UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

FERRO CORPORATION

(Exact name of registrant as specified in its charter)

Ohio		34-0217820
(State of Corporation)		(IRS Employer Identification No.)
1000 Lakeside Avenue		44114
Cleveland, OH		(Zip Code)
(Address of Principal executive offices)

216-641-8580
(Telephone Number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o NO þ

At October 31, 2008, there were 43,743,117 shares of Ferro Common Stock, par value $1.00, outstanding.

 

 

TABLE OF CONTENTS

PART I
Item 1 Financial Statements (Unaudited)		Page 3
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		Page 21
Item 3 Quantitative and Qualitative Disclosures about Market Risk		Page 33
Item 4 Controls and Procedures		Page 35
PART II
Item 1 Legal Proceedings		Page 36
Item 1A Risk Factors		Page 37
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds		Page 43
Item 3 Defaults Upon Senior Securities		Page 43
Item 4 Submission of Matters to a Vote of Security Holders		Page 43
Item 5 Other Information		Page 43
Item 6 Exhibits		Page 43
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Ferro Corporation and Consolidated Subsidiaries
Condensed Consolidated Statements of Income

		Three months ended								Nine months ended
		September 30,								September 30,
		2008				2007				2008				2007
		(Dollars in thousands, except per share amounts)
Net sales		$	608,588			$	550,701			$	1,866,240			$	1,634,064
Cost of sales			494,577				450,553				1,515,526				1,319,609
Gross profit			114,011				100,148				350,714				314,455
Selling, general and administrative expenses			78,274				71,069				238,122				234,212
Restructuring charges			9,042				5,826				22,280				7,689
Other expense (income):
Interest expense			12,497				14,488				39,740				46,220
Interest earned			(213	)			(271	)			(484	)			(1,425	)
Loss on extinguishment of debt			5,531				—				5,531				—
Foreign currency losses (gains), net			1,660				(10	)			769				924
Miscellaneous expense (income), net			727				(13	)			4,659				(399	)
Income before taxes			6,493				9,059				40,097				27,234
Income tax expense			1,605				3,472				16,688				10,814
Income from continuing operations			4,888				5,587				23,409				16,420
Loss from discontinued operations, net of tax			57				2				73				216
Net income			4,831				5,585				23,336				16,204
Dividends on preferred stock			225				252				675				797
Net income available to common shareholders		$	4,606			$	5,333			$	22,661			$	15,407
Per common share data
Basic earnings:
From continuing operations		$	0.11			$	0.12			$	0.53			$	0.36
From discontinued operations			0.00				0.00				0.00				0.00
		$	0.11			$	0.12			$	0.53			$	0.36
Diluted earnings:
From continuing operations		$	0.11			$	0.12			$	0.52			$	0.36
From discontinued operations			0.00				0.00				0.00				0.00
		$	0.11			$	0.12			$	0.52			$	0.36
Cash dividends declared		$	0.145			$	0.145			$	0.435			$	0.435

See accompanying notes to condensed consolidated financial statements.

Ferro Corporation and Consolidated Subsidiaries
Condensed Consolidated Balance Sheets

		September 30,				December 31,
		2008				2007
		(Dollars in thousands)
ASSETS
Current assets
Cash and cash equivalents		$	14,524			$	12,025
Accounts and trade notes receivable, net			253,183				245,369
Note receivable from Ferro Finance Corporation			29,708				29,577
Inventories			306,254				262,799
Deferred income taxes			23,549				15,764
Other receivables			52,500				33,419
Other current assets			7,412				8,239
Total current assets			687,130				607,192
Other assets
Property, plant and equipment, net			506,382				519,959
Goodwill			290,088				291,070
Amortizable intangible assets, net			11,899				9,071
Deferred income taxes			99,210				100,935
Other non-current assets			112,581				110,033
Total assets		$	1,707,290			$	1,638,260
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Loans payable and current portion of long-term debt		$	7,372			$	5,444
Accounts payable			263,189				269,591
Income taxes			23,926				—
Accrued payrolls			33,286				26,415
Accrued expenses and other current liabilities			90,235				108,882
Total current liabilities			418,008				410,332
Other liabilities
Long-term debt, less current portion			601,997				520,645
Postretirement and pension liabilities			130,151				140,988
Deferred income taxes			9,416				9,848
Other non-current liabilities			53,068				56,644
Total liabilities			1,212,640				1,138,457
Minority interests			10,318				9,896
Series A convertible preferred stock (approximates redemption value)			12,517				13,623
Shareholders’ equity
Common stock			52,323				52,323
Paid-in capital			167,105				166,391
Retained earnings			471,463				468,190
Accumulated other comprehensive loss			(18,827	)			(7,765	)
Common shares in treasury, at cost			(200,249	)			(202,855	)
Total shareholders’ equity			471,815				476,284
Total liabilities and shareholders’ equity		$	1,707,290			$	1,638,260

See accompanying notes to condensed consolidated financial statements.

Ferro Corporation and Consolidated Subsidiaries
Condensed Consolidated Statement of Shareholders’ Equity and Comprehensive Income

																						Accumulated				Total
		Common Shares																				Other				Share-
		in Treasury								Common				Paid-in				Retained				Comprehensive				holders’
		Shares				Amount				Stock				Capital				Earnings				Loss				Equity
		(In thousands)
Balances at December 31, 2007			8,753			$	(202,855	)		$	52,323			$	166,391			$	468,190			$	(7,765	)		$	476,284
Net income																			23,336								23,336
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments																							(15,014	)			(15,014	)
Postretirement benefit liability adjustments																							2,676				2,676
Raw material commodity swap adjustments																							454				454
Interest rate swap adjustments																							456				456
Total comprehensive income																											11,908
Cash dividends:
Common																			(18,883	)							(18,883	)
Preferred																			(675	)							(675	)
Income tax benefits															32												32
Stock-based compensation transactions			(173	)			2,606								682												3,288
Adjustment to initially apply FAS No. 158 as of January 1, 2008																			(505	)			366				(139	)
Balances at September 30, 2008			8,580			$	(200,249	)		$	52,323			$	167,105			$	471,463			$	(18,827	)		$	471,815

See accompanying notes to condensed consolidated financial statements.

