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, 2007

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

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

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, 2007, there were 43,515,015 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 27
Item 3		Quantitative and Qualitative Disclosures about Market Risk		Page 38
Item 4		Controls and Procedures		Page 40
		PART II
Item 1		Legal Proceedings		Page 42
Item 1A		Risk Factors		Page 42
Item 2		Unregistered Sales of Equity Securities and Use of Proceeds		Page 42
Item 3		Defaults Upon Senior Securities		Page 42
Item 4		Submission of Matters to a Vote of Security Holders		Page 42
Item 5		Other Information		Page 42
Item 6		Exhibits		Page 42
EX-31.1
EX-31.2
EX-32.1
EX-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,
						Adjusted								Adjusted
		2007				2006				2007				2006
		(Dollars in thousands, except per share amounts)
Net sales		$	550,701			$	500,573			$	1,634,064			$	1,544,218
Cost of sales			450,553				401,853				1,319,609				1,226,758
Gross profit			100,148				98,720				314,455				317,460
Selling, general and administrative expenses			71,069				74,116				234,212				231,955
Restructuring charges			5,826				—				7,689				—
Other expense (income):
Interest expense			14,488				16,818				46,220				48,155
Interest earned			(271	)			(971	)			(1,425	)			(2,741	)
Foreign currency transactions, net			(10	)			166				924				706
Miscellaneous (income) expense, net			(13	)			428				(399	)			3,070
Income before income taxes			9,059				8,163				27,234				36,315
Income tax expense			3,472				2,694				10,814				11,938
Income from continuing operations			5,587				5,469				16,420				24,377
Loss (income) from discontinued operations, net of tax			2				(62	)			216				405
Net income			5,585				5,531				16,204				23,972
Dividends on preferred stock			252				310				797				955
Net income available to common shareholders		$	5,333			$	5,221			$	15,407			$	23,017
Per common share data
Basic earnings:
From continuing operations		$	0.12			$	0.12			$	0.36			$	0.55
From discontinued operations			0.00				0.00				0.00				(0.01	)
		$	0.12			$	0.12			$	0.36			$	0.54
Diluted earnings:
From continuing operations		$	0.12			$	0.12			$	0.36			$	0.55
From discontinued operations			0.00				0.00				0.00				(0.01	)
		$	0.12			$	0.12			$	0.36			$	0.54
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

						Adjusted
		September 30,				December 31,
		2007				2006
		(Dollars in thousands)
ASSETS
Current assets
Cash and cash equivalents		$	25,821			$	16,985
Accounts and trade notes receivable, net			236,362				220,899
Note receivable from Ferro Finance Corporation			22,887				16,083
Inventories			280,044				269,234
Deposits for precious metals			—				70,073
Deferred income taxes			12,086				12,291
Other current assets			40,189				25,877
Total current assets			617,389				631,442
Other assets
Property, plant and equipment, net			535,713				526,802
Goodwill and other intangible assets, net			406,461				406,340
Deferred income taxes			93,791				94,490
Other non-current assets			107,110				82,528
Total assets		$	1,760,464			$	1,741,602
LIABILITIES and SHAREHOLDERS’ EQUITY
Current liabilities
Loans payable and current portion of long-term debt		$	11,515			$	10,764
Accounts payable			266,236				237,018
Income taxes			—				8,951
Accrued payrolls			32,073				33,164
Accrued expenses and other current liabilities			86,470				91,150
Total current liabilities			396,294				381,047
Other liabilities
Long-term debt, less current portion			524,863				581,654
Postretirement and pension liabilities			185,770				194,427
Deferred income taxes			17,762				11,037
Other non-current liabilities			63,326				21,599
Total liabilities			1,188,015				1,189,764
Series A convertible preferred stock			14,198				16,787
Shareholders’ equity
Common stock			52,323				52,323
Paid-in capital			163,074				158,504
Retained earnings			585,377				600,638
Accumulated other comprehensive loss			(41,838	)			(65,138	)
Common shares in treasury, at cost			(200,685	)			(211,276	)
Total shareholders’ equity			558,251				535,051
Total liabilities and shareholders’ equity		$	1,760,464			$	1,741,602

