	Six Months Ended June 30,
		2010		Ā	2009			2010		Ā	2009
Segment Net Sales
Electronic Materials		$174,528			$100,570			$321,761			$183,059
Performance Coatings		142,137			117,333			270,328			225,921
Color and Glass Perf. Materials		97,697			76,350			197,029			143,766
Polymer Additives		79,664			62,998			154,140			122,445
Specialty Plastics		43,359			36,934			81,732			71,793
Pharmaceuticals		6,100	Ā		5,092	Ā		11,360	Ā		10,102	Ā
Total Segment Net Sales		$543,485	Ā		$399,277	Ā		$1,036,350	Ā		$757,086	Ā
											Ā
Segment Income
Electronic Materials		$37,397			$6,387			$65,879			$8,804
Performance Coatings		14,422			6,225			23,904			5,626
Color and Glass Perf. Materials		9,982			2,223			17,265			(232	)
Polymer Additives		2,836			1,588			6,827			3,477
Specialty Plastics		3,503			2,709			5,322			4,171
Pharmaceuticals		(271	)		214	Ā		(146	)		327	Ā
Total Segment Income		67,869			19,346			119,051			22,173
											Ā
Unallocated corp. expenses		15,391			16,597			30,587			32,306
Impairment charges		0			0			2,202			0
Restructuring charges		21,205			(309	)		32,335			1,089
Interest Expense		13,766			17,190			26,677			28,364
Other (income) expense, net		(4,006	)		1,216	Ā		(2,040	)		3,310	Ā
Income (loss) before income taxes from continuing operations		$21,513	Ā		($15,348	)		$29,290	Ā		($42,896	)

Ā
Ferro Corporation and Consolidated Subsidiaries Condensed Consolidated Balance Sheets
Ā
(Dollars in thousands)	Ā	June 30,	Ā	December 31,
		2010		2009
Assets		(Unaudited)		(Audited)
Current assets:
Cash and cash equivalents		$29,732		$18,507
Accounts and trade notes receivable, net		320,711		285,638
Inventories		197,788		180,700
Deposits for precious metals		55,808		112,434
Deferred income taxes		19,277		19,618
Other receivables		39,460		27,795
Other current assets		6,416		7,180
Total current assets		669,192		651,872
				Ā
Property, plant & equipment, net		384,940		432,405
Goodwill		216,326		221,044
Amortizable intangible assets, net		12,443		10,610
Deferred income taxes		132,249		133,705
Other non-current assets		66,277		76,719
Total assets		$1,481,427		$1,526,355
				Ā
Liabilities and Equity
Current liabilities:
Loans payable and current portion of long-term debt		$5,066		$24,737
Accounts payable		206,172		196,038
Income taxes		21,937		7,241
Accrued payrolls		30,581		20,894
Other current liabilities		92,940		72,039
Total current liabilities		356,696		320,949
				Ā
Long-term debt, less current portion		347,707		398,720
Postretirement and pension liabilities		198,606		203,743
Deferred income taxes		1,286		1,124
Other non-current liabilities		26,342		31,897
Total liabilities		930,637		956,433
				Ā
Series A convertible preferred stock		9,427		9,427
				Ā
Shareholders' equity		531,840		550,226
Noncontrolling interests		9,523		10,269
Total liabilities and equity		$1,481,427		$1,526,355

Ā
Ferro Corporation and Consolidated Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited)
Ā
	Ā	Three Months Ended June 30,					Ā	Six Months Ended June 30,
(Dollars in thousands)		2010		Ā	2009			2010		Ā	2009
Cash flows from operating activities
Net income (loss)		$7,594			($11,188	)		$6,782			($31,159	)
Depreciation and amortization		21,075			22,744			41,251			41,353
Precious metals deposits		51,066			(14,954	)		56,626			(80,426	)
Accounts and trade notes receivable		(16,281	)		(12,934	)		(55,751	)		3,743
Inventories		(8,456	)		28,916			(26,853	)		75,512
Accounts payable		1,970			29,107			27,142			(37,894	)
Other changes in current assets and liabilities, net		17,324			(6,311	)		16,895			(15,781	)
Other adjustments, net		9,876	Ā		1,789	Ā		25,680	Ā		4,527	Ā
Net cash provided by (used for) continuing operations		84,168			37,169			91,772			(40,125	)
Net cash used for discontinued operations		0	Ā		(116	)		0	Ā		(361	)
Net cash provided by (used for) operating activities		84,168			37,053			91,772			(40,486	)
											Ā
Cash flows from investing activities
Capital expenditures for property, plant and equipment		(7,675	)		(20,348	)		(16,298	)		(22,969	)
Proceeds from business combination		5,887						5,887
Proceeds from sale of assets		(152	)		27	Ā		317	Ā		72	Ā
Net cash used for investing activities		(1,940	)		(20,321	)		(10,094	)		(22,897	)
											Ā
Cash flow from financing activities
Net (repayments) borrowing under loans payable		(17,606	)		27,981			(18,787	)		28,945
Proceeds from revolving credit facility		59,040			154,375			205,140			434,624
Principal payments on revolving credit facility		(61,640	)		(198,073	)		(206,840	)		(384,727	)
Principal payments on term loan facility		(50,000	)		(763	)		(50,000	)		(1,525	)
Debt issue costs		0			(1,262	)		0			(9,367	)
Cash dividends paid		(165	)		(28	)		(330	)		(636	)
Other financing activities		722	Ā		2,018	Ā		974	Ā		2,135	Ā
Net cash (used for) provided by financing activities		(69,649	)		(15,752	)		(69,843	)		69,449
Effect of exchange rate changes on cash and cash equivalents		(541	)		1,441	Ā		(610	)		1,235	Ā
Increase in cash and cash equivalents		12,038			2,421			11,225			7,301
Cash and cash equivalents at beginning of period		17,694	Ā		15,071	Ā		18,507	Ā		10,191	Ā
Cash and cash equivalents at end of period		$29,732	Ā		$17,492	Ā		$29,732	Ā		$17,492	Ā
											Ā
Cash paid during the period for:
Interest		$7,487			$12,237			$20,766			$25,792
Income taxes		$4,325			$1,740			$9,830			$5,635

Ā
Ferro Corporation and Consolidated Subsidiaries Supplemental Information Ā Segment Net Sales Excluding Precious Metals and Reconciliation of Sales Excluding Precious Metals to Net Sales (Unaudited)
Ā
(Dollars in thousands)	Ā	Three Months Ended June 30,			Ā	Six Months Ended June 30,
		2010	Ā	2009		2010	Ā	2009
								Ā
Electronic Materials		$86,659		$50,281		$162,736		$98,267
Performance Coatings		142,078		117,271		270,229		225,686
Color and Glass Perf. Materials		91,396		71,872		183,030		136,222
Polymer Additives		79,664		62,998		154,140		122,445
Specialty Plastics		43,359		36,934		81,732		71,793
Pharmaceuticals		6,100		5,092		11,360		10,102
Total segment sales excluding precious metals		449,256		344,448		863,227		664,515
								Ā
Sales of precious metals		94,229		54,829		173,123		92,571
								Ā
Total net sales		$543,485		$399,277		$1,036,350		$757,086

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. The Company believes 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.