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Ferro Corp. recently announced that net sales for the three months ended June 30, 2009, were $399 million, a decline of 37% from the second quarter of 2008. Sequentially, net sales increased 12% over the first quarter of 2009. The company recorded a loss from continuing operations for the second quarter of $11.1 million, or $0.27 per diluted share, compared with income of $8.2 million, or $0.17 per share, in the second quarter of 2008. The loss from continuing operations declined from $19.7 million, or $0.46 per share, in the first quarter of 2009.
The operating loss for the 2009 second quarter included net pre-tax charges of $6.4 million. These charges were primarily related to manufacturing rationalization and other cost reduction activities. Second quarter 2008 operating income was reduced by pre-tax charges of $13.8 million, primarily related to restructuring charges, asset write-offs and corporate development activities.
“The actions we are taking to reduce cost and expense have lowered our breakeven sales level, and as a result, we recorded positive operating income, higher gross margins, and reduced selling, general and administrative (SG&A) expense compared with the first quarter of 2009,” said James F. Kirsch, chairman, president and CEO. “Despite continued reduced customer demand, we made excellent progress during the 2009 second quarter, as we generated significantly improved operating leverage from a modest increase in sales compared with the first quarter. We believe our progressively improving cost structure will continue to benefit our operating performance when the worldwide economy recovers and customer demand strengthens.”
Net sales declined in the 2009 second quarter, compared with the prior-year period, due to weak worldwide customer demand reflecting the global economic slowdown that accelerated during the fourth quarter of 2008. Demand continued to be weak from customers serving economically cyclical markets, including construction, automobiles and appliances. The company’s sales decline included reduced sales of precious metals, which contributed approximately 6% to the net sales decline. Changes in foreign currency exchange rates accounted for approximately 3% of the net sales decline.
Sequentially, net sales increased 12% from the 2009 first quarter to the second 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 the Performance Coatings and Color and Glass Performance Materials segments as a result of continuing weak demand from customers serving the worldwide automotive and construction markets. Operating income was reduced from the prior-year period primarily as a result of lower sales volume. Sales in Electronic Materials declined as a result of lower sales volume. Demand for dielectric materials remained weak, compared with the prior-year period, continuing a trend from the 2009 first quarter. Reduced sales of precious metals also contributed to the sales decline. Segment income declined from the 2008 second quarter, driven by the reduced sales volume.
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.
Total segment income was $19.3 million, compared with $52.2 million in the 2008 second quarter and $2.8 million in the first quarter of 2009. The sequential growth in segment income from the 2009 first quarter was the result of an increase in product sales, combined with decreases in costs and expenses resulting from restructuring actions; staffing reductions; suspension of incentive compensation and other benefit cost reductions; and other cost/expense control initiatives.
Gross margins were 16.3% of sales in the 2009 second quarter, compared with 18.8% in the prior-year period. The decline in gross margin percentage was driven by the effects of lower manufacturing volume, which increased manufacturing costs per unit. Sequential improvement in gross margin percentage was recorded for the second straight quarter, from a trough in the fourth quarter of 2008, due to restructuring actions and other cost reduction programs.
The sequential improvements in gross margin percentage were partially offset by increased higher precious metal sales during the second quarter compared with the 2009 first quarter. For the quarter, raw material costs were lower, in aggregate, than in the prior-year period. Reductions in product prices offset some of the benefits of lower raw material costs. Gross profit for the 2009 second quarter was reduced by $3.7 million due to charges, primarily accelerated depreciation, related to manufacturing rationalization projects in Europe. Gross profit was reduced by charges of $1.4 million during the 2008 second quarter, primarily the result of asset write-offs and costs related to manufacturing rationalization activities.
Selling, general and administrative (SG&A) expense was $62.5 million in the 2009 second quarter, a decline of $17.2 million from the second quarter of 2008. The 22% decline was the result of expense reduction efforts, including staffing reductions, curtailment of discretionary spending, suspended incentive compensation, and a furlough program for salaried employees. Partially offsetting the decline in SG&A expense were increased pension expenses of approximately $5.0 million. Included in SG&A expense in the 2009 second quarter were charges of $3.0 million, primarily related to expense reduction initiatives and other manufacturing rationalization actions. The 2008 second quarter SG&A expense included charges of $2.4 million, primarily related to corporate development activities, asset write-offs and employee severance expenses.
A restructuring-related benefit of $0.3 million was recorded in the 2009 second quarter. The benefit was the result of a $3.7 million reduction in an environmental reserve related to a closed manufacturing site in Europe. This benefit was largely offset by restructuring charges recorded during the quarter, primarily related to manufacturing rationalization activities in Europe. Restructuring charges were $9.0 million in the second quarter of 2008.
During the 2009 second quarter, the company initiated an additional step in its ongoing European restructuring. Manufacturing operations in Nules, Spain, were discontinued in June and are being consolidated into the company’s existing operations in Almazora, Spain. This initiative is expected to reduce annual operating costs by approximately $2.5 million.
End-market demand is expected to remain flat from the second quarter to the third quarter of 2009, reflecting reduced global economic activity and continued effects from tight credit markets. In addition, the company’s third quarter results generally reflect seasonally reduced demand from European markets. Customer inventory destocking is expected to continue to decline during the next several months, which could result in some benefit to sales levels. However, the timing and magnitude of this benefit is difficult to forecast. The company plans to continue cost and expense reduction efforts and liquidity improvement initiatives to mitigate the effects of reduced customer demand. Due to limited visibility to customer orders and uncertainty in global markets, the company will not provide specific sales and earnings estimates for the third quarter.
For additional details, including an archive of a recent conference call discussing these results, visit www.ferro.com.