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				Income (Loss)				Equity
		(In thousands, except per share data)
Balances at December 31, 2006 - Adjusted			9,458			$	(211,276	)		$	52,323			$	158,504			$	600,638			$	(65,138	)		$	535,051
Net income																			16,204								16,204
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment																							28,183				28,183
Postemployment benefit liability adjustments																							(140	)			(140	)
Raw material commodity swap adjustments																							(1,903	)			(1,903	)
Interest rate swap adjustments																							(2,840	)			(2,840	)
Total comprehensive income																											39,504
Cash dividends:
Common																			(18,773	)							(18,773	)
Preferred																			(797	)							(797	)
Income tax benefits																			38								38
Transactions involving benefit plans			(644	)			10,591								4,570												15,161
Adjustment to initially apply FIN No. 48 as of January 1, 2007																			(11,933	)							(11,933	)
Balances at September 30, 2007			8,814			$	(200,685	)		$	52,323			$	163,074			$	585,377			$	(41,838	)		$	558,251

See accompanying notes to condensed consolidated financial statements.

Ferro Corporation and Consolidated Subsidiaries
Condensed Consolidated Statements of Cash Flows

		Nine months ended
		September 30,
						Adjusted
		2007				2006
		(Dollars in thousands)
Cash flows from operating activities
Net income		$	16,204			$	23,972
Depreciation and amortization			63,825				59,030
Precious metals deposits			70,073				(74,250	)
Accounts and trade notes receivable, inventories, and accounts payable			13,696				(75,233	)
Note receivable from Ferro Finance Corportion			(6,804	)			82,173
Other changes in current assets and liabilities, net			(27,964	)			6,923
Other adjustments, net			(7,701	)			(6,843	)
Net cash provided by continuing operations			121,329				15,772
Net cash used for discontinued operations			(48	)			(867	)
Net cash provided by operating activities			121,281				14,905
Cash flows from investing activities
Capital expenditures for property, plant and equipment			(43,247	)			(33,602	)
Proceeds from sale of assets and businesses			2,704				6,430
Cash investment in Ferro Finance Corporation			—				(25,000	)
Other investing activities			551				(105	)
Net cash used for investing activities			(39,992	)			(52,277	)
Cash flows from financing activities
Net repayments under short-term credit facilities			(740	)			(468	)
Proceeds from revolving credit facility			592,167				966,200
Proceeds from term loan facility			55,000				250,000
Principal payments on revolving credit facility			(700,864	)			(994,600	)
Principal payments on term loan facility			(2,287	)			—
Extinguishment of debentures			—				(155,000	)
Debt issue costs paid			(1,783	)			(15,804	)
Proceeds from exercise of stock options			9,217				2,196
Cash dividends paid			(19,570	)			(19,439	)
Other financing activities			(4,442	)			(2,308	)
Net cash (used for) provided by financing activities			(73,302	)			30,777
Effect of exchange rate changes on cash and cash equivalents			849				(202	)
Increase (decrease) in cash and cash equivalents			8,836				(6,797	)
Cash and cash equivalents at beginning of period			16,985				17,413
Cash and cash equivalents at end of period		$	25,821			$	10,616
Cash paid during the period for:
Interest		$	46,925			$	48,710
Income taxes		$	11,387			$	8,607

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, 2006. 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, 2007, are not necessarily indicative of the results expected in subsequent quarters or for the full year.

     Interest earned in the three and nine months ended September 30, 2006, of $1.0 million and $2.7 million, respectively, was reclassified from miscellaneous expense (income), net, and is shown separately in the condensed consolidated statements of income.

2. Accounting Methods Adopted in the Nine Months Ended September 30, 2007

     On January 1, 2007, we elected to change our costing method for our inventories not already costed under the lower of cost or market using the first-in, first-out (“FIFO”) method, while in prior years, these inventories were costed under the lower of cost or market using the last-in, first-out (“LIFO”) method. The percentage of inventories accounted for under the LIFO method at December 31, 2006, was 13.8% for U.S. inventories and 6.2% for consolidated inventories. We believe the FIFO method is preferable as it conforms the inventory costing methods for all of our inventories to a single method and improves comparability with our industry peers. The FIFO method also better reflects current acquisition cost of those inventories on our consolidated balance sheets and enhances the matching of future cost of sales with revenues. In accordance with Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Correction, all prior periods presented have been adjusted to apply the new method retrospectively. The effect of the change in our inventory costing method includes the LIFO reserve and related impact on the obsolescence reserve. This change increased our inventory balance by $13.7 million and increased retained earnings, net of income tax effects, by $8.5 million as of January 1, 2006.