Ferro Corporation and Consolidated Subsidiaries
Condensed Consolidated Statements of Cash Flows

		Nine months ended
		September 30,
		2008				2007
		(Dollars in thousands)
Cash flows from operating activities
Net income		$	23,336			$	16,204
Depreciation and amortization			57,770				63,825
Precious metals deposits			—				70,073
Accounts and trade notes receivable, inventories, and accounts payable			(66,426	)			13,696
Note receivable from Ferro Finance Corporation			(131	)			(6,804	)
Other changes in current assets and liabilities, net			(3,106	)			(27,964	)
Other adjustments, net			(9,532	)			(7,701	)
Net cash provided by continuing operations			1,911				121,329
Net cash used for discontinued operations			(73	)			(48	)
Net cash provided by operating activities			1,838				121,281
Cash flows from investing activities
Capital expenditures for property, plant and equipment			(51,805	)			(43,247	)
Expenditures for other assets			(3,400	)			—
Proceeds from sale of assets and businesses			586				2,704
Dividends received from affiliates			336				551
Net cash used for investing activities			(54,283	)			(39,992	)
Cash flows from financing activities
Net borrowings (repayments) under short-term facilities			2,102				(740	)
Proceeds from convertible notes			172,500				—
Proceeds from revolving credit facility			756,440				592,167
Proceeds from term loan facility			—				55,000
Extinguishment of 9 1/8% notes			(205,269	)			—
Principal payments on revolving credit facility			(638,227	)			(700,864	)
Principal payments on term loan facility			(8,689	)			(2,287	)
Debt issue costs paid			(5,462	)			(1,783	)
Proceeds from exercise of stock options			58				9,217
Cash dividends paid			(19,558	)			(19,570	)
Other financing activities			1,464				(4,442	)
Net cash provided by (used for) financing activities			55,359				(73,302	)
Effect of exchange rate changes on cash and cash equivalents			(415	)			849
Increase in cash and cash equivalents			2,499				8,836
Cash and cash equivalents at beginning of period			12,025				16,985
Cash and cash equivalents at end of period		$	14,524			$	25,821
Cash paid during the period for:
Interest		$	46,247			$	46,925
Income taxes		$	8,379			$	11,387

See accompanying notes to condensed consolidated financial statements.

Ferro Corporation and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements

1. Basis of Presentation

Ferro Corporation (“Ferro,” “we,” “us” or “the Company”) prepared these unaudited condensed consolidated financial statements of Ferro Corporation and its consolidated subsidiaries in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and, therefore, should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2007. The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the timing and amount of assets, liabilities, equity, revenues and expenses reported and disclosed. Actual amounts could differ from our estimates, resulting in changes in revenues or costs that could have a material impact on the Company’s results of operations, financial position, or cash flows. In our opinion, we made all adjustments that are necessary for a fair presentation, and those adjustments are of a normal recurring nature unless otherwise noted. Due to differing business conditions, our various initiatives, and some seasonality, the results for the three and nine months ended September 30, 2008, are not necessarily indicative of the results expected in subsequent quarters or for the full year.

2. Accounting Standards Adopted in the Nine Months Ended September 30, 2008

On January 1, 2008, we adopted FASB Statement No. 157, Fair Value Measurements, (“FAS No. 157”), FASB Staff Position No. FAS 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement Under Statement 13, (“FSP No. FAS 157-1”), and FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157, (“FSP No. FAS 157-2”). Effective July 1, 2008, we also adopted FASB Staff Position No. FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is not Active, (“FSP No. FAS 157-3”). FAS No. 157 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements, but does not require any new fair value measurements. FSP No. FAS 157-1 excludes FASB Statement No. 13, Accounting for Leases, (“FAS No. 13”) as well as other accounting pronouncements that address fair value measurement on lease classification or measurement under FAS No. 13 from the scope of FAS No. 157. FSP No. FAS 157-2 delays the effective date of FAS No. 157 for all nonrecurring fair value measurements of nonfinancial assets and nonfinancial liabilities until fiscal years beginning after November 15, 2008. FSP No. FAS 157-3 amends FAS No. 157 to give an example of how to determine the fair value of a financial asset in an inactive market, but does not change the fair value measurement principles of FAS No. 157. The portions of these pronouncements that were not delayed were adopted prospectively, and their adoption reduced the disclosed fair value of our borrowings under the revolving credit and term loan facilities and reduced the carrying value of our interest rate swaps. We are currently evaluating the impact on our consolidated financial statements of adopting the deferred portions of these pronouncements on January 1, 2009.

On January 1, 2008, we adopted the measurement provisions of FASB Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R), (“FAS No. 158”). The measurement provisions require companies to measure defined benefit plan assets and obligations as of the annual balance sheet date. Previously, we used September 30 as the measurement date for U.S. pension and other postretirement benefits. We have elected to use the September 30, 2007, measurement of assets and benefit obligations to calculate the fiscal year 2008 expense. Expense for the gap period from September 30 to December 31 is recognized as of January 1, 2008, as a charge of $0.5 million, net of tax, to retained earnings and a credit of $0.4 million, net of tax, to accumulated other comprehensive income.

On January 1, 2008, we adopted FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115, (“FAS No. 159”). This statement permits us to choose, at specified election dates, to measure eligible items at fair value (the “fair value option”). For items for which the fair value option has been elected, we would report unrealized gains and losses in earnings at each subsequent reporting date and recognize up-front costs and fees in earnings as incurred. We have not elected to measure any eligible items at fair value, and we do not have any current plans to do so. Therefore, adoption of FAS No. 159 did not have an effect on our consolidated financial statements.

On January 1, 2008, we adopted Emerging Issues Task Force Issue No. 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards, (“EITF No. 06-11”). EITF No. 06-11 requires that the income tax benefit from dividends that are charged to retained earnings and paid to employees for nonvested equity shares be recognized as an increase to paid-in capital. Previously, we recognized this income tax benefit as an increase to retained earnings. Beginning in 2008, we report this income tax benefit as an increase to paid-in capital.

3. Newly Issued Accounting Pronouncements

In December 2007, the FASB issued Statement No. 141(R), Business Combinations, (“FAS No. 141(R)”) and Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51, (“FAS No. 160”). These statements change the way that companies account for business combinations and noncontrolling interests (e.g., minority interests). Both standards are to be applied prospectively for fiscal years beginning after December 15, 2008. However, FAS No. 160 requires entities to apply the presentation and disclosure requirements retrospectively to comparative financial statements. In 2009, we will retrospectively reclassify the amount of minority interests in consolidated subsidiaries to equity and separately report the amount of net income or loss attributable to minority interests.

In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133, (“FAS No. 161). This Statement requires enhanced disclosures about an entity’s derivative and hedging activities. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. We do not expect the adoption of FAS No. 161 to have a material impact on our consolidated financial statements.

In April 2008, the FASB issued Staff Position No. FAS 142-3, Determination of the Useful Life of Intangible Assets, (“FSP No. FAS 142-3”). This pronouncement amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. FSP No. FAS 142-3 is to be applied prospectively and is effective for financial statements issued for fiscal years beginning after December 15, 2008, with early adoption prohibited. We are currently evaluating its effect on our financial statements.

In May 2008, the FASB issued Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), (“FSP No. APB 14-1”). This pronouncement specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP No. APB 14-1 is to be applied retrospectively and is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. If this pronouncement had been applied at September 30, 2008, the carrying value of the liability component of the 6.50% Convertible Senior Notes would have been approximately $152.7 million, including $0.4 million of imputed interest, and the carrying value of the equity component would have been approximately $19.6 million, net of $0.6 million of allocated third-party transaction costs.

