Third quarter income from continuing operations attributable to common shareholders was $0.17 per diluted share compared with a loss of $0.03 per diluted share in the third quarter of 2014. On an adjusted basis, earnings per diluted share were $0.24, versus $0.16 for the third quarter of 2014. The results in both years include charges relating to restructuring activities and other one-time items, and in the third quarter of 2014, costs associated with the refinancing of the Company’s debt.
Third quarter 2015 net sales were $279 million, compared with $276 million in the third quarter of 2014. Value-added sales, which exclude precious metal sales, were $271 million in the third quarter of 2015, an increase of 2% versus the same period last year. The increase in value-added sales was primarily driven by sales from the recently acquired Vetriceramici and Nubiola businesses, which contributed approximately $45 million in sales. The sales contribution from the acquisitions was largely offset by the adverse impact of foreign currency translation.
On a constant currency basis, adjusting for the impact of changes in foreign currency, value-added sales increased by 18%, with sales from the recent acquisitions accounting for much of the increase. Excluding the contribution from acquisitions, value-added sales for Ferro’s legacy business declined by 2%, due to lower sales in the Performance Coatings segment. On a constant currency basis, gross profit improved by approximately $13 million with both the legacy business and the acquisitions contributing to the growth.
Adjusted earnings for the third quarter of 2015 benefited from increased sales and improved gross profit, lower selling, general and administrative (“SG&A”) expenses and lower interest expense.
Peter Thomas, Chairman, President and Chief Executive Officer, said “Results for the quarter were generally in line with our expectations, despite difficult economic conditions and continuing challenges in certain markets where we do business. We continue to hold the line on costs while pursuing both organic and inorganic growth opportunities, resulting in a 50% increase in adjusted diluted earnings per share for the third quarter.
“Looking ahead to the fourth quarter, we anticipate a continuation of the recent challenging economic conditions. In addition, we expect customers in certain regions will reduce manufacturing activity near the end of the year and reduce their inventory levels. Given this outlook, we expect the legacy business, on a constant currency basis, will be down 1% - 2% in the fourth quarter, primarily due to lower sales in the Performance Coatings segment, driven by weak demand in our legacy tile coatings business. We expect this modest decline to be offset by $40 million - $45 million in sales from our recent acquisitions of Vetriceramici and Nubiola. Given the difficult business conditions anticipated in the fourth quarter, we expect full-year adjusted diluted EPS will be at the low-to-mid point of the range of our prior guidance of $0.82 - $0.87.”
Ferro reported net sales of $279 million in the third quarter of 2015, compared with net sales of $276 million in the third quarter of 2014. Value-added sales, which exclude precious metal sales, were $271 million in the third quarter of 2015 versus $265 million in the third quarter of the prior year. Consolidated value-added sales increased by 18%, on a constant currency basis, as a result of contributions from the Vetriceramici and Nubiola acquisitions and organic growth in the legacy Pigments, Powders and Oxides and Performance Colors and Glass segments. Constant currency organic growth in these two segments was offset by continued weakness in the tile coatings business within the Performance Coatings segment.
Vetriceramici, a producer of coatings for high-end ceramic tile, which Ferro acquired in December 2014, contributed $15 million to value-added sales growth in the quarter, while Nubiola, a producer of pigments for the coatings and plastics industries, which was acquired in July 2015, contributed $30 million. Almost all of Vetriceramici’s sales are reported in the Performance Coatings segment; Nubiola’s sales are reported in the Pigments, Powders and Oxides segment. Excluding the contribution from acquisitions, value-added sales in Ferro’s legacy business declined by 2%, due to lower sales in the Performance Coatings segment.
Gross profit was $77 million for the quarter compared with $73 million for the third quarter of 2014. The adjusted gross profit margin, as a percent of value-added sales, for the third quarter of 2015 was 28.3%, compared with 27.5% in the prior-year period. Included in the third quarter of 2015 is a nonrecurring purchase accounting adjustment of approximate $6 million related to the acquired Nubiola inventory. Excluding this item, the adjusted gross profit margin was approximately 30.5%.