     On January 1, 2007, we also changed our accounting method of accruing for major planned overhauls. Financial Accounting Standards Board (“FASB”) Staff Position No. AUG AIR-1, Accounting for Planned Maintenance Activities, (“AUG AIR-1”), prohibits our prior policy of accruing for major planned overhauls in advance of when the actual costs are incurred. Under our new policy, the costs of major planned overhauls are expensed when incurred. All prior periods presented have been adjusted to apply the new method retrospectively. Adoption of this accounting pronouncement decreased our accrued expenses and other current liabilities by $2.2 million and increased retained earnings, net of income tax effects, by $1.5 million as of January 1, 2006.

     On January 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (“FIN 48”). FIN 48 clarifies what criteria must be met prior to recognition of the financial statement benefit of a position taken or expected to be taken in a tax return. This interpretation also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures. The adoption of this interpretation decreased the opening balance of retained earnings by $11.9 million as of January 1, 2007. We have elected to continue to report interest and penalties as income tax expense.

     On January 1, 2007, we also adopted Statement of Financial Accounting Standards No. 156, Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140, (“FAS No. 156”). This statement requires an entity to recognize at fair value a servicing asset or liability each time it undertakes an obligation to service a financial asset by

entering into a servicing contract. We provide “collection agent” services for our U.S. and certain international receivable sales programs. The “collection agent” fees received by the Company approximate adequate compensation. Therefore, the adoption of FAS No. 156 did not have an effect on our consolidated financial statements.

     We have presented the effects of the changes in accounting principles for inventory costs and for major planned overhauls for 2007 and 2006 below. We have combined certain financial statement line items if they were not affected by the changes in accounting principles.

Condensed Consolidated Statements of Income

		Three months ended September 30, 2007
		Computed				Change to				Reported
		under LIFO				FIFO				under FIFO
		(Dollars in thousands, except per share amounts)
Net sales		$	550,701			$	—			$	550,701
Cost of sales			451,518				(965	)			450,553
Gross profit			99,183				965				100,148
Selling, general and administrative expenses			71,069				—				71,069
Restructuring charges			5,826				—				5,826
Other expense			14,194				—				14,194
Income before income taxes			8,094				965				9,059
Income tax expense			3,282				190				3,472
Income from continuing operations			4,812				775				5,587
Loss from discontinued operations, net of tax			2				—				2
Net income			4,810				775				5,585
Dividends on preferred stock			252				—				252
Net income available to common shareholders		$	4,558			$	775			$	5,333
Per common share data
Basic earnings:
From continuing operations		$	0.10			$	0.02			$	0.12
From discontinued operations			0.00				0.00				0.00
		$	0.10			$	0.02			$	0.12
Diluted earnings:
From continuing operations		$	0.10			$	0.02			$	0.12
From discontinued operations			0.00				0.00				0.00
		$	0.10			$	0.02			$	0.12

		Nine months ended September 30, 2007
		Computed				Change to				Reported
		under LIFO				FIFO				under FIFO
		(Dollars in thousands, except per share amounts)
Net sales		$	1,634,064			$	—			$	1,634,064
Cost of sales			1,321,205				(1,596	)			1,319,609
Gross profit			312,859				1,596				314,455
Selling, general and administrative expenses			234,212				—				234,212
Restructuring charges			7,689				—				7,689
Other expense			45,320				—				45,320
Income before income taxes			25,638				1,596				27,234
Income tax expense			10,389				425				10,814
Income from continuing operations			15,249				1,171				16,420
Loss from discontinued operations, net of tax			216				—				216
Net income			15,033				1,171				16,204
Dividends on preferred stock			797				—				797
Net income available to common shareholders		$	14,236			$	1,171			$	15,407
Per common share data
Basic earnings:
From continuing operations		$	0.33			$	0.03			$	0.36
From discontinued operations			0.00				0.00				0.00
		$	0.33			$	0.03			$	0.36
Diluted earnings:
From continuing operations		$	0.33			$	0.03			$	0.36
From discontinued operations			0.00				0.00				0.00
		$	0.33			$	0.03			$	0.36