4. Inventories

Inventories consisted of the following:

		September 30,				December 31,
		2008				2007
		(Dollars in thousands)
Raw materials		$	94,975			$	74,659
Work in process			50,639				41,640
Finished goods			160,640				146,500
Total		$	306,254			$	262,799

In the production of some of our products, we use precious metals, some of which we obtain from financial institutions under consignment agreements with terms of one year or less. The financial institutions retain ownership of the precious metals and charge us fees based on the amounts we consign. These fees were $1.1 million and $0.8 million for the three months ended September 30, 2008 and 2007, respectively, and $3.4 million and $2.8 million for the nine months ended September 30, 2008 and 2007, respectively, and were charged to cost of sales. We had on hand $125.8 million at September 30, 2008, and $148.3 million at December 31, 2007, of precious metals owned by financial institutions, measured at fair value based on market prices for identical assets.

5. Property, Plant and Equipment

Property, plant and equipment is reported net of accumulated depreciation of $668.0 million at September 30, 2008, and $713.5 million at December 31, 2007.

6. Financing and Long-term Debt

Loans payable and current portion of long-term debt consisted of the following:

		September 30,				December 31,
		2008				2007
		(Dollars in thousands)
Loans payable to banks		$	3,128			$	954
Current portion of long-term debt			4,244				4,490
Total		$	7,372			$	5,444

Long-term debt consisted of the following:

		September 30,				December 31,
		2008				2007
		(Dollars in thousands)
$172.5 million 6.50% Convertible Senior Notes		$	172,500			$	—
$200 million 9 1/8% Senior Notes, net of unamortized discounts			—				199,636
Revolving credit facility			132,070				13,857
Term loan facility			293,261				301,950
Capitalized lease obligations			7,863				8,924
Other notes			547				768
			606,241				525,135
Less current portion			(4,244	)			(4,490	)
Total		$	601,997			$	520,645

Credit Rating

At September 30, 2008, the Company’s corporate credit rating was B1, with a positive outlook, by Moody’s Investor Services, Inc. and B+, with a stable outlook, by Standard & Poor’s Rating Group.

6.50% Convertible Senior Notes

In August 2008, Ferro issued $172.5 million of 6.50% Convertible Senior Notes due 2013 (the “Convertible Notes”). The proceeds from the offering, along with available cash, including borrowings under Ferro’s revolving credit facility, were used to purchase all of Ferro’s outstanding 9 1/8% Senior Notes. The Convertible Notes bear interest at a rate of 6.5% per year, payable semi-annually in arrears on February 15 and August 15 of each year, beginning on February 15, 2009. The Convertible Notes mature on August 15, 2013.

The Convertible Notes are convertible, under certain circumstances, using a net share settlement process, into a combination of cash and shares of Ferro’s common stock. The initial base conversion price of the Convertible Notes is approximately $32.34, based on the initial base conversion rate of 30.9253 shares of common stock per $1,000 principal amount of Convertible Notes. Upon conversion of a Convertible Note, the holder will receive cash equal to the principal amount of the Convertible Note and shares of common stock to the extent the Convertible Note’s conversion value exceeds the principal amount. In addition, upon certain circumstances, Ferro will increase the applicable conversion rate for a holder who elects to convert its Convertible Notes. The number of additional shares of common stock is determined pursuant to a specified formula, which is dependent on the Company’s stock price at the time of conversion. Ferro may be required to repurchase the Convertible Notes if Ferro is involved in certain types of corporate transactions or other events constituting a fundamental change.

9 1/8% Senior Notes

In June 2008, Ferro commenced a cash tender offer to purchase any and all of its outstanding $200 million aggregate principal amount of 9 1/8% Senior Notes due 2009 (the “9 1/8% Notes”). In August and September, we purchased all of the 9 1/8% Notes for $205.3 million, including call premiums and tender costs, and recorded a loss of $5.5 million, including unamortized discounts and fees. We financed the purchase of the 9 1/8% Notes and related costs from the issuance of the Convertible Notes, along with available cash, including borrowings under Ferro’s revolving credit facility.

Revolving Credit and Term Loan Facilities

In 2006, we entered into an agreement with a group of lenders for a $700 million credit facility, consisting of a multi-currency senior revolving credit facility and a senior term loan facility. In 2007, we cancelled the unused portion of the term loan facility and amended the credit facility (the “Amended Credit Facility”). At September 30, 2008, the Amended Credit Facility consisted of a $300 million revolving credit facility, which matures in 2011, and a $305 million term loan facility, which matures in 2012. As part of the agreement, we can request an increase of $50 million in the revolving credit facility. We had $159.3 million at September 30, 2008, and $277.5 million at December 31, 2007, available under the revolving credit facility, after reductions for standby letters of credit secured by this facility. In 2007, we began making periodic principal payments on the term loans. We are required to make minimum quarterly principal payments of $0.8 million from July 2008 to July 2011. During the last year of the loan’s life, we are required to repay the remaining balance of the term loans in four quarterly installments. Currently, those last four payments will be $71.0 million each. In addition to the minimum quarterly payments, each April we may be required to make an additional principal payment. The amount of this additional payment is dependent on the Company’s leverage and certain cash flow metrics. Any additional payment that is required reduces, on a dollar-for-dollar basis, the amount due in the last four quarterly payments. In April 2008, we made an additional principal payment of $6.4 million.

The interest rates under the Amended Credit Facility are equal to the sum of (A) either (1) LIBOR or (2) the higher of the Federal Funds Rate plus 0.5% or the Prime Rate and (B) for the revolving credit facility, a variable margin based on the Company’s leverage, or for the term loan facility, a fixed margin. As part of the 2007 amendments, $175 million of borrowings under the term loan facility were restricted to using three-month LIBOR in determining their interest rates. This change was made in connection with interest rate swap agreements executed in 2007. These swap agreements effectively fixed the interest rate through June 2011 on $150 million of borrowings under the term loan facility. The average interest rate for revolving credit borrowings was 4.4% at September 30, 2008, and 6.5% at December 31, 2007, and the effective interest rate for term loan borrowings after adjusting for the interest rate swaps was 6.2% at September 30, 2008, and 7.2% at December 31, 2007.

Receivable Sales Programs

We have several programs to sell, on an ongoing basis, pools of our trade accounts receivable. These programs accelerate cash collections at favorable financing costs and help us manage the Company’s liquidity requirements. The costs associated with these programs are reported as interest expense and were $5.1 million and $5.3 million for the nine months ended September 30, 2008 and 2007, respectively.

