Ferro Corporation (Ferro), a US based supplier of technology-based performance materials, has reported net sales of $2.24 billion for the year-end 2008, up 4.5%, compared with the net sales of $2.15 billion in the previous year-end. It has also reported a net loss of $39.7 million, or $1.26 loss per share, for the year-end 2008, compared with the net loss of $94.5 million, or $2.34 loss per share, in the previous year-end.
Loss from continuing operations for 2008 was $54 million, compared with a loss of $100 million, in 2007. The improvement was primarily the result of lower selling, general and administrative expenses, lower interest expense, and a lower impairment charge, partially offset by increased restructuring charges and a loss on the extinguishment of debt. In 2008, the operating loss included net pre-tax charges of $116 million. These charges included impairment charges of $80 million for goodwill and other long-lived assets associated with the company’s tile, specialty plastics and electronic materials businesses and restructuring charges of $26 million. The company recorded additional pre-tax charges of $10 million primarily related to a loss on the extinguishment of debt resulting from bond refinancing activities, manufacturing rationalization activities, and corporate development expenses. In 2007, the operating loss included $166 million in charges primarily related to impairment charges, restructuring charges and legal settlements.
“The past year closed with some of the most significant economic challenges in decades, and in response, our team took aggressive action to reduce costs and expenses, conserve cash and lower debt,” stated chairman, president and chief executive officer James F. Kirsch. “We are taking additional actions in 2009 to further lower costs and assure our continued access to liquidity. These actions, combined with the initiatives we began in 2006 to rationalize our worldwide manufacturing operations, are building a strong foundation for Ferro’s future. While economic conditions are expected to remain difficult in 2009, we are focused on supporting our worldwide customers with the industry-leading products that they know and trust. I am confident that Ferro is poised to benefit strongly as the global economy rebounds.”
Continued Focus on Cost Cutting and Improving Operational Efficiencies:
“Although we are not satisfied with the results of the fourth quarter, we are pleased with the progress we have made to cut costs, improve efficiency and unlock the future earnings potential of the company,” Kirsch said. “Our restructuring programs around the world have generated annual cost and expense savings of more than $45 million, in aggregate, from mid-2006 through the end of 2008, and we expect to generate an additional $40 million in annual savings over the next two years. These efforts are lowering our fixed costs, and building a cost structure that will generate significantly improved earnings potential as the global economy recovers.”
Actions taken in 2008 and 2009 include:
Headcount reductions at locations around the world which reduced total employment by about 12% during 2008, with an additional 2% staff reduction in January 2009;
Initiation of the fourth and final major phase of restructuring within Ferro’s Inorganics business in Europe, which is expected to reduce annual costs by about $14 million over the next two years;
The closing of a pigments plant in Toccoa, Georgia, in December 2008, which is expected to generate annual savings of $3 million to $4 million;
Production reductions, extended holiday and post-holiday shutdowns, reduced staffing and shortened work weeks at manufacturing sites where customer orders do not support full-time operations;
A 50% reduction in planned capital spending for 2009 compared with 2008;
A reduction in the common stock dividend, which will result in a cash savings of $24 million on an annualized basis;
A worldwide hiring freeze, elimination of most 2009 wage increases for salaried and non-contract employees, and significant reductions in discretionary spending;
Suspension of company’s 401(k) matching contributions and additional cost saving changes in benefit plans and human resources policies;
Inventory reductions and other working capital improvements.
2008 Full-Year Results:
Price increases and favorable changes in foreign currency exchange rates were the primary drivers of sales growth during 2008. Price increases during the year included those related to higher precious metal costs, which are passed through to customers as higher product prices. Changes in foreign currency exchange rates added about 3.5%age points to the increase in sales for the year. Volume declines partially offset the sales growth, particularly in the last two months of the year, as customers reduced orders sharply in concert with weakened economic activity.
In 2008, sales growth was led by the Electronic Materials segment where demand increased for conductive pastes and powders, particularly for products used in the manufacture of solar cells. Increased precious metal costs contributed to the sales increase. Sales also increased in the Performance Coatings, Polymer Additives and Color and Glass Performance Materials segments. In each segment, sales were higher due to a combination of favorable changes in foreign currency exchange rates and higher product pricing, partially offset by lower volumes. Sales volume declines were the most significant in the final two months of the year, as customers cut their production volumes and their inventory because of weaker economic activity around the world. Sales declined in the Specialty Plastics segment, primarily as a result of lower sales volume.
Gross profit percentage was 18.0% of sales for the year, compared with 18.7% of sales in 2007. In 2008, gross profit was essentially flat with 2007 and was reduced by $3 million, primarily as a result of charges for asset write-offs and other costs associated with the company’s manufacturing rationalization programs. During 2007, gross profit was reduced by $8 million in charges, largely resulting from accelerated depreciation and other costs related to manufacturing rationalization programs.
Selling, general and administrative (SG&A) expense declined to $297 million in 2008, from $315 million in 2007. As a percentage of sales, SG&A declined to 13.2% in 2008, from 14.7% during 2007. The 2008 reduction in SG&A expense occurred largely during the final three months of the year as the company made cost and expense reductions to align the business with the rapidly deteriorating global economy. Included in the 2008 SG&A expense were net charges of $4 million related to corporate development activities, asset write-offs and employee severance expenses, partially offset by benefits from litigation settlements and insurance proceeds. SG&A expense in 2007 included charges of $12 million primarily related to litigation settlements and corporate development activities.
Total segment income for 2008 was $144 million, compared with $147 million during 2007. Segment income increased in the Electronic Materials segment as a result of higher sales volume of conductive pastes and powders, manufacturing cost improvements and benefits from prior-period restructuring efforts. Segment income also increased in the Pharmaceutical segment, driven by an improved product mix. Income declined in all other segments, primarily due to lower sales volumes and higher raw material costs, partially offset by higher product prices. The company estimates that costs for raw materials increased about $80 million during 2008, compared with the prior year. Product price increases across all product lines were adequate to offset the rising costs, but not sufficient to maintain gross margins.
The company recorded an $80 million charge for impairment of goodwill and other long-lived assets in 2008. Goodwill was impaired related to tile coatings products in the Performance Coatings segment, and goodwill and property, plant and equipment were impaired related to plastics products in the Specialty Plastics segment. The impairments were due to lower forecasted cash flows in the businesses resulting from significant reductions in demand from customers due to the current worldwide economic downturn.