		Three months ended September 30, 2006
		Originally				Change to				Adoption of
		Reported				FIFO				AUG AIR-1				Adjusted
		(Dollars in thousands, except per share amounts)
Net sales		$	500,573			$	—			$	—			$	500,573
Cost of sales			401,923				(168	)			98				401,853
Gross profit			98,650				168				(98	)			98,720
Selling, general and administrative expenses			74,116				—				—				74,116
Other expense			16,441				—				—				16,441
Income before income taxes			8,093				168				(98	)			8,163
Income tax expense			2,663				62				(31	)			2,694
Income from continuing operations			5,430				106				(67	)			5,469
Income from discontinued operations, net of tax			(62	)			—				—				(62	)
Net income			5,492				106				(67	)			5,531
Dividends on preferred stock			310				—				—				310
Net income available to common shareholders		$	5,182			$	106			$	(67	)		$	5,221
Per common share data
Basic earnings:
From continuing operations		$	0.12			$	0.00			$	0.00			$	0.12
From discontinued operations			0.00				0.00				0.00				0.00
		$	0.12			$	0.00			$	0.00			$	0.12
Diluted earnings:
From continuing operations		$	0.12			$	0.00			$	0.00			$	0.12
From discontinued operations			0.00				0.00				0.00				0.00
		$	0.12			$	0.00			$	0.00			$	0.12

		Nine months ended September 30, 2006
		Originally				Change to				Adoption of
		Reported				FIFO				AUG AIR-1				Adjusted
		(Dollars in thousands, except per share amounts)
Net sales		$	1,544,218			$	—			$	—			$	1,544,218
Cost of sales			1,226,771				66				(79	)			1,226,758
Gross profit			317,447				(66	)			79				317,460
Selling, general and administrative expenses			231,955				—				—				231,955
Other expense			49,190				—				—				49,190
Income before income taxes			36,302				(66	)			79				36,315
Income tax expense			11,943				(25	)			20				11,938
Income from continuing operations			24,359				(41	)			59				24,377
Loss from discontinued operations, net of tax			405				—				—				405
Net income			23,954				(41	)			59				23,972
Dividends on preferred stock			955				—				—				955
Net income available to common shareholders		$	22,999			$	(41	)		$	59			$	23,017
Per common share data
Basic earnings:
From continuing operations		$	0.55			$	0.00			$	0.00			$	0.55
From discontinued operations			(0.01	)			0.00				0.00				(0.01	)
		$	0.54			$	0.00			$	0.00			$	0.54
Diluted earnings:
From continuing operations		$	0.55			$	0.00			$	0.00			$	0.55
From discontinued operations			(0.01	)			0.00				0.00				(0.01	)
		$	0.54			$	0.00			$	0.00			$	0.54

Condensed Consolidated Balance Sheets

		September 30, 2007
		Computed				Change to				Reported
		under LIFO				FIFO				under FIFO
		(Dollars in thousands)
ASSETS
Current assets
Inventories		$	263,727			$	16,317			$	280,044
Deferred income taxes			18,126				(6,040	)			12,086
Other current assets			325,259				—				325,259
Total current assets			607,112				10,277				617,389
Other assets			1,143,075				—				1,143,075
Total assets		$	1,750,187			$	10,277			$	1,760,464
LIABILITIES and SHAREHOLDERS’ EQUITY
Current liabilities		$	396,294			$	—			$	396,294
Other liabilities			791,721				—				791,721
Total liabilities			1,188,015				—				1,188,015
Series A convertible preferred stock			14,198				—				14,198
Shareholders’ equity
Retained earnings			575,100				10,277				585,377
Other shareholders’ equity			(27,126	)			—				(27,126	)
Total shareholders’ equity			547,974				10,277				558,251
Total liabilities and shareholders’ equity		$	1,750,187			$	10,277			$	1,760,464

		December 31, 2006
		Originally				Change to				Adoption of
		Reported				FIFO				AUG AIR-1				Adjusted
		(Dollars in thousands)
ASSETS
Current assets
Inventories		$	254,513			$	14,721			$	—			$	269,234
Deferred income taxes			18,175				(5,615	)			(269	)			12,291
Other current assets			349,917				—				—				349,917
Total current assets			622,605				9,106				(269	)			631,442
Other assets
Deferred income taxes			94,662				—				(172	)			94,490
Other non-current assets			1,015,670				—				—				1,015,670
Total assets		$	1,732,937			$	9,106			$	(441	)		$	1,741,602
LIABILITIES and SHAREHOLDERS’ EQUITY
Current liabilities
Income taxes		$	8,732			$	—			$	219			$	8,951
Accrued expenses and other current liabilities			93,206				—				(2,056	)			91,150
Other current liabilities			280,946				—				—				280,946
Total current liabilities			382,884				—				(1,837	)			381,047
Other liabilities			808,717				—				—				808,717
Total liabilities			1,191,601				—				(1,837	)			1,189,764
Series A convertible preferred stock			16,787				—				—				16,787
Shareholders’ equity
Retained earnings			590,136				9,106				1,396				600,638
Other shareholders’ equity			(65,587	)			—				—				(65,587	)
Total shareholders’ equity			524,549				9,106				1,396				535,051
Total liabilities and shareholders’ equity		$	1,732,937			$	9,106			$	(441	)		$	1,741,602

