Reported diluted earnings per share from continuing operations of USD 0.11; adjusted earnings per share from continuing operations of USD 0.10, exceeding prior guidance of USD 0.05-USD 0.07; achieved 15% reduction in selling, general and administrative expense levels as a result of value creation strategy; cost-saving actions to date to generate 2013 savings of over USD 30 million; cost savings run rate at quarter-end estimated at USD 30 million; company reaffirms commitment to reduce operating costs by USD 70 million in 2014 and increases 2013 full-year adjusted earnings guidance to USD 0.35-0.40 per share.
Ferro Corporation has reported results for the first quarter ended 31 March 2013. The company’s first-quarter adjusted earnings exceeded expectations, and the company has increased its guidance for the full year based on the progress of its value creation strategy, including cost-saving initiatives, and strong first-quarter results.
For the first quarter of 2013, Ferro reported diluted earnings per share from continuing operations of USD 0.11. Adjusted earnings per share from continuing operations in the quarter totalled USD 0.10, exceeding the previously announced guidance range of USD 0.05-USD 0.07.
Ferro reported net sales of USD 418 million in the first quarter, compared with net sales of USD 460 million in the first quarter of 2012. Reduced volumes and changes in pricing and mix accounted for the entire decline in net sales at approximately 5% and 4%, respectively. Value added sales, which exclude precious metal sales, were USD 387 million, versus USD 418 million in the first quarter of 2012.
On a sequential basis, comparing the first quarter of 2013 with the fourth quarter of 2012, net sales increased 4.4% and value added sales increased 7.5%.
The company reported net income attributable to common shareholders of USD 0.8 million, or USD 0.01 per diluted share, in the 2013 first quarter, compared with USD 3.8 million, or USD 0.04 per diluted share, in the prior-year quarter. The adjusted net income from continuing operations attributable to common shareholders was USD 8.4 million, or USD 0.10 per diluted share, compared with USD 5.5 million, or USD 0.06 per diluted share, in the first quarter of 2012. Included in the first quarter 2012 earnings per diluted share of USD 0.06 are the results of the solar pastes product line, which incurred an operating loss of approximately USD 4 million. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was approximately USD 32 million in the first quarter compared with USD 28 million in the same period of 2012.
Commenting on the results, Peter Thomas, President and Chief Executive Officer, said, “We are making substantial progress on our value creation strategy, resulting in a strong start to the year with adjusted earnings per share of USD 0.10 for the quarter. All of our businesses performed ahead of plan in the quarter, with sequential value added sales increasing by 7.5% and gross profit improving by 38%-20.5% of value-added sales. While European economic conditions continue to be weak, our businesses in the region are beginning to stabilize, partially due to increases in our exports to growth markets and the strong positions we have in automotive applications and glass systems which have allowed us to achieve sales growth exceeding the industry averages for the region. Our strategy of exporting from Europe into higher growth geographies and focusing commercial operations on attractive niche applications to offset the weak European economy is succeeding.”
“In addition, the actions we have taken to date to reduce costs have resulted in substantially lower selling, general and administrative expenses and will save the company approximately USD 30 million in 2013. The benefits of our cost-saving initiatives are being realized more quickly than expected, providing the momentum for earnings to exceed our earlier guidance.”
Thomas concluded, “This quarter’s performance provides early evidence that the value creation strategy developed by our Board and management team is working. I am pleased with the momentum we have generated and am excited by our plans to drive significantly higher earnings, cash flow and returns on invested capital. We remain confident that we can meet our commitment to reduce operating costs by USD 70 million in 2014. Based on the improvements made to date and our business outlook for the remainder of the year, we have increased our full-year adjusted earnings guidance to USD 0.35-USD 0.40 per share.”
Net sales for the three months ended 31 March 2013, were USD 418 million versus USD 460 million in the first quarter of 2012. Reduced volumes and changes in pricing and product mix accounted for the entire decline at approximately 5% and 4%, respectively.
On a value added basis, removing the sale of precious metals, sales were USD 387 million, compared with USD 418 million. Adjusting for the impact of exiting the solar pastes product line (USD 5 million) and a borates mine in Argentina (USD 1 million), value added sales declined by 6.2%.
Sales declined across all of the reportable segments, with the largest declines in Performance Coatings; Pigments, Powders and Oxides; and Polymer Additives. The exit of the solar pastes product line drove the majority of the change in the Pigments, Powders and Oxides segment. Sales of performance coatings product offerings declined versus the prior-year period primarily due to an increasingly competitive sales environment and reduced demand. Sales for coatings products were particularly weak in Latin America. Polymer Additives sales have been adversely impacted by expected changes in environmental regulations pertaining to certain plasticizer products, which is resulting in product replacement by customers, particularly in Europe.
