Form 8-K FERRO CORP For: Aug 04

FERRO REPORTS RESILIENT SECOND QUARTER 2020 PERFORMANCE

Innovation and optimization drive year-over-year Gross Profit Margin expansion

Second Quarter Continuing Operations*  

  Year to Date Continuing Operations*



Net Sales declined 21.5% to $204.8M, or 19.6% on a constant currency basis



Net Sales declined 12.8% to $457.1M, or 10.9% on a constant currency basis 

   

Gross Profit declined 19.4% to $63.7M, Gross Profit Margin improved 80 bps to 31.1%



Gross Profit declined 8.0% to $144.5M, Gross Profit Margin improved 170 bps to 31.6%

   

Adjusted Gross Profit Margin improved 30 bps to 32.1%



Adjusted Gross Profit Margin improved 130 bps to 32.3%

   

GAAP diluted EPS of $(0.03), Adjusted diluted EPS of $0.12



GAAP diluted EPS of $0.16, Adjusted diluted EPS of $0.37

 

Net Loss1 declined 151.0% to $5.5M, Adjusted EBITDA declined 29.5% to $30.9M



Net Income1 declined 56.8% to $10.6M, Adjusted EBITDA declined 8.5% to $71.6M

 

Adjusted EBITDA Margin declined to 15.1%



Adjusted EBITDA Margin improved 80 bps to 15.7%





Ferro demonstrated the resilience of its portfolio in the second quarter, increasing gross profit margins despite the challenging macro-economic circumstances.  The breadth of our product lines mitigated the impact of weakness in certain sectors, as many of our products serve critical industries that continued to operate during the quarter. Adjusted Gross Profit Margin improved to 32.1 percent, even with sales volumes down 20 percent. Our business proposition of high-margin, essential products, supplemented by innovation and optimization initiatives showed its potential.

Our second quarter performance, although down from last year, was in line with our expectations and, as we moved through the quarter, established what we see as a trend of meaningful improvement from the macro-economic low point. Order patterns in the later part of the quarter showed our customers beginning to have more visibility into their business needs for the second half of 2020, and we now expect the third quarter to track in the same favorable direction that we experienced coming out of the second quarter.  In addition, based on what we have seen so far, we are cautiously optimistic that this positive momentum will continue into the fourth quarter. Although the timing and strength of an economic recovery are unknown, we see signs that our continuing operations will produce sequential quarterly improvement.  However, visibility through the second half of the year remains somewhat clouded to publish a guidance range for the remainder of the year.

Ferro’s associates around the globe remain committed to delivering our essential products and services to critical industries, even as they manage through the challenges presented by the COVID-19 pandemic.  They also are advancing on our strategic priorities of innovation and optimization and the sale of our Tile Coatings Systems business, which we continue to expect to complete in the second half of 2020. I am proud of their dedication and professionalism and we continue to make their health and safety a top priority.

Peter Thomas
Chairman, President and CEO, Ferro Corporation







Key Results from Continuing Operations*    (amounts in millions, except EPS)

Sales and Gross Profits

Q2 2020

% Change

2020 YTD

% Change

Net Sales

$

204,801

-21.5%

$

457,127

-12.8%

Net Sales (constant currency)

204,801

-19.6%

457,127

-10.9%

Gross Profit (GAAP)

63,744

-19.4%

144,482

-8.0%

Gross Profit Margin

31.1%

80 bps

31.6%

170 bps

Adjusted Gross Profit (constant currency)

65,676

-19.0%

147,592

-7.1%

Adjusted Gross Profit Margin

32.1%

30 bps

32.3%

130 bps

Net Income/(Loss), EBITDA and EPS

Q2 2020

% Change

2020 YTD

% Change

Net Income/(Loss) 1

$

(5,540)

-151.0%

$

10,583

-56.8%

Adjusted EBITDA

30,896

-29.5%

71,619

-8.5%

Adjusted EBITDA Margin

15.1%

(170) bps

15.7%

80 bps

GAAP diluted EPS

$

(0.03)