Condensed Consolidated Statements of Cash Flows

		Nine months ended September 30, 2007
		Computed				Change to				Reported
		under LIFO				FIFO				under FIFO
		(Dollars in thousands)
Cash flows from operating activities
Net income		$	15,033			$	1,171			$	16,204
Depreciation and amortization			63,825				—				63,825
Precious metals deposits			70,073				—				70,073
Accounts and trade notes receivable, inventories, and accounts payable			15,292				(1,596	)			13,696
Note receivable from Ferro Finance Corporation			(6,804	)			—				(6,804	)
Other changes in current assets and liabilities, net			(27,964	)			—				(27,964	)
Other adjustments, net			(8,126	)			425				(7,701	)
Net cash provided by continuing operations			121,329				—				121,329
Net cash used for discontinued operations			(48	)			—				(48	)
Net cash provided by operating activities			121,281				—				121,281
Cash flows from investing activities			(39,992	)			—				(39,992	)
Cash flows from financing activities			(73,302	)			—				(73,302	)
Effect of exchange rate changes on cash and cash equivalents			849				—				849
Increase in cash and cash equivalents			8,836				—				8,836
Cash and cash equivalents at beginning of period			16,985				—				16,985
Cash and cash equivalents at end of period		$	25,821			$	—			$	25,821

		Nine months ended September 30, 2006
		Originally				Change to				Adoption of
		Reported				FIFO				AUG AIR-1				Adjusted
		(Dollars in thousands)
Cash flows from operating activities
Net income		$	23,954			$	(41	)		$	59			$	23,972
Depreciation and amortization			59,030				—				—				59,030
Precious metals deposits			(74,250	)			—				—				(74,250	)
Accounts and trade notes receivable, inventories, and accounts payable			(75,299	)			66				—				(75,233	)
Note receivable from Ferro Finance Corporation			82,173				—				—				82,173
Other changes in current assets and liabilities, net			7,009				—				(86	)			6,923
Other adjustments, net			(6,845	)			(25	)			27				(6,843	)
Net cash provided by continuing operations			15,772				—				—				15,772
Net cash used for discontinued operations			(867	)			—				—				(867	)
Net cash provided by operating activities			14,905				—				—				14,905
Cash flows from investing activities			(52,277	)			—				—				(52,277	)
Cash flows from financing activities			30,777				—				—				30,777
Effect of exchange rate changes on cash and cash equivalents			(202	)			—				—				(202	)
Decrease in cash and cash equivalents			(6,797	)			—				—				(6,797	)
Cash and cash equivalents at beginning of period			17,413				—				—				17,413
Cash and cash equivalents at end of period		$	10,616			$	—			$	—			$	10,616

3. Newly Issued Accounting Pronouncements

     In September 2006, the FASB issued Statement No. 157, Fair Value Measurements, (“FAS No.157”). 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. Accordingly, FAS No. 157 does not require any new fair value measurements, but will change current practice for some entities. FAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We will apply this standard prospectively, as permitted.

     In September 2006, the FASB issued 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”). We are required to adopt the measurement provisions of FAS No. 158 as of December 31, 2008. The measurement provisions require companies to measure defined benefit plan assets and obligations as of the balance sheet date. Currently, we use September 30 as the measurement date for U.S. pension and other postretirement benefits. We are evaluating these requirements and have not yet determined the impact this may have on our consolidated financial statements.

     In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, (“FAS No. 159”). This statement permits all entities to choose, at specified election dates, to measure eligible items at fair value (the “fair value option”). A business entity should report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Upfront costs and fees related to items for which the fair value option is elected shall be recognized in earnings as incurred and not deferred. FAS No. 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007. We are currently evaluating the impact of the adoption of this statement; at this time, we are uncertain as to the impact on our results of operations and financial position.

