Ferro Reports 2009 Full-Year and Fourth-Quarter Results

Ferro Corporation (NYSE: FOE) (the “Company”) announced net sales of $1,658 million for the year ended December 31, 2009, a decline of 26 percent from net sales of $2,245 million in 2008.

Loss from continuing operations for 2009 was $40 million, or $0.85 per diluted share, compared with a loss of $53 million, or $1.28 per diluted share, in 2008. The improvement was primarily the result of lower impairment and restructuring charges, combined with reduced selling, general and administrative expenses. These improvements were partially offset by reduced gross profit resulting from lower sales and increased interest expense. In 2009, the operating loss included net pre-tax charges of $40 million. These charges included impairment charges of $8 million for goodwill associated with the Company’s pharmaceutical business and restructuring charges of $11 million. The Company recorded additional pre-tax charges of $21 million primarily due to manufacturing rationalization and other expense reduction activities and the amortization of fees related to the Company’s credit facilities. In 2008, the loss from continuing operations included $116 million in charges primarily related to impairment charges, restructuring charges and a loss on the extinguishment of debt.

2009 Full-Year Results

Net sales declined due to the global economic downturn and the resulting decline in customer demand. Sales were most affected in the United States and Europe, where credit markets were difficult and consumer demand was the most affected. Compared to 2008, demand declined sharply, particularly in the first half of the year, in economically cyclical markets including automobiles, construction and appliances. For the year, lower sales volume accounted for approximately 22 percentage points of the overall sales decline. Changes in product mix and prices accounted for approximately 2.6 percentage points of the sales decline and changes in foreign currency exchange rates contributed an additional 1.5 percentage point decline. Reduced sales of precious metals, which included reductions in volume and changes in prices, contributed approximately 3.1 percentage points of the sales decline. Sales declined in all segments and all regions compared with the prior-year period.

Net sales increased, sequentially, in each quarter during 2009 as customers’ inventory destocking moderated and end-market demand showed modest improvement. Improved demand in Asia and Latin America was a leading contributor to the Company’s sequential sales increase.

Gross profit percentage increased to 19.0 percent of net sales for the year, compared with 18.0 percent of sales in 2008. This increase was achieved despite lower sales volumes as a result of plant closures, staffing reductions and other cost-reductions activities. In 2009, gross profit was reduced by $5.0 million, primarily as a result of charges for accelerated depreciation and other costs of the Company’s manufacturing rationalization programs. During 2008, gross profit was reduced by $3.1 million in charges resulting from asset write-offs and other costs associated with manufacturing rationalization.

Selling, general and administrative (SG&A) expense declined by $25 million in 2009, to $272 million, from $297 million in 2008. SG&A expense as a percent of sales increased to 16.4 percent in 2009, from 13.2 percent during 2008, due to lower sales. The reduction in SG&A expense was due to actions that included staffing reductions, curtailment of discretionary spending and unpaid furloughs for certain salaried employees. Partially offsetting these declines was an increase of $20.1 million in pension expense. Included in SG&A expense during 2009 were $12.2 million in charges primarily related to employee severance and other costs of expense reduction initiatives. SG&A expense in 2008 included net charges of $3.9 million related to corporate development activities, asset write-offs and employee severance expenses, partially offset by benefits from litigation settlements and insurance proceeds.

Total segment income for 2009 was $105 million, compared with $144 million during 2008. Total segment income improved from $22 million in the first six months of 2009 to $83 million in the second half of the year as sales began to improve sequentially and cost reductions yielded benefits. For the full year, total segment income as a percent of sales was unchanged from 2008 at 6.4 percent. Segment income declined in Color and Glass Performance Materials, Electronic Materials and Performance Coatings due to declines in gross profit resulting from lower sales volume. The lower gross profit was partially offset by reductions in SG&A expense resulting from staffing reductions and expense reduction initiatives. Segment income declined in Pharmaceuticals primarily as a result of reduced demand for high-value products that caused a change in product mix. Segment income increased in Specialty Plastics and Polymer Additives as reductions in SG&A expense more than offset declines in gross profit driven by lower sales.