In our largest program, we sell substantially all of Ferro’s U.S. trade accounts receivable to Ferro Finance Corporation (“FFC”), a wholly-owned unconsolidated qualified special purpose entity (“QSPE”). FFC finances its acquisition of trade receivable assets by issuing beneficial interests in (securitizing) the receivables to multi-seller receivables securitization companies (the “Conduits”). In June 2008, we amended the program to reduce the maximum proceeds and the conduits’ commitment levels from $100 million to $75 million. Ferro had received net proceeds of $75.0 million at September 30, 2008, and $54.6 million at December 31, 2007, for outstanding receivables. FFC and the Conduits have no recourse to Ferro’s other assets for failure of debtors to pay when due, as the assets transferred are legally isolated in accordance with the U.S. bankruptcy laws. Ferro, on behalf of FFC and the Conduits, provides normal collection and administration services for the trade accounts receivable sold.

Activity from this program for the nine months ended September 30 is detailed below:

		2008				2007
		(Dollars in thousands)
Trade accounts receivable sold to FFC		$	840,151			$	739,005
Cash proceeds from FFC			840,405				731,454
Trade accounts receivable collected and remitted to FFC and the conduits			820,027				726,553

In addition, we maintain several international programs to sell trade accounts receivable, primarily without recourse. The commitments supporting these programs can be withdrawn at any time and totaled $78.0 million at September 30, 2008, and $80.8 million at December 31, 2007. Ferro had received net proceeds under the international programs of $28.8 million at September 30, 2008, and $42.1 million at December 31, 2007, for outstanding receivables. Ferro provides normal collection and administration services for the trade accounts receivable sold to certain financial institutions.

Activity from these programs for the nine months ended September 30 is detailed below:

		2008				2007
		(Dollars in thousands)
Trade accounts receivable sold to financial institutions		$	186,054			$	128,788
Cash proceeds from financial institutions			184,628				125,024
Trade accounts receivable collected and remitted to financial institutions for programs where we provide collection and administrative services			60,863				65,060

7. Financial Instruments

The following financial instruments are measured at fair value for disclosure purposes. The carrying values of these instruments may or may not be their fair values.

6.50% Convertible Senior Notes. The carrying amount of the Convertible Notes was $172.5 million and their fair value was $159.7 million at September 30, 2008. The fair value of these notes is based on a third party’s estimated bid price.

9 1/8% Senior Notes. The carrying amount of the 9 1/8% Notes was $199.6 million and their fair value was $205.0 million at December 31, 2007. The fair value of these notes is based on a third party’s estimated bid price.

Revolving credit facility. The carrying amount of the revolving credit facility was $132.1 million at September 30, 2008, and $13.9 million at December 31, 2007. The fair value of the revolving credit facility was $122.9 million at September 30, 2008, and $13.9 million at December 31, 2007. The fair value of the revolving credit facility is based on the present value of expected future cash flows and assumptions about current interest rates. Beginning in 2008 in connection with the adoption of FAS No. 157, the fair value also reflects assumptions about the creditworthiness of the Company that market participants would use in pricing the debt.

Term loan facility. The carrying amount of the term loan facility was $293.3 million at September 30, 2008, and $302.0 million at December 31, 2007. The fair value of the term loan facility was $272.9 million at September 30, 2008, and $302.0 million at December 31, 2007. The fair value of the term loan facility is based on the present value of expected future cash flows and assumptions about current interest rates. Beginning in 2008 in connection with the adoption of FAS No. 157, the fair value also reflects assumptions about the creditworthiness of the Company that market participants would use in pricing the debt.

The following financial instruments are measured and recorded at fair value on a recurring basis. The inputs to the valuation techniques used to measure fair value are classified into the following categories:

Level 1:				Quoted market prices in active markets for identical assets or liabilities.
Level 2:				Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3:				Unobservable inputs that are not corroborated by market data.

The carrying amount, fair value, and classification within the fair value hierarchy of these financial instruments were as follows:

						Fair Value Measurements
		September 30,				at September 30, 2008												December 31,
		2008				Level 1				Level 2				Level 3				2007
		(Dollars in thousands)
Assets
Foreign currency forward contracts		$	1,374			$	—			$	1,374			$	—			$	16
Precious metals forward contracts			—				—				—				—				755
Total fair value		$	1,374			$	—			$	1,374			$	—			$	771
Liabilities
Interest rate swaps		$	(7,401	)		$	—			$	(7,401	)		$	—			$	(8,109	)
Foreign currency forward contracts			(73	)			—				(73	)			—				(284	)
Raw material commodity swaps			(938	)			—				(938	)			—				(1,499	)
Precious metals forward contracts			(6	)			—				(6	)			—				—
Total fair value		$	(8,418	)		$	—			$	(8,418	)		$	—			$	(9,892	)

Interest rate swaps. To reduce our exposure to interest rate changes on variable-rate debt, we entered into interest rate swap agreements in 2007. These swaps effectively converted $150 million of our variable-rate term loan facility to a fixed rate. We mark these agreements to fair value and recognize the resulting gains or losses as other comprehensive income or loss. In 2007, the fair value of the interest rate swaps was based on settlement prices provided by the counterparties. Beginning in 2008 in connection with the adoption of FAS No. 157, the fair value of the swaps is based on the present value of expected future cash flows, which reflects assumptions about current interest rates and the creditworthiness of the Company that market participants would use in pricing the swaps.

Foreign currency forward contracts. We manage foreign currency risks principally by entering into forward contracts to mitigate the impact of currency fluctuations on transactions. We mark these contracts to fair value based on market prices for comparable contracts and recognize the resulting gains or losses in net foreign currency gains or losses.

Raw material commodity swaps. We hedge a portion of our exposure to changes in the pricing of certain raw material commodities principally using swap arrangements that allow us to fix the price of the commodities for future purchases. We mark these contracts to fair value based on market prices for comparable contracts and recognize the resulting gains or losses as other comprehensive income or loss. After the contracts mature and the materials are sold, the gains and losses are recognized as part of cost of sales.

Precious metals forward contracts. We enter into forward purchase arrangements with precious metals suppliers to completely cover the value of fixed price sales contracts for products with precious metal content. Some of these agreements, with purchase commitments totaling $13.0 million at September 30, 2008, are designated as normal purchase contracts and are not marked to fair value. We mark the remaining precious metal contracts to fair value based on market prices for comparable contracts and recognize the resulting gains or losses as miscellaneous income or expense.

8. Income Taxes

Income tax expense for the first nine months of 2008 was $16.7 million, or 41.6% of pre-tax income. Income tax expense for the first nine months of 2007 was $10.8 million, or 39.7% of pre-tax income. The reasons for the increase in the effective tax rate were a change in the mix of income by country and a decrease in the U.S. tax cost on foreign dividends. The effective tax rate was also impacted by an unfavorable tax court decision in Brazil, an increase in the valuation allowance, and favorable adjustments to prior-year accruals which, in aggregate, totaled $2.4 million.