     In June 2007, the Emerging Issues Task Force of the FASB reached a consensus on 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. Currently, we recognize this income tax benefit as an increase to retained earnings. EITF No. 06-11 is to be applied prospectively in fiscal years beginning after December 15, 2007. Beginning in 2008, we will report this income tax benefit as an increase to paid-in capital.

4. Inventories

     As noted in Note 2, effective January 1, 2007, we elected to change our costing method for selected inventories. We applied this change in accounting principle by adjusting all prior periods presented retrospectively. Inventories consisted of the following:

						Adjusted
		September 30,				December 31,
		2007				2006
		(Dollars in thousands)
Raw materials		$	79,823			$	74,160
Work in process			43,206				44,658
Finished goods			157,015				150,416
Total		$	280,044			$	269,234

     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 $0.8 million and $0.8 million for the three months ended September 30, 2007 and 2006, respectively, and $2.8 million and $2.2 million for the nine months ended September 30, 2007 and 2006, respectively, and were charged to cost of sales. In November 2005, the financial institutions renewed their requirement for cash deposits from us to provide additional collateral beyond the value of the underlying precious metals. Outstanding collateral deposits were $70.1 million at December 31, 2006. These requirements were eliminated during the first six months of 2007. We had on hand $126.3 million at September 30, 2007, and $120.9 million at December 31, 2006, of precious metals owned by financial institutions, measured at fair value.

5. Property, Plant and Equipment

     Property, plant and equipment is reported net of accumulated depreciation of $763.4 million at September 30, 2007, and $691.4 million at December 31, 2006.

6. Financing and Long-term Debt

     Long-term debt consists of the following:

		September 30,				December 31,
		2007				2006
		(Dollars in thousands)
$200,000 Senior Notes, 9.125%, due January 2009 *		$	199,545			$	199,273
Revolving credit facility			19,256				127,953
Term loan facility			302,713				250,000
Capital lease obligations			6,965				6,744
Other notes			1,272				1,008
			529,751				584,978
Less current portion			(4,888	)			(3,324	)
Total		$	524,863			$	581,654

Credit Rating

     In May 2007, Moody’s Investor Services, Inc. (“Moody’s”) reassigned a senior credit rating to the Company after withdrawing its rating in March 2006 due to delays in the filing of financial statements for 2005 and quarterly statements for 2004 through 2006. At September 30, 2007, the Company’s senior credit rating was B1, with a positive outlook, by Moody’s and B+, with a stable outlook, by Standard & Poor’s Rating Group (“S&P”).

Revolving Credit and Term Loan Facilities

     In 2006, we entered into an agreement with a group of lenders for a $700 million credit facility. At that time, the credit facility consisted of a five-year, $250 million multi-currency senior revolving credit facility and a six-year, $450 million senior term loan facility.

     In June 2007, we amended the credit facility (the “Amended Credit Facility”) primarily to increase the size of the revolving credit facility by $50 million to $300 million, reduce interest expense, and increase operating flexibility. We had $272.1 million at September 30, 2007, and $109.3 million at December 31, 2006, available under the revolving credit facility, after reductions for standby letters of credit secured by this facility. In addition, we can request an increase of $50 million in the revolving credit facility. With the amendment, we reduced the margins for borrowings under both the revolving credit and the term loan facilities as compared with the margins that were in effect prior to the amendment. For the revolving credit facility, as amended, the variable margin is based on the Company’s leverage ratio. Previously, the variable margin was based on the Company’s credit ratings as determined by S&P and Moody’s. In addition, the amendment increased our operating flexibility by increasing the amount of restructuring and manufacturing rationalization programs permitted, relaxing restrictions on the use of proceeds from asset dispositions, and modifying covenants related to Ferro’s leverage ratio and fixed charge coverage ratio.

     In January 2007, we borrowed $55 million of our term loan facility and used the proceeds to reduce borrowings under our revolving credit facility. We also cancelled the remaining unused term loan commitment of $145 million, which was reserved to finance the potential accelerated payment of the senior notes, since the default under the senior notes was no longer continuing. As a result of canceling the remaining commitment, we wrote off to interest expense $2.0 million of deferred financing fees related to the term loan facility in the first quarter of 2007. In the second quarter of 2007, we began making periodic principal payments on the term loans. At September 30, 2007, we had borrowed $302.7 million in term loans. The Company is required to make quarterly principal payments of $0.8 million from October 2007 to July 2011 and $72.6 million from October 2011 to April 2012 and a final payment of $72.6 million in June 2012.