Gross profit was USD 79 million during the 2013 first quarter, compared with USD 86 million during the first quarter of 2012. Excluding special charges, adjusted gross profit was USD 80 million compared with USD 86 million in the prior-year period. During the first quarter of 2013, gross profit was reduced by charges of approximately USD 1 million related to residual costs at closed manufacturing sites that were affected by prior-period restructuring actions and the write down of inventory related to the solar disposition. In the same period last year, gross profit was reduced by charges of nearly USD 1 million related to residual costs at closed manufacturing sites. The primary driver of the decline in gross profit dollars was lower sales volumes, particularly in the Performance Coatings and Polymer Additives segments, and the exit of the solar pastes product line. Adjusted gross profit as a per cent of value added sales for the first quarter of 2013 was 20.8% versus 20.7% in the same period of 2012. Despite lower levels of sales, gross margin levels were maintained primarily due to cost reductions and business mix.
Selling, general, and administrative (“SG&A”) expenses were USD 62 million during the first quarter of 2013 compared with USD 73 million in the prior-year quarter, a decline of 15%, or USD 11 million. SG&A expenses related to the Performance Materials operating group were approximately USD 40 million in the first quarter of 2013, compared with approximately USD 48 million in the first quarter of 2012, a reduction of approximately 15%. In the Performance Chemicals operating group, SG&A expenses declined from approximately USD 7 million to approximately USD 6 million. Corporate SG&A expenses were approximately USD 15 million in the first quarter of 2013 versus approximately USD 18 million in the prior-year quarter.
Actions taken in 2012 and early 2013 linked to the sale of the solar pastes assets and the company’s cost-saving initiatives were the major drivers of the SG&A reduction. Reduced personnel-related costs accounted for approximately 75% of the SG&A reduction. Of the USD 11 million SG&A reduction, approximately USD 5 million was associated with exiting the solar pastes product line. SG&A expenses in the 2013 first quarter included special charges of approximately USD 1 million, primarily related to certain nonrecurring corporate charges. SG&A expenses in the prior-year quarter included special charges of nearly USD 2 million, primarily related to expenses at sites that were closed during earlier restructuring actions and severance expenses.
Total debt as of the end of the first quarter of 2013 declined by USD 6 million to USD 341 million compared with USD 347 million at 31 December 2012. The cash balance increased during the first quarter by USD 3 million to USD 33 million. Cash from operations was a use of USD 17 million, with working capital accounting for USD 12 million of the use. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was approximately USD 32 million in the first quarter compared with USD 28 million in the same period last year.
First-quarter 2013 results for the solar pastes product line included the following:
- net sales of approximately USD 4 million
- value added sales of approximately USD 1 million;
- gross profit of less than USD 1 million;
- SG&A attributable to the product line of less than USD 1 million.
- First-quarter 2012 results for the solar pastes product line included the following:
- net sales of approximately USD 22 million;
- value added sales of approximately USD 6 million;
- gross profit of approximately USD 1 million;
- SG&A attributable to the product line of approximately USD 5 million.
Adjusted earnings per share for 2013 are expected to be in the range of USD 0.35-USD 0.40 per diluted share. The expected increase in earnings compared with 2012 will be driven primarily by cost savings of approximately USD 30 million and the exit from the solar pastes product line. The expected improvements in the company’s cost structure will be partially offset by inflation and the normalization of incentive compensation.
Adjusting for the impact of the solar pastes and pharmaceuticals transactions and before the impact of changes in foreign currency rates, sales growth is expected to be approximately 2%. The sales outlook assumes continued weak economic conditions in Europe and modest growth in all other regions. For the year, cash flow is expected to be slightly positive.
As part of Ferro’s value creation strategy, the company has reorganized its businesses to improve operating efficiencies and better align commercial and manufacturing operations with the markets served. Consequently, the company will now report under a structure that reflects how performance of its businesses is evaluated, strategic decisions are made and resources are allocated. With the new structure, the company will have five reporting segments. It will continue to report Specialty Plastics, Polymer Additives, and Performance Coatings consistent with past practices. The former Color and Glass Performance Materials reporting segment has been divided into two new segments: Performance Colors and Glass; and Pigments, Powders and Oxides. Electronic Materials is no longer a separately reported segment, and its remaining product lines have been folded into the two new reporting segments, based on technology and commercial synergies. Finally, given the recent sale of the company’s pharmaceutical business, it is no longer reported as a segment and its results are reported in discontinued operations, including prior periods.
In conjunction with the changes to reportable segments, the company also changed the profitability metric used by management to evaluate segment performance to segment gross profit. Segment gross profit will be measured for reporting purposes by excluding certain other costs of sales, including costs associated with facilities that have been idled or closed. The historical metric was segment operating income, which included SG&A expenses directly incurred by each segment and certain allocated costs. Beginning in the third quarter of 2012, the company revised its approach for managing SG&A expenses by shifting accountability for controlling costs to the appropriate functional leaders across the individual sites, as opposed to the segment teams. For additional information, please refer to the company’s Quarterly Report on Form 10-Q for the quarter ended 31 March 2013 filed with the SEC.
A replay of the conference call held on 25 April will be available for replay through 30 September 2013. The live broadcast and replay can be accessed through the Investor Information portion of the company’s website at www.ferro.com.
Ferro Corporation is a leading global supplier of technology-based performance materials and chemicals for manufacturers. Ferro products are sold into the building and construction, automotive, appliances, electronics, household furnishings, and industrial products markets. Headquartered in Mayfield Heights, Ohio, the company has approximately 4,700 employees globally and reported 2012 sales of USD 1.8 billion.