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Ferro Corp. recently announced that its net sales for the three months ended September 30, 2009, were $442 million, a decline of 25% from the third quarter of 2008. Net sales increased 11%, sequentially, from the second quarter of 2009.
For the third quarter, the company recorded income from continuing operations of $2.8 million, or $0.04 per diluted share, compared with income from continuing operations of $3.9 million, or $0.07 per share, in the third quarter of 2008. The third quarter income from continuing operations was a $13.9 million improvement from a loss from continuing operations of $11.1 million, or $0.27 per share, in the second quarter of 2009. The operating income for the 2009 third quarter included net pre-tax charges of $14.1 million that were primarily related to impairment of goodwill, manufacturing rationalization and other cost-reduction activities. Third quarter 2008 operating income was reduced by pre-tax charges of $17.9 million that were primarily related to restructuring charges, a loss on extinguishment of debt and corporate development activities.
“Our positive momentum accelerated in the third quarter, resulting in improved gross margins and higher segment income margins compared with the third quarter of 2008, despite lower sales,” said James F. Kirsch, chairman, president and CEO. “The improved margins show that our efforts to lower our sales breakeven level, reduce cost and expense, and restructure the company are achieving results. Although we have made significant progress, we are continuing our efforts to streamline the business, reduce our cost structure and improve productivity from the manufacturing floor to our corporate support operations. We believe these actions will position us to provide attractive returns to our shareholders as global customer demand continues to recover.”
The net sales decline in the 2009 third quarter, compared to the previous year’s third quarter, reflected the global economic slowdown that accelerated during the fourth quarter of 2008. Demand from customers serving economically cyclical markets, including construction, automobiles and appliances, continued to gradually improve from a low point in the 2009 first quarter. The company’s sales decline included reduced sales of precious metals, which contributed approximately 3 percentage points to the 25% net sales decline. Changes in foreign currency exchange rates accounted for approximately 1 percentage point of the net sales decline.
Net sales increased 11%, sequentially, from the 2009 second quarter to the third quarter. Sequential sales growth was recorded in all regions, with the highest percentage growth in Asia and Latin America.
Compared with the prior-year period, sales declined in Performance Coatings as a result of lower sales volumes of tile coatings, partially offset by higher sales volumes of porcelain enamel. Sales increased sequentially for the second consecutive quarter from their trough in the 2009 first quarter as customer inventory destocking moderated and end-market demand stabilized. Segment income increased in Performance Coatings compared with the prior-year period as a result of lower manufacturing costs and reduced selling, general and administrative (SG&A) expense that more than offset the negative effects of lower manufacturing volume.
Sales declined in Electronic Materials as a result of lower sales of dielectric materials, conductive metal pastes and powders, and surface finishing materials, compared with last year’s third quarter. Lower sales of precious metals accounted for approximately half of the overall sales decline. Sales excluding precious metals increased 9%, sequentially, from the 2009 second quarter. The cost of the precious metals that are contained in many of the company’s Electronic Materials products are passed through to customers with minimal gross margin contribution. Sales of solar pastes benefited from improved demand from Asian solar cell manufacturers, although demand for solar pastes in Europe remained soft. Segment income declined compared with the third quarter of 2008 as a result of the negative effects of lower volume, although this decline was partially offset by reduced SG&A expense resulting from expense-control initiatives.
Sales declined in Color and Glass Performance Materials compared with the prior-year quarter. Sales increased sequentially from the first and second quarters of 2009 as customer demand improved, particularly in automotive enamels where weak end-market demand and customer inventory destocking had been a significant drag on sales. Although segment income declined in Color and Glass Performance Materials from the prior-year period, segment income as a percent of sales increased. The decline in segment income was the result of the negative effects of lower manufacturing volumes associated with lower customer demand, partially offset by improved manufacturing cost performance and reductions in SG&A expense.
Total segment income was $41.5 million, compared with $46.8 million in the 2008 third quarter and $19.3 million in the second quarter of 2009. The growth in segment income from the second to the third quarter of 2009 was the result of the sequential growth in sales volume; the realization of savings from restructuring and other cost and expense control initiatives; and reduced inventory liquidation. Total segment income as a percent of sales improved to 9.4% in the 2009 third quarter from 7.9% in the prior-year period.
Gross margins were 21.1% of sales in the 2009 third quarter, compared with 18.7% in the third quarter of 2008. Gross margin percentage increased for the third consecutive quarter, from a low in the fourth quarter of 2008, due to restructuring actions, staffing reductions and other cost-reduction programs. For the quarter, raw material costs were lower compared with the third quarter of 2008. Although reductions in product prices offset much of the benefit of lower raw material costs, the lower raw material costs did have a net positive effect on gross margin percentage. Gross profit for the 2009 third quarter was reduced by charges of $0.3 million that were primarily related to costs of staffing reductions and accelerated depreciation. Gross profit for the 2008 third quarter included charges of $1.5 million primarily related to asset write-offs and manufacturing rationalization activities.
Ferro continues to focus on cost and expense reductions to lower its sales breakeven level and improve profitability. Worldwide staffing has been reduced more than 20% since the beginning of 2008, including a reduction of approximately 9% during 2009. Progress is on schedule in ongoing restructuring initiatives in the Performance Coatings and Color and Glass Performance Materials manufacturing operations in Europe. The previously announced project to discontinue manufacturing operations in Limoges, France, is expected to begin generating approximately $14 million in annual cost savings during 2010. In addition, the June 2009 suspension of operations at a tile coatings plant in Nules, Spain, is expected to reduce annual costs by $2 million to $3 million.
In early October, the company initiated additional cost and expense reduction projects at sites around the world. The projects will result in manufacturing cost reductions in Performance Coatings, Color and Glass Performance Materials and Specialty Plastics through staffing reductions and facility consolidations in Europe and Asia. The projects will also reduce SG&A expense in Electronic Materials, Performance Coatings and Color and Glass Performance Materials. In total, approximately 230 positions are expected to be eliminated when the projects are fully implemented in mid-2010. Total cash spending related to the new projects is expected to be approximately $19 million over the next three quarters, which includes $14 million in severance costs and $3 million in capital spending. The payback period for these projects is estimated to be approximately 13 months.
Ferro expects stabilization in end-market demand around the world to continue in the coming months, along with modest growth in selected regions. The company remains cautious, however, regarding the outlook for fourth quarter sales. Customers remain focused on cash flow and liquidity, and have indicated that inventories are likely to be held to very low levels at the end of the year. However, if end-market demand remains steady and customer inventories are reduced in December, then it is likely that the environment would be favorable for sales of the company’s products in early 2010. Ferro expects to continue initiatives that result in cost and expense savings during the coming quarters.
Visibility to future customer orders has improved modestly, but it remains more limited than normal. Due to the continued limited visibility to customer orders and uncertainty in global markets, the company will not provide specific sales and earnings estimates for the fourth quarter.
For additional details, including a recent conference call discussing these results, visit www.ferro.com.