     The interest rates under the Amended Credit Facility are 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 June 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 June 2007. These swap agreements effectively fixed the interest rate through June 2011 on $150 million of borrowings under the term loan facility. At September 30, 2007, the average interest rate for revolving credit borrowings was 7.4%, and the effective interest rate for term loan borrowings after adjusting for the interest rate swaps was 7.3%. At December 31, 2006, the average interest rate was 8.1% for revolving credit borrowings and 8.1% for term loan borrowings.

Senior Notes and Debentures

     The senior notes are redeemable at our option at any time for the principal amount then outstanding plus the present value of unpaid interest through maturity. The senior notes are redeemable at the option of the holders only upon both a change in control of the Company and a rating by either Moody’s or S&P below investment grade as defined in the indenture. Currently, the ratings by Moody’s and S&P of the senior notes are below investment grade.

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. 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”) for proceeds of up to $100.0 million. FFC had received net proceeds of $65.5 million at September 30, 2007, and $60.6 million at December 31, 2006, 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 agent” services with respect to the trade accounts receivable sold. In June 2007, we amended the program primarily to reduce its fees and to make Ferro’s leverage ratio the basis for these fees.

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

		2007				2006
		(Dollars in thousands)
Trade accounts receivable sold to FFC		$	739,005			$	769,580
Cash proceeds from FFC			731,454				852,019
Trade accounts receivable collected and remitted to FFC and the conduits			726,553				763,519

     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 $85.8 million at September 30, 2007, and $49.2 million at December 31, 2006. The proceeds from outstanding receivables sold under the international programs were $51.2 million at September 30, 2007, and $33.7 million at December 31, 2006.

Other Financing Arrangements

     In June 2007, we entered into two international variable-rate credit facilities secured by specific accounts receivable. Beginning in the third quarter, these underlying accounts receivable are treated as sold and, at September 30, 2007, were included in the above disclosures about our international programs to sell trade accounts receivable.

7. Financial Instruments

     The carrying amounts of borrowings under the Amended Credit Facility approximate their fair values, due to their variable market interest rates. To reduce our exposure to interest rate changes on variable-rate debt, we entered into interest rate swap agreements. These swaps effectively converted $150 million of our variable-rate debt to a fixed rate.

     The carrying amount of the senior notes was $199.5 million at September 30, 2007, and $199.3 million at December 31, 2006. The fair value of the senior notes was $205.5 million at September 30, 2007, and $205.5 million at December 31, 2006. The fair value of Ferro’s senior notes is based on a third party’s estimated bid price.

     We manage foreign currency risks principally by entering into forward contracts to mitigate the impact of currency fluctuations on transactions. We hedge a portion of our exposure to changes in the pricing of certain raw material commodities using swap arrangements that allow us to fix the price of the commodities for future purchases. When we enter into fixed price sales contracts for products with precious metal content, we also enter into a forward purchase arrangement with a precious metals supplier to cover the value of the fixed price sales contract. We also purchase portions of our natural gas requirements under fixed price contracts to reduce the volatility of cost changes. For gas contracts entered into prior to April 2006, we marked these contracts to fair value and recognized the resulting gains or losses as miscellaneous income or expense, respectively. Beginning April 2006, we designated new natural gas contracts as normal purchase contracts, which are not marked-to-market. Our purchase commitment for natural gas under normal purchase contracts was $6.2 million at September 30, 2007.

     The notional amounts, carrying amounts of assets (liabilities), and fair values of these derivative instruments are presented below. Fair values are based on market quotations or third parties’ estimated bid prices.

		September 30,				December 31,
		2007				2006
		(Dollars in thousands)
Interest rate swaps:
Notional amount		$	150,000			$	—
Carrying amount and fair value		$	(4,656	)		$	—
Foreign currency forward contracts:
Notional amount		$	169,454			$	121,430
Carrying amount and fair value		$	(101	)		$	(640	)
Raw material commodity swaps:
Notional amount (in metric tons of base metals)			1,595				2,004
Carrying amount and fair value		$	(1,043	)		$	1,939
Precious metals forward contracts:
Notional amount (in troy ounces)			554,043				183,264
Carrying amount and fair value		$	997			$	192
Marked-to-market natural gas forward purchase contracts:
Notional amount (in MBTUs)			—				120,000
Carrying amount and fair value		$	—			$	(442	)

8. Income Taxes

     Income tax expense was 39.7% of pre-tax income for the nine months ended September 30, 2007, and 32.9% of pre-tax income for the nine months ended September 30, 2006. The primary reasons for the increase in the effective tax rate were the tax effect of restructuring charges, a change in the mix of income and losses by country, and a relatively high tax cost on 2007 earnings repatriated from outside the United States.