-123.1%

$

0.16

-30.4%

Adjusted EPS

0.12

-47.8%

0.37

-2.6%

Second Quarter 2020 Highlights

 Segment Results Continuing Operations * (amounts in millions, except EPS)

Functional Coatings

Q2 2020

% Change

2020 YTD

% Change

Net Sales

$

131,672

-19.6%

$

287,107

-13.2%

Net Sales (Constant Currency)

131,672

-17.3%

287,107

-11.0%

Gross Profit (GAAP)

36,119

-26.7%

83,936

-13.9%

Gross Profit Margin

27.4%

(270) bps

29.2%

(30) bps

Adjusted Gross Profit (Constant Currency)

37,847

-23.6%

86,722

-10.6%

Adj. Gross Profit Margin (Constant Currency)

28.7%

(240) bps

30.2%

10 bps

Color Solutions

Q2 2020

% Change

2020 YTD

% Change

Net Sales

$

73,129

-24.8%

$

170,020

-12.2%

Net Sales (Constant Currency)

73,129

-23.4%

170,020

-10.7%

Gross Profit (GAAP)

26,985

-9.1%

60,772

4.6%

Gross Profit Margin

36.9%

640 bps

35.7%

570 bps

Adjusted Gross Profit (Constant Currency)

26,985

-11.2%

60,795

2.1%

Adj. Gross Profit Margin (Constant Currency)

36.9%

510  bps

35.8%

450 bps



Currency Exposure 2019 Weighting

FX sensitivity

EUR – Euro

35% to 40%

% Change

Operating Profit

CNY -Yuan Renminbi

6% to 8%

+1% all FX change

~$0.6 million to ~$0.8 million

MXN – Mexican Peso

2% to 4%

+1% Euro change

~$0.4 million to ~$0.6 million



·

other factors affecting the Company’s business that are beyond its control, including disasters, pandemics (such as COVID-19), accidents and governmental actions;

·

Ferro’s ability to successfully complete the sale of its Tile Coatings Systems business, including obtaining the requisite regulatory approvals;

·

demand in the industries into which Ferro sells its products may be unpredictable, cyclical, or heavily influenced by consumer spending;

·

the effectiveness of the Company’s efforts to improve operating margins through sales growth, price increases, productivity gains, and improved purchasing techniques;

·

currency conversion rates and economic, social, political, and regulatory conditions in the U.S. and around the world;

·

the availability of reliable sources of energy and raw materials at a reasonable cost;

·

challenges associated with a multi-national company such as Ferro competing lawfully with local competitors in certain regions of the world;

·

Ferro’s ability to successfully implement and/or administer its optimization initiatives, including its investment and restructuring programs, and to produce the desired results;

·

Ferro’s ability to successfully introduce new products and services or enter into new growth markets;

·

Ferro’s ability to identify suitable acquisition candidates, complete acquisitions, effectively integrate the acquired businesses and achieve the expected synergies, as well as the acquisitions being accretive and Ferro achieving the expected returns on invested capital;

·

the impact of damage to, or the interruption, failure or compromise of the Company’s information systems due to events including but not limited to aging information systems infrastructure, computer viruses and cyber security breaches;

·

the implementation and operations of business information systems and processes;

·

increasingly aggressive domestic and foreign governmental regulation of hazardous and other materials and regulations affecting health, safety and the environment;

·

our ability to address safety, human health, social, product liability and environmental risks associated with our current and historical products, product life cycles and production processes;

·

competitive factors, including intense price competition;

·

increased, and possibly inconsistent, domestic and foreign regulations of privacy and data security;

·

changes in U.S. and other governments’ trade policies;

·

restrictive covenants in the Company’s credit facilities could affect its strategic initiatives and liquidity;

·

Ferro’s ability to access capital markets, borrowings or financial transactions; sale of products and materials into highly regulated industries;

·

limited or no redundancy for certain of the Company’s manufacturing facilities and possible interruption of operations at those facilities;

·

our ability to attract and retain key personnel;

·

exposure to lawsuits, governmental investigations and proceedings relating to current and historical operations and products;

·

Ferro’s ability to protect its intellectual property, including trade secrets, or to successfully resolve claims of infringement brought against it;

