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Ferro Moves Forward

With legacy financial issues mostly resolved, firm focuses on growing businesses

by Marc S. Reisch
February 19, 2007 | A version of this story appeared in Volume 85, Issue 8

Smooth Operator
Credit: Ferro
Ferro uses a three-roll mill to manufacture silver paste that is used in solar cells, flat-panel displays, and hybrid circuits.
Credit: Ferro
Ferro uses a three-roll mill to manufacture silver paste that is used in solar cells, flat-panel displays, and hybrid circuits.

IN 2005, specialty chemical maker Ferro was dogged by accounting and leadership problems and "could have ended up on the slag heap," admits James F. Kirsch, its president and chief executive officer for the past 15 months. Today, he says, recovery is well under way.

Thanks to the resolution of many of the financial issues that have plagued the firm since 2004, Kirsch says, Ferro is heading for revitalization with a newly restructured organization, operational revamps, and an internal culture based on accountability. The company has already reported improvements. Sales for the first nine months of 2006 were $1.5 billion, up 8.4% compared with the same period a year earlier. And net income rose 57% to nearly $24 million.

Yet the company still has many challenges ahead. Ferro had nearly $685 million in debt at the end of September 2006, up $130 million from the end of 2005. When Ferro announces its 2006 results on March 1, it expects to report fourth-quarter sales of about $500 million, a figure that will bring sales for the year to about $2 billion. But because of restructuring charges, it forecasts a net loss of about $9 million for the quarter, which will wipe out about one-third of its earnings for the first three quarters of the year.

Ferro's troubles began in July 2004 when it delayed reporting second-quarter results and said that profit in the quarter would be significantly lower than expected. An internal investigation had found questionable accounting entries by an employee in the firm's polymer additives business that inflated reported results. By late 2005, internal and external investigations found that all the irregular entries were made by a single employee in the business. The probes also found that the entries were made without the knowledge or involvement of senior management.

The investigation resulted in a cascading series of earnings filing delays and restatements of company financial results going back to 2003. Ultimately, the accounting irregularities forced the firm to lower earnings for its polymer additives business by $10.1 million. The employee responsible for the misstatements was tried and convicted of securities fraud.

In April 2006, the failure to file timely financial statements led one unidentified holder of Ferro debt to declare the firm in default of loan covenants and give it 90 days to correct the situation. KPMG, Ferro's independent accounting firm, warned that "the company faces certain liquidity uncertainties that raise substantial doubts about [Ferro's] ability to continue as a going concern." The Cleveland-based firm quickly arranged alternative financing in case any lenders called in their loans. It finally filed all outstanding financial statements with the Securities & Exchange Commission in mid-December 2006.

Kirsch, 49, joined Ferro as its president and chief operating officer in October 2004, just a few months after the accounting problems began. Earlier in his career, he had spent 19 years at Dow Chemical, where his jobs included global business director for propylene oxide and derivatives and global vice president of electrochemicals. After leaving Dow, he had been president and director of fuel-cell maker Ballard Generation Systems. Kirsch came to Ferro after serving as president of Premix Inc. and Quantum Composites, manufacturers of thermoset molding compounds.

In November 2005, the new president was thrust into the midst of Ferro's efforts to extract itself from its financial difficulties when then-chairman and CEO Hector R. Ortino, 63, died suddenly of natural causes. Kirsch was named CEO and joined the board of directors.

Credit: Ferro
Credit: Ferro

KIRSCH SAYS he instituted a plan to turn the company around as soon as he became CEO. He realized the job would not be easy. "I think that when a firm has gone through what Ferro has gone through for the last several years, it is very difficult to maintain an upbeat winning attitude and deliver excellent results," he tells C&EN.

Elements of the plan are already in place. In addition to filing all outstanding financial reports with SEC, Ferro has started to restructure production in its European color and glass operations; it plans to eliminate redundant manufacturing sites by 2009 and save about $50 million a year. The firm will save another $8 million a year when it shuts down its Niagara Falls, N.Y., electronic materials plant at the end of this year. Together, the actions will eliminate up to 750 positions in a workforce that today stands at about 6,800.

New leaders are in place at Ferro's three major businesses: electronic materials, organic specialties, and inorganic specialties. The first business includes dielectric, solar, surface finishing, and metal-core substrate materials. The second includes polymer additives, pharmaceutical active ingredients, electrolytes, and specialty plastic compounds. And the third, going back to the company's founding in 1919, includes tile glazes, porcelain enamels, glass coatings, and pigments.

The firm's business leaders are now committed to bringing profit margins, which were under 5% in 2005, up to the double-digit range, Kirsch says. As a consequence of changes now under way, "I actually think morale is terrific," he says.

Kirsch says prospects are good for Ferro's inorganic specialties and electronic materials businesses. For instance, the firm is building a 20,000-metric-ton-per-year tile colors plant at its site in Castellon, Spain. And it has introduced new products in the growing electronics sector, including photovoltaic materials that reduce silicon requirements in solar cells.

Still to be ironed out is the company's standing with credit rating agencies. Wesley E. Chinn, director of Standard & Poor's Ratings Services, warns that Ferro remains on S&P's credit watch "with negative implications" pending a meeting with the firm to discuss its financial status. "Clearly, they have made significant progress, but the bulk of our traditional analytical work is still under way," Chinn says.

And Ferro is reviewing the divestment of certain organic specialties businesses. It tried to sell its specialty plastics business to private equity investment firm Wind Point Partners late last year, but the deal fell through. The Pfanstiehl pharmaceutical active ingredients business, purchased in 2000, could be sold if Ferro finds the right buyer, Kirsch says. Pfanstiehl "is an example of a business that requires a lot of investment and has a longer time horizon" to realize returns, he observes.

Today, Ferro is a long way from the slag heap to which Kirsch once feared it was headed. He declines to predict how big the company will be five years from now. However, he is willing to say that Ferro will be "a very high quality, consistently profitable" business in five years' time.


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