An impairment charge of $8 million was recorded in 2009 related to the Company’s Pharmaceuticals business. The impairment was triggered by changes made to the assumptions used to determine valuation under the market approach. In 2008, the Company recorded an $80 million charge for impairment of goodwill and other long-lived assets. In 2008, goodwill was impaired related to the tile coatings business within the Performance Coatings segment, and goodwill and property, plant and equipment assets were impaired in the Specialty Plastics segment.

Restructuring charges declined to $11 million in 2009, from $26 million in 2008. The restructuring charges in both years were primarily related to manufacturing rationalization activities in the Company’s European manufacturing operations and other cost-reduction actions.

Interest expense increased to $64 million in 2009, from $51 million in the prior year. The 2009 interest expense included a $3.2 million write-off of unamortized fees related to the Company’s credit facilities that was triggered by repayments of debt. The 2009 interest expense also was higher than in 2008 due to increased interest rates, primarily resulting from an amendment to Ferro’s credit facilities, which was completed in March 2009. In addition, average borrowing levels increased during 2009, driven largely by a requirement to provide cash on deposit as collateral for precious metals leases.

Total debt on December 31, 2009 was $423 million. In addition, the Company had $10 million in net proceeds from international programs to sell receivables. At the end of 2008, Ferro recorded balance sheet debt of $570 million and had year-end 2008 net proceeds of $17 million from international receivables factoring programs. Total borrowings, including balance sheet debt and proceeds from receivables programs, declined by $154 million during 2009. Debt declined primarily due to an equity offering in November 2009. The net proceeds of the offering were used to reduce debt and will fund future restructuring and strategic growth programs.

2009 Fourth-Quarter Results

Net sales for the three months ended December 31, 2009 were $458 million, a 6 percent increase over net sales of $432 million in the fourth quarter of 2008. Sales increased in the Electronic Materials, Color and Glass Performance Materials and Performance Coatings segments. Partially offsetting these increases were sales declines in the Polymer Additives, Specialty Plastics and Pharmaceuticals segments. Changes in product mix and price contributed approximately 2.8 percentage points of the year-over-year change in sales, sales volume accounted for approximately 2.0 percentage points, and changes in foreign currency exchange rates contributed 1.2 percentage points to the sales change.

Net sales increased, sequentially, by $16 million, or 4 percent, in the fourth quarter of 2009 compared with the third quarter. The growth continued a pattern of modest sequential sales increases that were recorded for the final three quarters of 2009. The sequential growth was driven by increased product sales in the Company’s Electronic Materials, Performance Coatings and Pharmaceuticals segments. The sales increase was partially offset by lower sales in the Polymer Additives segment.

Gross profit percentage during the 2009 fourth quarter increased to 22.0 percent of sales, compared with 15.1 percent of sales in the fourth quarter of 2008. The increase was the result of actions taken throughout 2009 to respond to reduced customer demand associated with the worldwide economic downturn. The actions included staffing reductions and production schedule adjustments. In addition, plant shutdowns and further reductions in manufacturing staffing to reduce costs and improve manufacturing efficiency were initiated in connection with the Company’s worldwide manufacturing rationalization projects. During the fourth quarter of 2009, gross profit was reduced by charges of $1.1 million, primarily related to manufacturing rationalization activities.

Selling, general and administrative expense for the 2009 fourth quarter was $76 million, including $5.3 million in charges primarily related to severance cost and other charges that are expected to result in reduced SG&A expense in future periods. The fourth quarter 2009 SG&A expense also included increased pension expense of approximately $5.7 million compared with the prior-year period. In addition, during the fourth quarter, the Company recorded $6.0 million in incentive compensation expense. This was the only incentive compensation expense recorded for 2009.

Restructuring charges were $7.2 million in the 2009 fourth quarter, an increase from $3.7 million in the fourth quarter of 2008. The restructuring charges were primarily related to our manufacturing rationalization actions and other cost and expense reduction initiatives.