Ferro Corporation has 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.
The conference call discussing results will be available for replay for 30 days on the company website.