SG&A expenses were $48 million in the third quarter of 2015 compared with $52 million in the prior-year quarter. Excluding special items in both periods, adjusted SG&A expenses declined by $4 million to $44 million from $48 million. On a constant currency basis, adjusted SG&A expenses increased approximately $2 million to $44 million in the third quarter of 2015, compared with $42 million in the same period last year. Included in the third quarter of 2015 is approximately $7 million of incremental SG&A expenses associated with the Vetriceramici and Nubiola acquisitions. On a constant currency basis, and excluding SG&A expenses associated with acquisitions, adjusted SG&A for the legacy business declined by approximately $6 million. This reduction in SG&A expenses was driven primarily by lower incentive compensation expenses.
Income from continuing operations for the quarter ended September 30, 2015, was $16 million, or $0.17 per diluted share, compared with a loss of $3 million, or a loss of $0.03 per diluted share, in the third quarter of 2014. Adjusted income attributable to common shareholders was $21 million, or $0.24 per diluted share, compared with $14 million, or $0.16 per diluted share, in the prior-year quarter.
The effective tax rate in the third quarter of 2015 was 19.6%. On an adjusted basis, the effective tax rate for the third quarter of 2015 was 21.2%, compared with 36.0% in the same period last year. The reported and adjusted effective tax rates for the third quarter of 2015 include certain discrete tax benefits. Excluding these discrete items, the normalized, effective tax rates would be in the range of 27% - 28%.
Adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) were $47 million, compared with $34 million in the same period last year. Adjusted EBITDA margins, as a percentage of value-added sales, were 17.3% in the third quarter of 2015 and 12.7% in the same period last year. The adjusted return on invested capital (“ROIC”), excluding recent acquisitions, was 12.8% for the twelve-month period ending on September 30, 2015, compared with 11.1% for the year ending December 31, 2014.
During the quarter, the Company purchased $7 million in shares of its common stock, or about 580,000 shares. Since the quarter ended September 30, 2015, the Company has repurchased an additional $10 million in shares of common stock, or about an additional 880,000 shares and has approximately $8 million remaining on the current stock repurchase authorization, which was approved during the third quarter of 2015. The Company’s Board of Directors has approved a follow-on share repurchase program under which the Company is authorized to repurchase up to an additional $25 million of the Company’s outstanding shares of commons stock on the open market, including through a Rule 10b5-1 plan, in privately negotiated transactions, or otherwise.
The Company anticipates global economic conditions will remain challenging, particularly in certain countries where Ferro does business, including Indonesia, China, Brazil, Russia, and Ukraine. Customers in certain regions are also expected to reduce manufacturing activity in the fourth quarter and reduce inventory levels to manage cash requirements. In addition, the Company expects demand for tile products, more broadly, to continue to be soft, including in Europe and the Middle East and North Africa (“MENA”) region.
Given this outlook, the Company is reducing its sales expectation for the remainder of the year but is maintaining its prior full-year adjusted diluted EPS guidance of $0.82 - $0.87.
Ferro expects value-added sales in the fourth quarter to be approximately $255 million - $265 million. Value-added sales, on a constant currency basis, are projected to decline by 1% - 2% for the legacy business, while acquisitions should add $40 million - $45 million in value-added sales. For the fourth quarter of 2015, gross profit, as a percent of value-added sales, is expected to be in the range of 28.5% - 29.0%, and operating profit is expected to be in the range of 10.0% - 10.5% of value-added sales. The Company anticipates the full-year effective tax rate will be approximately 25%.
For the year, the Company expects cash flow from continuing operations, excluding M&A activity and the stock repurchase program, to be in the range of $40 million - $50 million.
On September 3, 2015, the Company announced that it had signed a definitive agreement to acquire 100% of the equity of Egypt-based tile coatings manufacturer Al Salomi for Frits and Glazes on a cash-free and debt-free basis, for approximately $39 million in cash, subject to working capital and other customary adjustments. The transaction is expected to close in the fourth quarter, subject to customary closing conditions.
A recording of the announcement conference call will be available for replay through November 30, 2015 at www.ferro.com.