During the first nine months of 2008, we allocated income tax expense directly to shareholders’ equity for the following items: $0.7 million for postretirement benefit liability adjustments, $0.2 million for raw material commodity swap adjustments, $0.2 million for interest rate swap adjustments, and $0.2 million for the adjustments to initially apply FAS No. 158. During the first nine months of 2007, we allocated income tax expense (benefit) directly to shareholders’ equity for the following items: $0.5 million for postretirement benefit liability adjustments, $(1.2) million for raw material commodity swap adjustments, and $(1.8) million for interest rate swap adjustments.

The Company conducts business globally, and, as a result, the U.S. parent company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, the U.S. parent company and its subsidiaries are subject to examination by taxing authorities throughout the world, including Spain, France, Germany, Netherlands, Italy, Japan, China, Portugal, and the United Kingdom. With few exceptions, we are not subject to federal, state, local or non-U.S. income tax examinations for years before 2000.

9. Contingent Liabilities

As previously disclosed, in February 2003, we produced documents in connection with an investigation by the United States Department of Justice into possible antitrust violations in the heat stabilizer industry. In April 2006, we were notified by the Department of Justice that the Government had closed its investigation. Before closing its investigation, the Department of Justice took no action against the Company or any of its current or former employees. In 2003, the Company was named as a defendant in several lawsuits alleging civil damages and requesting injunctive relief relating to the conduct the Government was investigating, and, in June 2008, the Company was named in four more indirect purchaser lawsuits related to an existing lawsuit in the Eastern District of Pennsylvania. In July 2007, we entered into a definitive written settlement agreement in the class action lawsuit involving direct purchasers. The settlement agreement was approved by the United States District Court for the Eastern District of Pennsylvania in December 2007. Although the Company decided to bring this matter to a close through settlement, the Company did not admit to any of the alleged violations and continues to deny any wrongdoing. The Company is vigorously defending the remaining six civil actions alleging antitrust violations in the heat stabilizer industry. These actions are in their early stages; therefore, we cannot determine the outcomes of these lawsuits at this time. In December 2006, we filed a lawsuit against the former owner of our heat stabilizer business seeking indemnification for the defense of these lawsuits and any resulting payments by the Company. In April 2008, the United States District Court for the Northern District of Ohio dismissed our lawsuit, and we have appealed the court’s decision to the United States Court of Appeals for the Sixth Circuit.

There are various other lawsuits and claims pending against the Company and its consolidated subsidiaries. In our opinion, the ultimate liabilities, if any, and expenses resulting from such lawsuits and claims will not materially affect the consolidated financial position, results of operations, or cash flows of the Company.

The Company had bank guarantees and standby letters of credit issued by financial institutions, which totaled $14.4 million at September 30, 2008, and $17.7 million at December 31, 2007. These agreements primarily relate to Ferro’s insurance programs, potential environmental remediation liabilities, and foreign tax payments. If the Company fails to perform its obligations, the guarantees and letters of credit may be drawn down by their holders, and we would be liable to the financial institutions for the amounts drawn.

10. Retirement Benefits

Information concerning net periodic benefit costs of our U.S. pension plans (including our unfunded nonqualified plans), non-U.S. pension plans, and postretirement health care and life insurance benefit plans for the three months ended September 30 is as follows:

		U.S. Pension Plans								Non-U.S. Pension Plans								Other Benefit Plans
		2008				2007				2008				2007				2008				2007
		(Dollars in thousands)
Components of net periodic cost:
Service cost		$	50			$	317			$	1,308			$	1,663			$	16			$	124
Interest cost			5,177				5,026				2,955				2,359				731				836
Expected return on plan assets			(5,663	)			(5,140	)			(2,148	)			(1,871	)			—				—
Amortization of prior service cost			25				39				29				27				(411	)			(349	)
Net amortization and deferral			624				1,456				53				148				—				—
Curtailment and settlement effects			—				—				(133	)			—				—				(814	)
Special termination benefits			—				—				—				2,189				—				—
Net periodic benefit cost		$	213			$	1,698			$	2,064			$	4,515			$	336			$	(203	)

Information concerning net periodic benefit costs of our U.S. pension plans (including our unfunded nonqualified plans), non-U.S. pension plans, and postretirement health care and life insurance benefit plans for the nine months ended September 30 is as follows:

		U.S. Pension Plans								Non-U.S. Pension Plans								Other Benefit Plans
		2008				2007				2008				2007				2008				2007
		(Dollars in thousands)
Components of net periodic cost:
Service cost		$	150			$	948			$	4,366			$	4,888			$	48			$	428
Interest cost			15,531				15,083				8,934				6,937				2,193				2,554
Expected return on plan assets			(16,989	)			(15,392	)			(6,484	)			(5,499	)			—				—
Amortization of prior service cost			75				118				78				82				(1,233	)			(935	)
Net amortization and deferral			1,872				4,405				165				434				—				—
Curtailment and settlement effects			—				250				(133	)			—				—				(814	)
Special termination benefits			—				—				—				2,189				—				—
Net periodic benefit cost		$	639			$	5,412			$	6,926			$	9,031			$	1,008			$	1,233

The change in net periodic cost is due primarily to restructuring activities related to closing the Company’s Rotterdam, Netherlands, and Niagara Falls, New York, manufacturing facilities, the freezing of pension benefits at several U.S. plants, and the limiting of eligibility for retiree medical and life insurance coverage for nonunion employees. We recorded curtailment gains of $0.1 million in the third quarter of 2008 and special termination benefits of $2.2 million in the third quarter of 2007 for pension benefits related to the Rotterdam, Netherlands, closing. We recorded curtailment gains of $0.7 million in the third quarter of 2007 for other benefits and curtailment losses of $0.3 million in the first quarter of 2007 for pension benefits related to the Niagara Falls, New York, closing.

11. Stock-Based Compensation

The following table contains the total stock-based compensation expense recorded in selling, general and administrative expense for the nine months ended September 30:

		2008				2007
		(Dollars in thousands)
Stock options		$	1,753			$	2,333
Performance shares			187				794
Deferred stock units			411				505
Restricted shares			307				—
Total		$	2,658			$	3,632

The following table contains information regarding the stock-based compensation as of and for the nine-month period ended September 30, 2008:

										Aggregate
						Weighted-				Grant Date				Remaining
		Number of				Average Fair				Fair Value of				Service or
		Shares or				Value per				Shares or				Performance
		Units Granted				Share or Unit				Units Granted				Period
										(Dollars in				(In years)
										thousands)
Stock options			513,100			$	4.27			$	2,191				3.4
Performance shares			77,825				17.26				1,343				2.4
Deferred stock units			34,200				16.69				571				0.4
Restricted shares			99,600				17.51				1,744				2.4

The stock-based compensation transaction in shareholders’ equity consisted of the following for the nine months ended September 30, 2008:

		Common Shares
		in Treasury								Paid-in
		Shares				Amount				Capital
		(In thousands)
Stock options			(3	)		$	367			$	2,236
Performance shares, net			—				25				(654	)
Deferred stock units			(33	)			143				—
Directors’ deferred compensation			—				(558	)			558
Preferred stock conversions			(38	)			689				—
Restricted shares			(99	)			1,940				(1,458	)
Total			(173	)		$	2,606			$	682

Restricted Share Awards

Under the 2006 Long-Term Incentive Plan, the Company may award restricted shares of Ferro common stock. The restricted shares vest in three years from the date of the award and are forfeited if the recipient’s employment terminates, except in the case of death or disability. During the vesting period, the recipient is not entitled to exercise rights pertaining to the restricted shares, including the right to vote such shares, and dividends on the restricted shares are deferred without interest. Following the vesting period, the recipient may not dispose of the shares for two years, without Ferro’s prior written consent. The first restricted shares were awarded in 2008.