·

Ferro’s multi-jurisdictional tax structure and its ability to reduce its effective tax rate, including the impact of the Company’s performance on its ability to utilize significant deferred tax assets;

·

borrowing costs that could be affected adversely by interest rate increases;

·

management of Ferro’s general and administrative expenses;

·

the impact of the Tax Cuts and Jobs Act on our business;

·

stringent labor and employment laws and relationships with the Company’s employees;

·

the impact of requirements to fund employee benefit costs, especially post-retirement costs;

·

implementation of business processes and information systems, including the outsourcing of functions to third parties;

·

risks associated with the manufacture and sale of material into industries making products for sensitive applications;

·

risks and uncertainties associated with intangible assets;

·

the effectiveness of strategies to increase Ferro’s return on invested capital, internal rate of return and other return metrics, and the short-term impact that acquisitions may have on such metrics;

·

liens on the Company’s assets by its lenders affect its ability to dispose of property and businesses; and

·

amount and timing of any repurchase of Ferro’s common stock.





(In thousands, except per share amounts)

Three Months Ended

Six Months Ended



June 30,

June 30,



2020

2019

2020

2019



Net sales

$

$

$

$

Cost of sales

Gross profit

Selling, general and administrative expenses

Restructuring and impairment charges

Other expense (income):

Interest expense

Interest earned

Foreign currency losses (gains), net

Miscellaneous expense (income), net

Income (loss) before income taxes

Income tax expense

Income (loss) from continuing operations

Income (loss) from discontinued operations, net of income taxes

Net income (loss)

Less: Net income attributable to noncontrolling interests

Net income (loss) attributable to Ferro Corporation common shareholders

$

$

$

$

Earnings (loss) per share attributable to Ferro Corporation common shareholders:

Basic earnings (loss):

Continuing operations

Discontinued operations

 -



Diluted earnings (loss):

Continuing operations

Discontinued operations

 -



Shares outstanding:

Weighted-average basic shares

Weighted-average diluted shares

End-of-period basic shares





(Dollars in thousands)

Three Months Ended

Six Months Ended



June 30,

June 30,



2020

2019

2020

2019

Segment Net Sales

Functional Coatings

$

$

$

$

Color Solutions

Total segment net sales

$

$

$

$



Segment Gross Profit

Functional Coatings

$

$

$

$

Color Solutions

Other costs of sales

Total gross profit

$

$

$

$



Selling, general and administrative expenses

Strategic services

$

$

$

$

Functional services

Incentive compensation

Stock-based compensation

Total selling, general and administrative expenses

$

$

$

$







(Dollars in thousands)

June 30,

December 31,



2020

2019

ASSETS

Current assets

Cash and cash equivalents

$

$

Accounts receivable, net

Inventories

Other receivables

Other current assets

Current assets held-for-sale

Total current assets

Other assets

Property, plant and equipment, net

Goodwill

Intangible assets, net

Deferred income taxes

Operating leased assets

Other non-current assets

Non-current assets held-for-sale

Total assets

$

$



LIABILITIES AND EQUITY

Current liabilities

Loans payable and current portion of long-term debt

$

$

Accounts payable

Accrued payrolls

Accrued expenses and other current liabilities

Current liabilities held-for-sale

Total current liabilities

Other liabilities

Long-term debt, less current portion

Postretirement and pension liabilities

Operating leased non-current liabilities

Other non-current liabilities

Non-current liabilities held-for-sale

Total liabilities

Equity

Total Ferro Corporation shareholders’ equity

Noncontrolling interests

Total liabilities and equity

$

$





(Dollars in thousands)

Three Months Ended

Six Months Ended



June 30,

June 30,



2020

2019

2020

2019

Cash flows from operating activities

Net income

$

$

$

$

Loss on sale of assets

Depreciation and amortization

Interest amortization

Restructuring and impairment

Accounts receivable

Inventories

Accounts payable

Other current assets and liabilities, net

Other adjustments, net

Net cash used in operating activities

Cash flows from investing activities

Capital expenditures for property, plant and equipment and other long-lived assets

