Ceramic Industry News

Ferro Looks to Additional Cost Savings After First Quarter Loss (posted 5/11/09)

May 11, 2009
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The company recorded a loss from continuing operations of $19.7 million, compared with income of $7.9 million in the first quarter of 2008.

Ferro Corp. recently announced that net sales for the three months ended March 31, 2009, were $358 million, a decline of 39% from the first quarter of 2008. The company recorded a loss from continuing operations for the first quarter of $19.7 million, or $0.46 per diluted share, compared with income of $7.9 million, or $0.17 per share, in the first quarter of 2008. The operating loss for the quarter included net pre-tax charges of $3.3 million, primarily related to restructuring and corporate development activities. First quarter 2008 operating income was reduced by pre-tax charges of $4.0 million, primarily related to restructuring and other manufacturing rationalization activities.

“During the 2009 first quarter, customer demand stabilized at the low levels we experienced in December 2008, and customers’ inventory destocking continued,” said James F. Kirsch, chairman, president and chief executive officer. “We are responding aggressively to the weak first quarter economic environment with additional cost and expenditure reduction initiatives to help us weather the current global downturn and build a more efficient cost structure. These initiatives are designed to reduce our immediate cash outlays, improve our ongoing cost structure, maintain our access to liquidity and strengthen our position for future growth when the economy recovers.

“Our worldwide business teams continue to manage through this challenging business cycle with focus and determination. I’m extremely proud of our employees’ support of the difficult actions we are taking, the numerous operational improvements they are making to strengthen Ferro, and especially of their unwavering commitment to our customers.”

The company continued to take actions to reduce costs and lower expenses in response to the weakness in worldwide customer demand. Cost and expenditure reduction actions during the 2009 first quarter include:
  • Additional staffing reductions of approximately 300 employee positions, or 5% of the company’s total workforce. These reductions are in addition to a 12% reduction in the workforce during 2008.
  • Implementation of a mandatory one-week unpaid furlough for all U.S.-based salaried employees during the first half of 2009.
  • Elimination of most salary increases and suspension of company matching contributions to U.S. employees’ 401(k) plans.
  • Temporary plant shutdowns and reduced work hours to align staffing to customer demand.
  • Successful negotiation of an amendment to the company’s credit facilities that maintains the size of the facility.
  • Elimination of common stock dividends, reducing cash outflows by approximately $25 million on an annualized basis.
  • A 50% reduction in the 2009 capital spending plan compared with 2008.
  • Initiation of a new phase of the company’s ongoing European manufacturing restructuring. This new phase is expected to generate $14 million in annual cost savings when completed at the end of 2010.
Net sales declined in the 2009 first quarter due to weak customer demand, reflecting the reduced demand the company experienced in the final months of 2008 as the global economy slowed. Demand was particularly weak from customers serving the worldwide automotive, construction, appliance and capacitor markets. The sales volume decline in the quarter included reduced sales of precious metals. Precious metal costs are generally passed through to customers with minimal gross profit contribution. Reduced precious metal sales contributed approximately 8% points to the 39% net sales decline. Unfavorable changes in foreign currency exchange rates accounted for approximately 4% points of the net sales decline. Sales declined in all segments and all regions compared with the prior-year period.

Sales declined in the Color and Glass Performance Materials and Performance Coatings segments primarily as a result of weak demand from automotive and construction applications. These segments each recorded a loss as a result of lower sales volume. Reductions in inventory during the quarter also contributed to the losses. Sales in Electronic Materials declined, driven by sharp reductions in demand for dielectric materials. A number of capacitor manufacturers that use Ferro’s dielectric materials had extended plant shutdowns during the quarter. Reduced sales of precious metals also contributed to the decline in sales. Segment income declined, driven by the effects of reduced sales volume and a less favorable product mix.

Sales in the Polymer Additives and Specialty Plastics segments declined as a result of reduced demand from customers serving construction, automotive and appliance markets. Segment income declined as a result of the lower sales volume, partially offset by reductions in manufacturing costs and selling, general and administrative expense.

Gross margins were 15.4% of sales in the first quarter of 2009, compared with 18.5% of sales in the prior-year period. The decline in gross margin was driven by the effects of lower manufacturing volume, which increased manufacturing costs per unit. For the quarter, raw material costs were lower, in aggregate, than in the prior-year period. Changes in product prices generally tracked the change in raw material costs. In the first quarter of 2008, gross profit was negatively impacted by costs of $3.3 million related to the clean-up of an accidental discharge of product into the wastewater treatment facility at the company’s Bridgeport, N.J., manufacturing plant. Gross margins in the first quarter of 2009 improved compared with margins in the fourth quarter of 2008, reflecting the beneficial effects of the company’s cost containment efforts.

Selling, general and administrative (SG&A) expense was $68.1 million in the first quarter of 2009, a decline of $9.4 million from the first quarter of 2008. The decline was a result of expense reduction efforts, including staffing reductions and lower discretionary spending. Reductions in discretionary spending included the elimination of incentive compensation accruals.

Partially offsetting the decline in SG&A expense was an increase of approximately $4.8 million in pension expense as a result of the decline in value of pension assets in 2008 and increased health care costs compared with the first quarter of 2008. Included in SG&A expense in the first quarter of 2009 were charges of $1.3 million that were primarily related to corporate development activities. The 2008 first quarter SG&A expense included a net benefit of $0.4 million, primarily from favorable litigation developments, which was partially offset by expenses related to corporate development activities.

Restructuring charges of $1.4 million were recorded in the 2009 first quarter, primarily resulting from manufacturing rationalization programs in the company’s European operations. Restructuring charges of $4.2 million were recorded in the first quarter of 2008. During the 2009 first quarter the company announced a new phase in its ongoing European restructuring program that will result in the closing of a manufacturing plant in Limoges, France. The restructuring actions are expected to reduce staffing by approximately 125 employee positions and to result in annual cost savings of $14 million when the restructuring project is planned to be completed by the end of 2010.

End-market demand is expected to remain weak during the second quarter of 2009, reflecting reduced global economic activity and continued effects from tight credit markets. It is possible that supply chain destocking will decline during the next several months, which could result in some improvement in sales. However, the timing and magnitude of this improvement is difficult to forecast. The company plans to continue cost and expense reduction efforts to help mitigate the effects of weak customer demand.

Additional details are available at www.ferro.com.


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