12. Restructuring and Cost Reduction Programs

During 2008, we continued several restructuring programs across a number of our business segments with the objectives of leveraging our global scale, realigning and lowering our cost structure and optimizing capacity utilization. The programs are primarily associated with North America and Europe. Management continues to evaluate our business, and therefore, there may be supplemental provisions for new plan initiatives as well as changes in estimates to amounts previously recorded, as payments are made or actions are completed.

In July 2006, we announced that we were restructuring our European operations, including a portion of our Performance Coatings and Color and Glass Performance Materials segments. This program affected operations in Spain, Italy, Portugal, France, Netherlands, and Germany. We expect these actions to significantly reduce the cost structure of our manufacturing operations.

The initial phase of this European restructuring resulted in a workforce reduction of 127 employees in these two segments and we are evaluating further workforce reductions. A decision to proceed with actions related to any additional charges will be made after the Company has completed required consultations with employee representatives at the affected sites. Revised total anticipated charges through 2009 amount to $11.5 million. Charges incurred through 2007 amounted to $9.0 million. Restructuring charges for the nine months ended September 30, 2008, include $1.1 million for employee severance costs, other costs of $0.7 million, and $0.3 million of accrual reversals.

In May 2007, we began the next phase of our European restructuring by initiating discussions with representatives of workers at our Rotterdam, Netherlands, porcelain enamel manufacturing site. In September 2007, we reached an agreement with the Rotterdam Works Council. As a result, the Company discontinued porcelain enamel manufacturing at its Rotterdam facility in the third quarter of 2008 and consolidated production at other European facilities. This consolidation resulted in the reduction of 84 employees. Restructuring charges are expected to total $26.5 million. During 2007, we recorded $11.8 million in restructuring charges and an additional $0.5 million for inventory write downs included in cost of sales. During the first nine months of 2008, we recorded $8.9 million for employee severance costs, $3.8 million for future minimum lease obligations, and $0.9 million in other costs, partly offset by a pension curtailment credit of $0.1 million.

In addition to the European restructuring efforts, we initiated worldwide restructuring plans for our Performance Coatings, Color and Glass Performance Materials, Polymer Additives, and Specialty Plastics segments in November 2007, March 2008, and April 2008. These restructuring plans resulted in the reduction of 109 employees. Total estimated employee termination charges through 2008 are $5.4 million. During 2007, we recorded total charges of $1.4 million. In the first nine months of 2008, we recorded $4.0 million of additional restructuring charges.

In February 2008, we announced the closing of a Plastics facility in Aldridge, United Kingdom. This closure resulted in the reduction of 10 employees and total costs of $0.6 million. During the first nine months of 2008, we recorded $0.4 million in severance costs and $0.2 million in lease termination costs.

In June 2008, we announced the partial closing of a Performance Coatings facility in Americana, Brazil. This closure resulted in the reduction of 66 employees and total costs of $1.5 million. During the first nine months of 2008, we recorded $1.1 million in severance costs and $0.4 million of asset impairment costs.

In September 2008, we closed the Polymer Additives facility in Castanheira, Portugal, which resulted in the elimination of 10 employees with a total cost of $1.2 million. During September 2008, we recorded $0.2 million in severance costs, $0.5 million in contract termination costs, and $0.5 million in asset impairment costs.

We have summarized the activities and accrual balances related to our restructuring and cost reduction programs below:

		Employee
		Termination				Other				Asset
		Benefits				Costs				Impairment				Total
		(Dollars in thousands)
Balance, December 31, 2007		$	8,381			$	1,560			$	—			$	9,941
Restructuring charges			15,346				6,025				909				22,280
Cash payments			(21,570	)			(1,723	)			—				(23,293	)
Currency translation adjustment			(193	)			(363	)			—				(556	)
Non-cash items			(76	)			(178	)			(909	)			(1,163	)
Balance, September 30, 2008		$	1,888			$	5,321			$	—			$	7,209

We expect to make cash payments to settle the remaining liability for employee termination benefits and other costs primarily within the next 12 months, except where legal or contractual restrictions prevent us from doing so.

13. Discontinued Operations

Discontinued operations relate to the Powder Coatings, Petroleum Additives and Specialty Ceramics businesses that we sold in 2002 and 2003. There were no sales or cash flows from investing or financing activities from discontinued operations in the nine months ended September 30, 2008 or 2007. The loss from discontinued operations includes ongoing legal costs and reserve adjustments directly related to discontinued operations. Discontinued operations resulted in the following pre-tax losses and related income tax benefits:

		Three months ended								Nine months ended
		September 30,								September 30,
		2008				2007				2008				2007
		(Dollars in thousands)
Pre-tax losses		$	94			$	4			$	120			$	355
Tax benefits			37				2				47				139
Net of tax losses		$	57			$	2			$	73			$	216

We have continuing environmental remediation obligations that are related to these divestitures, and we had accrued $3.3 million at September 30, 2008, and $3.3 million at December 31, 2007, for these matters.