Collections of financing receivables

Business acquisitions, net of cash acquired

 -

 -

 -

Other investing activities

Net cash provided by investing activities

Cash flows from financing activities

Net borrowings under loans payable

Principal payments on term loan facility - Amended Credit Facility

Proceeds from revolving credit facility - Amended Credit Facility

Principal payments on revolving credit facility - Amended Credit Facility

Purchase of treasury stock

 -

 -

 -

Other financing activities

Net cash provided by (used in) financing activities

Effect of exchange rate changes on cash and cash equivalents

Increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Less: Cash and cash equivalents of discontinued operations at end of period

Cash and cash equivalents of continuing operations at end of period

$

$

$

$



Cash paid during the period for:

Interest

$

$

$

$

Income taxes

$

$

$

$







(Dollars in thousands, except per share amounts)

Cost of sales

Selling general and administrative expenses

Restructuring and impairment charges

Other expense, net

Income tax expense6

Net income attributable to common shareholders

Diluted earnings per share





2020



As reported

$

$

$

$

$

$

$

Adjustments:

Restructuring

 -

 -

 -

 -

Acquisition related costs1

 -

 -

 -

 -

Costs related to optimization projects3

 -

 -

 -

Costs related to divested businesses and assets

 -

 -

 -

Tax on adjustments

 -

 -

 -

 -

Total adjustments7

As adjusted

$

$

$

 -

$

$

$

$







2019



As reported

$

$

$

$

$

$

$

Adjustments:

Restructuring

 -

 -

 -

 -

Acquisition related costs2

 -

 -

Costs related to optimization projects4

 -

 -

 -

Costs related to divested businesses and assets

 -

 -

 -

     Other5

 -

 -

 -

 -

Tax on adjustments

 -

 -

 -

 -

Total adjustments7

As adjusted

$

$

$

 -

$

$

$

I was l

(1)

The adjustments to “Selling general and administrative expenses” primarily include legal, professional and other expenses related to acquisition costs.

(2)

The adjustments to “Cost of Sales” primarily include environmental costs related to our recent acquisitions. The adjustments to “Selling general and administrative expenses” primarily include legal, professional and other expenses related to acquisition costs. The adjustments to “Other expense, net” relate to purchase price adjustments related to an acquisition that is beyond the measurement period.

(3)

Costs related to Optimization projects of $5.2 million include costs associated with our Americas manufacturing optimization initiative of $2.7 million, which is comprised of costs for process development and production testing, professional fees for legal and tax services, supplies and equipment commissioning, and utility setup and testing. The remaining $2.5 million of costs relate to global optimization projects and discrete projects at our previous acquisitions.

(4)

Costs related to Optimization projects of $6.0 million include costs associated with our Americas manufacturing optimization initiative of $5.0 million, which is comprised of costs for process development and production testing, professional fees for legal and tax services, supplies and equipment commissioning, and utility setup and testing. The remaining $1.0 million of costs relate to global optimization projects and discrete projects at our previous acquisitions.

(5)

The adjustments to “Other expense, net” relate to gains and losses on asset sales.    

(6)

Income tax expense reflects the reported expense, adjusted for adjustments being tax effected at the respective statutory rate where the item originated.

(7)

Due to rounding, total earnings per share related to adjustments does not always add to the total adjusted earnings per share.





(Dollars in thousands, except per share amounts)

Cost of sales

Selling general and administrative expenses

Restructuring and impairment charges

Other expense, net

Income tax expense6

Net income  attributable to common shareholders

Diluted earnings per share





2020



As reported

$

$

$

$

$

$

$

Adjustments:

Restructuring

 -

 -

 -

 -

Acquisition related costs1

 -

 -

 -

Costs related to optimization projects3

 -

 -

 -

Costs related to divested businesses and assets

 -

 -

 -

Tax on adjustments

 -

 -

 -

 -

Total adjustments7

As adjusted

$

$

$

 -

$

$

$

$







2019



As reported

$

$

$

$

$

$

$

Adjustments:

Restructuring

 -

 -

 -

 -

Acquisition related costs2