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These charges included an impairment charge of $128.7 million for goodwill and other long-lived assets associated with the company’s polymer additives and pharmaceutical businesses. The company recorded additional pre-tax charges of $37.3 million, primarily for restructuring, other activities related to manufacturing rationalization and legal settlements. In 2006, operating income was reduced by pre-tax expenses of $34.9 million, primarily related to manufacturing rationalization activities and costs associated with an accounting investigation and restatement.
“We continue to build a foundation for the future through aggressive restructuring efforts and organizational change,” said Chairman, President and Chief Executive Officer James F. Kirsch. “While we are disappointed by our reported loss for 2007, we are encouraged by strong cash flow from net operating activities and our ability to reduce debt. We will continue to drive cost and expense savings across the business, while investing in our customer relationships and stressing the values and behaviors that support our opportunities to win and enhance value for our shareholders.”
Kirsch added that the company is on track with the restructuring programs it has initiated over the past 18 months, and that Ferro remains committed to meeting its goal of 10% operating margins, as a percent of sales excluding precious metals, in 2010. This will be achieved through organic growth of higher-value products coupled with incremental savings generated from Ferro’s ongoing restructuring programs, the aggressive pursuit of manufacturing productivity improvements, improved pricing for value, and expense reductions.
Net sales increased 8% in 2007, primarily as a result of product price increases and favorable changes in foreign currency exchange rates. Compared with 2006, sales increased in the Performance Coatings, Color and Glass Performance Materials, Electronic Materials, and Polymer Additives segments. Sales declined in the Specialty Plastics and Other Businesses segments. Sales to customers outside the U.S. grew by 16% while sales within the U.S. fell by 1%.
Increased product prices and favorable changes in foreign currency exchange rates were the primary drivers of the increased sales. The effects of lower volume in Specialty Plastics, porcelain enamel products in Performance Coatings, and Polymer Additives partially offset the sales increases. The volume declines were largely the result of weak demand from U.S. markets in automobiles, appliances and residential housing.
Gross margins were 18.9% of sales in 2007, compared with 20.4% of sales in 2006. Gross profit during 2007 was negatively impacted by higher raw material costs, including precious metals. While the company was generally able to increase prices to offset higher raw material costs, it was not able to increase prices sufficiently to maintain gross margin as a percent of sales. Gross profit in 2007 also was reduced by $7.9 million in costs primarily related to accelerated depreciation and other costs associated with the company’s manufacturing rationalization programs. Gross profit was also negatively impacted by unplanned manufacturing costs due to temporary interruptions in operations at manufacturing facilities in South Plainfield and Bridgeport, N.J., and increased costs required to address product specification requirements at the company’s Evansville, Ind., specialty plastics manufacturing plant. Charges related to manufacturing rationalization reduced gross profit by $4.6 million in 2006.
Selling, general and administrative (SG&A) expense was $319.1 million in 2007, or 14.5% of sales. Included in the 2007 SG&A expense were $12.2 million in charges primarily related to settlement agreements with plaintiffs in civil lawsuits related to alleged antitrust violations in the heat stabilizer industry, other legal settlements and divestment activities. SG&A expense in 2006 was $305.2 million, or 15.0% of sales, including charges of $8.2 million related to the costs of an accounting restatement and a settlement loss from a nonqualified benefit retirement plan, partially offset by benefits from changes to the company’s postretirement benefit programs.
Total segment income for 2007 was $154.0 million, up slightly from the prior-year level of $152.6 million. The total segment income reflected higher income from the Color and Glass Performance Materials, where the effects of increased product pricing more than offset increasing raw material costs. Segment income declined in Performance Coatings, mainly as the result of higher raw material and manufacturing costs that were not fully offset by higher product pricing.
Income in the Electronic Materials segment declined due to the effects of weak demand for dielectric materials in the first half of the year and added manufacturing costs resulting from a temporary interruption in manufacturing at the business’ manufacturing facility in South Plainfield, N.J. Strong demand for the company’s metal pastes and powders in the second half of the year partially offset the income decline.
Restructuring charges of $16.9 million were recorded in 2007, resulting from rationalization programs in the company’s European inorganic materials manufacturing facilities and costs associated with discontinuing dielectric materials production at an Electronic Materials manufacturing location in Niagara Falls, N.Y. The restructuring project in Electronic Materials was completed in 2007, and the restructuring programs in Europe are expected to continue through 2009.
Sales for the 2008 first quarter, ending March 31, are expected to be approximately $550 million to $575 million, compared with sales of $530 million in the first quarter of 2007, reflecting an ongoing mix of business conditions in different regions. Business conditions in the U.S. are expected to be difficult due to continued weak demand from the housing, appliance and automotive markets.
Earnings for the first quarter are expected to be in the range of $0.12 to $0.17 per share. This estimate includes expected charges of approximately $0.05 per share, primarily from the continuation of manufacturing rationalization activities. Also included in the first quarter estimates are pre-tax charges of $2 million to $3 million to complete the restoration of full wastewater treatment capabilities at the company’s Bridgeport, N.J., manufacturing plant. The company reported income from continuing operations of $0.14 per share in the first quarter of 2007, including charges of approximately $0.08 per share.
Additional information is available at www.ferro.com.