14. Earnings per Share

Details of the calculation of basic and diluted earnings per share are shown below:

		Three months ended								Nine months ended
		September 30,								September 30,
		2008				2007				2008				2007
		(In thousands, except per share amounts)
Basic earnings per share computation:
Net income available to common shareholders		$	4,606			$	5,333			$	22,661			$	15,407
Add: Loss from discontinued operations			57				2				73				216
		$	4,663			$	5,335			$	22,734			$	15,623
Weighted-average common shares outstanding			43,266				43,030				43,226				42,881
Basic earnings per share from continuing operations		$	0.11			$	0.12			$	0.53			$	0.36
Diluted earnings per share computation:
Net income available to common shareholders		$	4,606			$	5,333			$	22,661			$	15,407
Add: Loss from discontinued operations			57				2				73				216
Plus: Convertible preferred stock			—				—				—				—
		$	4,663			$	5,335			$	22,734			$	15,623
Weighted-average common shares outstanding			43,266				43,030				43,226				42,881
Assumed conversion of convertible senior notes			—				—				—				—
Assumed conversion of convertible preferred stock			—				—				—				—
Assumed satisfaction of performance share conditions			76				59				72				54
Assumed satisfaction of deferred stock unit conditions			20				24				11				14
Assumed exercise of stock options			161				—				—				—
Weighted-average diluted shares outstanding			43,523				43,113				43,309				42,949
Diluted earnings per share from continuing operations		$	0.11			$	0.12			$	0.52			$	0.36

15. Comprehensive Income

The components of comprehensive income were as follows:

		Three months ended								Nine months ended
		September 30,								September 30,
		2008				2007				2008				2007
		(Dollars in thousands)
Net income		$	4,831			$	5,585			$	23,336			$	16,204
Other comprehensive income, net of tax:
Foreign currency translation adjustments			(36,261	)			15,441				(15,014	)			28,183
Postretirement benefit liability adjustments			3,090				(137	)			2,676				(140	)
Raw material commodity swap adjustments			(1	)			(391	)			454				(1,903	)
Interest rate swap adjustments			(150	)			(2,089	)			456				(2,840	)
Comprehensive income		$	(28,491	)		$	18,409			$	11,908			$	39,504

16. Reporting for Segments

The Company has six reportable segments: Performance Coatings, Electronic Materials, Color and Glass Performance Materials, Polymer Additives, Specialty Plastics and Other Businesses. We have combined our Tile Coating Systems and Porcelain Enamel business units into one reportable segment, Performance Coatings, based on their similar economic and operating characteristics. We have also combined two of our segments, Pharmaceuticals and Fine Chemicals, into one reportable segment, Other Businesses, because they do not meet the quantitative thresholds for separate disclosure.

The accounting policies of our segments are consistent with those described for our consolidated financial statements in the summary of significant accounting policies contained in our Annual Report on Form 10-K for the year ended December 31, 2007. We measure segment income for internal reporting purposes as income from continuing operations before unallocated corporate expenses, restructuring charges, other expense (income) items, such as interest expense, and income tax expense. Unallocated corporate expenses primarily consist of corporate employment costs and professional services.

Net sales to external customers by segment are presented in the table below. Sales between segments were not material.

		Three months ended								Nine months ended
		September 30,								September 30,
		2008				2007				2008				2007
		(Dollars in thousands)
Performance Coatings		$	162,523			$	153,742			$	501,819			$	451,058
Electronic Materials			155,122				116,645				452,317				338,412
Color and Glass Performance Materials			115,013				113,575				374,083				329,195
Polymer Additives			93,081				85,230				284,107				252,903
Specialty Plastics			58,097				62,236				183,499				198,994
Other Businesses			24,752				19,273				70,415				63,502
Total net sales		$	608,588			$	550,701			$	1,866,240			$	1,634,064

Below are each segment’s income and reconciliations to income before taxes from continuing operations:

		Three months ended								Nine months ended
		September 30,								September 30,
		2008				2007				2008				2007
		(Dollars in thousands)
Performance Coatings		$	12,135			$	8,449			$	34,400			$	29,947
Electronic Materials			17,095				8,522				43,527				19,534
Color and Glass Performance Materials			9,712				11,727				40,695				39,462
Polymer Additives			4,385				3,417				11,703				10,576
Specialty Plastics			2,796				3,586				7,520				10,961
Other Businesses			2,645				593				7,405				7,982
Total segment income			48,768				36,294				145,250				118,462
Unallocated corporate expenses			13,031				7,215				32,658				38,219
Restructuring charges			9,042				5,826				22,280				7,689
Other expense, net			20,202				14,194				50,215				45,320
Income before taxes from continuing operations		$	6,493			$	9,059			$	40,097			$	27,234

We sell our products throughout the world, and we attribute sales to countries based on the country where we generate the customer invoice. We have detailed net sales by geographic region in the table below:

		Three months ended								Nine months ended
		September 30,								September 30,
		2008				2007				2008				2007
		(Dollars in thousands)
United States		$	281,502			$	232,405			$	811,678			$	710,423
International			327,086				318,296				1,054,562				923,641
Total net sales		$	608,588			$	550,701			$	1,866,240			$	1,634,064

17. Subsequent Event

On September 29, 2008, we entered into an agreement for the sale of our fine chemicals business to Novolyte Technologies LP, an affiliate of Arsenal Capital Management LP. On October 31, 2008, we amended the agreement, primarily to reduce the selling price from $66.0 million to $60.0 million, and closed the sale of the U.S. portion of the business for $52.0 million. The remaining $8.0 million of purchase price will be held in escrow until the completion of an equity transfer of Ferro (Suzhou) Energy Storage Materials Co. Ltd. (“Ferro Suzhou”), a wholly-owned subsidiary of Ferro, which owns the fine chemicals business’ manufacturing facilities in Suzhou, China. The equity transfer of Ferro Suzhou is subject to certain conditions, including government approval of the equity transfer in China and the receipt of certain permits or licenses. The equity transfer is expected to be completed by the end of 2008.

At September 30, 2008, the fine chemicals business had approximately $25 million of property, plant and equipment, $12 million of accounts receivable, $9 million of inventory, and $7 million of accounts payable and other liabilities.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Net income for the three months ended September 30, 2008, declined to $4.8 million from $5.6 million in the third quarter of 2007. Income declined primarily as a result of higher selling, general and administrative expenses, a loss on the extinguishment of debt resulting from bond refinancing activities and higher restructuring charges. Partially offsetting these higher costs were increased gross profit, resulting from higher sales, and lower interest expense.

Net sales increased by 10.5% primarily as a result of higher sales in our Electronic Materials, Performance Coatings, and Polymer Additives segments. Sales declined in the Specialty Plastics segment, compared with the third quarter of 2007. The primary drivers for the increased sales were improved product pricing and product mix, as well as changes in foreign currency exchange rates. Higher product pricing included increased pass-through of higher precious metal costs.

Raw material costs continued to be volatile in the quarter. While prices of a number of commodities fell during the quarter, these prices did not immediately translate to lower costs within the supply chain. Petrochemical-based input costs declined during the quarter, for instance, but temporary shutdowns of refining capacity in the U.S. Gulf Coast resulting from late-summer hurricanes delayed the downstream effects of lower crude oil prices. In aggregate, raw material prices were higher than in the prior-year period.

Gross profit increased during the third quarter, both in dollar terms and as a percent of sales, compared with the third quarter of 2007. Gross profit percentage continues to be negatively impacted by higher precious metal costs, which we generally pass through to customers with minimal gross profit contribution.

