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Ferro: 2010 3Q results

Ferro Corporation announced on 25 October its third-quarter 2010 results, with net sales of USD 529 million for the three months ended 30 September 2010, an increase of 20% compared to net sales of US…

Ferro Corporation announced on 25 October its third-quarter 2010 results, with net sales of USD 529 million for the three months ended 30 September 2010, an increase of 20% compared to net sales of USD 442 million in the third quarter of 2009. In the 2010 third quarter, Ferro“s operating results included net pre-tax charges of USD 42.7 million, which, in turn, included a loss on extinguishment of debt of USD 19.3 million, restructuring and impairment charges of USD 9.6 million and other charges of USD 13.8 million primarily related to debt refinancing activities, manufacturing rationalization actions and employee severance. Loss from continuing operations for the 2010 third quarter, including the charges, totalled USD 2.4 million, or USD 0.04 per diluted share, compared to USD 2.8 million, or USD 0.04 per diluted share, in the third quarter of 2009. For the same period of 2009, operating results included net pre-tax charges of USD 14.1 million, mainly related to impairment of goodwill, manufacturing rationalization and other cost reduction actions. Net sales increased 20% compared with the third quarter of 2009, resulting from the continued recovery in customer demand that began after the economic downturn in 2009. Increased sales volume contributed 20 percentage points to the growth in sales while changes in product mix and price contributed an additional 3 percentage points to sales growth, compared to the same quarter in 2009. Growth, however, was reduced by approximately 3 percentage points due to changes in foreign currency exchange rates. Increased sales of precious metals, including changes in both price and volume, accounted for approximately 6 percentage points of the overall sales increase compared with the 2009 period. Gross profit increased to USD 120.3 million, or 22.8% of net sales, compared to USD 93.2 million or 21.1% of net sales in the same quarter of 2009. The increase resulted from a combination of higher sales volume, changes in product mix and pricing, and cost reductions achieved through restructuring actions. In the 2010 third quarter, charges that were included in cost of sales reduced gross profit by USD 0.7 million. The charges were primarily the result of accelerated depreciation and other costs of manufacturing rationalization actions. During the third quarter of 2009, gross profit was reduced by charges of USD 0.3 million related to staffing reductions and accelerated depreciation. Selling, general and administrative (SG&A) expense increased by USD 8.9 million compared with the third quarter of 2009. SG&A expense declined to 14.2% of sales in the quarter compared with 14.9% in the prior-year quarter. The primary drivers of the increase in SG&A spending on a dollar basis were increased accruals for incentive compensation and higher special charges. Charges of USD 5.5 million, including expenses related to manufacturing rationalization actions and employee severance, contributed to SG&A expense during the 2010 third quarter. In the third quarter of 2009, SG&A expense included special charges of USD 2.7 million related primarily to expense reduction initiatives. Segment income increased in Electronic Materials, Color and Glass Performance Materials, Polymer Additives, Specialty Plastics, and Pharmaceuticals compared with the prior-year period and was lower in Performance Coatings. Income increased in Electronic Materials due to increased customer demand, especially metal powders and silver and aluminium pastes used by manufacturers of solar cells. Income in Color and Glass Performance Materials improved due to increased sales volume combined with lower manufacturing costs, partially offset by higher SG&A expense. Income increased in Polymer Additives primarily due to improved manufacturing costs and changes in product prices. Income increased in Specialty Plastics as a result of improved product pricing, lower manufacturing costs and reduced SG&A spending. Income increased in Pharmaceuticals primarily as a result of changes in product mix. Income declined in Performance Coatings as a result of higher manufacturing costs, including production disruptions due to adverse weather in Latin America, and changes in foreign currency exchange rates. Restructuring and impairment charges were USD 9.6 million in the 2010 third quarter compared with USD 11.1 million in the prior-year quarter. Manufacturing rationalization actions in Europe were the primary drivers of the charges, including projects that will result in the closing of manufacturing operations at locations in the Netherlands and Portugal. In addition, the company recorded a charge of USD 2.2 million related to a decline in value of property at a manufacturing site in the US that was closed in 2008. Interest expense was USD 10.5 million during the 2010 third quarter, a decline of USD 7.4 million from the prior-year period. The primary driver of the decline in interest expense was lower average borrowing levels compared with the third quarter of 2009. Included in the third-quarter interest expense was a charge of USD 0.8 million for a non-cash write-off of unamortized fees related to a repayment of term loans. A USD 19.3 million loss on extinguishment of debt was recorded in the 2010 third quarter related to debt refinancing activities. The charge included a write-off of unamortized fees and the difference between the carrying value and fair value of the 6.5% convertible notes purchased pursuant to a tender offer and a write-off of unamortized fees associated with an amendment and restatement of the company“s credit facility. On 30 September 2010, no cash deposits were required for precious metals under our lease agreements, which was a reduction of USD 56 million from the collateral required on 30 June 2010. The company currently has commitments for precious metal lease lines of approximately USD 148 million without any requirements for collateral, and total lease commitments of over USD 200 million, including lease lines that require collateral. Total debt on 30 September 2010 was USD 326 million, a decrease of USD 98 million from 31 December 2009. In addition, at the end of the 2010 third quarter, the company had net proceeds of USD 2.8 million from international receivables factoring programmes. Net proceeds from international receivables factoring on 31 December 2009 were USD 10.3 million. Customer demand is expected to follow historical seasonal trends during the remainder of 2010. Sales in the 2010 fourth quarter are expected to be higher than the fourth quarter of 2009, reflecting the continuing recovery in customer demand. Sequentially, sales are expected to decline from the 2010 third quarter, reflecting normal seasonal patterns that are driven by reduced demand from construction-related markets and year-end holidays. The company continues to execute additional manufacturing rationalization and expense reduction initiatives during 2010, including plant closings and staffing reductions. Based on these assumptions and year-to-date results, the company has increased its estimates for 2010 financial performance. The company currently estimates full-year 2010 net sales will increase between 22 and 24% compared with 2009, to between USD 2.025 billion and USD 2.050 billion. Adjusted EBITDA is expected to be in the range of USD 260 million to USD 265 million in 2010, compared with the previous outlook of USD 240 million to USD 255 million. Adjusted earnings per share for 2010 are expected to be in the range of USD 1.02 to USD 1.08. Capital expenditures of approximately USD 50 million; Expected completion of major operational actions related to manufacturing restructuring projects by the end of 2010, although some charges may be recorded in 2011; Pension expense of approximately USD 24 million and cash contributions to the company“s worldwide pension plans of approximately USD 25 million; Depreciation and amortization of approximately USD 80 million, including accelerated depreciation associated with manufacturing rationalization projects; and Interest expense of approximately USD 43 million. For 2011, based on an assumption of continued moderate worldwide economic growth, the company expects further improvements in sales and earnings per share. The company intends to provide an outlook for 2011 along with its 2010 year-end earnings which will be announced during the first quarter of 2011. Adjusted EBITDA and adjusted earnings per share are financial measures not required by, or presented in accordance with, accounting principles generally accepted in the US (U.S. GAAP). The measures are presented here because they provide 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 measures impractical. An audio replay of the call will be available until 9 p.m. Eastern time, 2 November. To access the replay, dial 800-819-5739 if calling from the US or Canada, or 203-369-3350 if calling from outside North America. The replay of the conference call can be accessed through the Investor Information portion of the company“s website at www.ferro.com. A podcast of the conference call is also available on the company“s website. Headquartered in Cleveland, Ohio, the Company has approximately 5,200 employees globally and reported 2009 sales of USD 1.7 billion.

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