Selling, general and administrative (“SG&A”) expense increased in the 2008 third quarter compared to the prior year. The principal drivers for the increase were changes in foreign currency exchange rates, and higher incentive compensation and benefit expenses. As a percentage of net sales, our 2008 third quarter SG&A expense was 12.9%, unchanged from the third quarter of 2007.

Interest expense declined in the three months ended September 30, 2008, compared with the prior-year period. The decline was due to lower interest rates on our debt, partially offset by higher average borrowing levels. During the third quarter, we issued new convertible bonds. The proceeds from the new bonds, along with additional borrowings under our revolving credit facility, were used to repay our 9 1/8% coupon senior notes, due January 2009. The repayment of the senior notes resulted in a loss on extinguishment of debt of $5.5 million during the quarter.

Outlook

Economic conditions weakened during the quarter, resulting in reduced demand from customers in a number of regions around the world. Contributing to the weakness was a reduction in the availability of credit in many worldwide markets, which is expected to have a continuing negative effect on future consumer and business spending. Markets in the United States that are related to residential housing, automobiles and automotive parts, and appliances are expected to remain weak until there is a general increase in economic activity and consumer demand. Markets outside the United States have been stronger in recent quarters, but international markets, particularly in continental Europe, weakened during the third quarter and are expected to exhibit weak customer demand in the coming quarter, although some of this reduced demand is expected to be offset by higher sales in North Africa, the Middle East and Eastern Europe. Demand for our electronic materials used in solar cells is strong and is expected to continue to show year-over-year growth, although rapid expansion of capacity among solar cell manufacturers could lead to some increased demand volatility due to short-term supply chain imbalances in the future.

We expect to continue to record charges associated with our current and future restructuring programs, particularly related to our rationalization of our manufacturing operations in Europe.

Factors that could adversely affect our future financial performance are described under the heading “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q for the quarter ended September 30, 2008.

Results of Operations

Comparison of the three months ended September 30, 2008 and 2007

		Three months ended
		September 30,
		2008				2007				$ Change				% Change
		(Dollars in thousands,
		except per share amounts)
Net sales		$	608,588			$	550,701			$	57,887				10.5	%
Cost of sales			494,577				450,553				44,024				9.8	%
Gross profit			114,011				100,148				13,863				13.8	%
Gross profit percentage			18.7	%			18.2	%
Selling, general and administrative expenses			78,274				71,069				7,205				10.1	%
Restructuring charges			9,042				5,826				3,216				55.2	%
Other expense (income):
Interest expense			12,497				14,488				(1,991	)			(13.7	%)
Interest earned			(213	)			(271	)			58				(21.4	%)
Loss on extinguishment of debt			5,531				—				5,531				—
Foreign currency losses (gains), net			1,660				(10	)			1,670				(16,700.0	%)
Miscellaneous expense (income), net			727				(13	)			740				(5,692.3	%)
Income before taxes			6,493				9,059				(2,566	)			(28.3	%)
Income tax expense			1,605				3,472				(1,867	)			(53.8	%)
Income from continuing operations			4,888				5,587				(699	)			(12.5	%)
Loss from discontinued operations, net of tax			57				2				55				2,750.0	%
Net income		$	4,831			$	5,585			$	(754	)			(13.5	%)
Diluted earnings per share		$	0.11			$	0.12			$	(0.01	)			(8.3	%)

Sales for the quarter ended September 30, 2008, increased by 10.5%, driven by increased product prices, including pass-throughs for higher precious metal costs, improved product mix, and favorable changes in foreign currency exchange rates. Aggregated sales volume had a slightly negative effect on sales for the quarter, as a result of lower volume in Specialty Plastics, Polymer Additives and Color and Glass Performance Materials, partially offset by increased sales volume in Electronic Materials.

Gross profit increased in the 2008 third quarter primarily as a result of increased product pricing and lower manufacturing costs, partially offset by higher raw material costs. Gross profit was reduced by $1.5 million in the quarter as a result of costs related to manufacturing rationalization activities and asset write-offs. Charges for manufacturing rationalization activities were $0.5 million in the third quarter of 2007. Gross profit as a percent of sales was negatively impacted by higher raw materials costs, including precious metal costs. Precious metal costs are generally passed through to customers with minimal gross profit contributions.

Selling, general and administrative (“SG&A”) expenses were 12.9% of net sales in the 2008 third quarter, unchanged from the third quarter of 2007. SG&A spending in the third quarter increased, in dollar terms, primarily due to changes in foreign currency exchange rates, increased benefit expenses and higher incentive compensation accruals. The 2008 third-quarter SG&A expense also included charges of $1.9 million primarily related to corporate development activities, partially offset by a favorable insurance settlement.

Restructuring charges were $9.0 million in the 2008 third quarter, an increase from $5.8 million in the third quarter of 2007. The 2008 third quarter charges were primarily related to our manufacturing rationalization activities in Europe related to our Performance Coatings and Color and Glass Performance Materials segments.

Interest expense declined in the 2008 third quarter as a result of lower average interest rates, partially offset by higher borrowing levels.

During the 2008 third quarter, we refinanced our 9 1/8% coupon senior notes using the proceeds of a new convertible bond issue and additional borrowing from our revolving credit facility. In connection with the repayment of the previous senior notes, we recorded a loss on extinguishment of debt of $5.5 million during the quarter. This loss consists of costs that would have been reported as interest expense during the remaining life of the previous senior notes had we not extinguished the debt early.

Income tax expense for the three months ending September 30, 2008, was $1.6 million, or 24.7% of pre-tax income, compared to $3.5 million, or 38.5% of pre-tax income, in the third quarter of 2007. The reasons for the decrease in the effective tax rate were a change in the mix of income by country and a decrease in the U.S. tax cost on foreign dividends.

There were no new businesses included in discontinued operations in the third quarter of 2008.

		Three months ended
		September 30,
		2008				2007				$ Change				% Change
		(Dollars in thousands)
Segment Sales
Performance Coatings		$	162,523			$	153,742			$	8,781				5.7	%
Electronic Materials			155,122				116,645				38,477				33.0	%
Color & Glass Performance Materials			115,013				113,575				1,438				1.3	%
Polymer Additives			93,081				85,230				7,851				9.2	%
Specialty Plastics			58,097				62,236				(4,139	)			(6.7	%)
Other Businesses			24,752				19,273				5,479				28.4	%
Total segment sales		$	608,588			$	550,701			$	57,887				10.5	%
Segment Operating Income
Performance Coatings		$	12,135			$	8,449			$	3,686				43.6	%
Electronic Materials			17,095				8,522				8,573				100.6	%
Color & Glass Performance Materials			9,712				11,727				(2,015	)			(17.2	%)
Polymer Additives			4,385				3,417				968				28.3	%
Specialty Plastics			2,796				3,586				(790	)			(22.0	%)
Other Businesses			2,645				593				2,052				346.0	%
Total segment operating income		$	48,768			$	36,294			$	12,474				34.4	%