     On January 1, 2007, we adopted FIN 48. For further information regarding the adoption of FIN 48, refer to Note 2.

     As of January 1, 2007, we had unrecognized tax benefits of $47.4 million, which, if recognized, would have a favorable impact of $23.5 million on income tax expense. We have recorded accrued interest and penalties related to unrecognized tax benefits totaling $3.7 million at January 1, 2007. During the first nine months of 2007, there were no significant changes in the amount of unrecognized tax benefits. We do not anticipate any significant increase or decrease in the amount of unrecognized tax benefits within the next twelve months.

     The Company conducts business globally, and, as a result, the U.S. parent company or one of its subsidiaries files 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. 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

     In February 2003, we were requested to produce 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 and that the Company was relieved of any obligation to retain documents that were responsive to the Government’s earlier document request. Before closing its investigation, the Department of Justice took no action against the Company or any of its current or former employees. The Company was previously named as a defendant in several lawsuits alleging civil damages and requesting injunctive relief relating to the conduct the Government was investigating. We entered into a verbal agreement in June 2007 and a definitive written settlement agreement in July 2007 with the direct purchasers in one of these class action civil lawsuits related to alleged antitrust violations in the heat stabilizer industry. 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 settlement agreement must be approved by the United States District Court for the Eastern District of Pennsylvania. The Company is vigorously defending the remaining two civil actions alleging antitrust violations in the heat stabilizer industry, which are in their preliminary stages; therefore, we cannot determine the outcomes of these lawsuits at this time. We have asserted a claim against the former owner of our heat stabilizer business of indemnification for the defense of these lawsuits and any resulting payments by the Company, including the payments of approximately $6.3 million to the class of direct purchasers and a plaintiff that opted out of the class of direct purchasers and entered into a separate settlement agreement with the Company.

     In a July 2004 press release, we announced that our Polymer Additives business performance in the second quarter of 2004 fell short of expectations and that our Audit Committee would investigate possible inappropriate accounting entries in the Polymer Additives business. We were later sued in a series of putative securities class action lawsuits related to this July 2004 announcement. Those lawsuits were consolidated into a single case in the United States District Court for the Northern District of Ohio against the Company, our deceased former Chief Executive Officer, our former Chief Financial Officer, and a former Operating Vice President of the Company. In June 2007, the United States District Court for the Northern District of Ohio dismissed the plaintiffs’ complaint, after which the plaintiffs appealed the District Court decision to the Sixth Circuit Court of Appeals. In September 2007, however, the plaintiffs filed a voluntary dismissal, with prejudice, of their appeal, thus ending this litigation.

     Also following the July 2004 press release, four derivative lawsuits were filed and subsequently consolidated in the United States District Court for the Northern District of Ohio. These lawsuits alleged breach of fiduciary duties and mismanagement-related claims. In March 2006, the Court dismissed the consolidated derivative action without prejudice. In April 2006, the plaintiffs filed a motion seeking relief from the judgment that dismissed the derivative lawsuit and seeking to amend their complaint further following discovery. The plaintiffs’ motion was denied. Later in April 2006, plaintiffs filed a Notice of Appeal to the Sixth Circuit Court of Appeals. The Directors and named executives consider the allegations contained in the derivative actions to be unfounded, have vigorously defended this action and will defend against the new filing. We have notified Ferro’s directors and officers liability insurer of the claim. This appeal is currently under consideration by the Sixth Circuit Court of Appeals; therefore, we cannot determine the outcome of this litigation at this time.

     In June 2005, a putative class action lawsuit was filed against the Company and certain former and current employees alleging breach of fiduciary duty with respect to ERISA plans in connection with the matters announced in the July 2004 press release. In October 2006, the parties reached a settlement in principle that would result in the dismissal of the lawsuit, with prejudice, in exchange for a settlement amount of $4.0 million, of which $3.4 million was paid by the Company’s liability insurer and $0.6 was paid by the Company. The Company and the individual defendants have expressly denied any wrongdoing. The United States District Court approved the settlement in September 2007, thus ending this lawsuit.

     In September 2007, we entered into a settlement agreement with the U.S. Securities and Exchange Commission (“SEC”) related to the SEC’s investigation of the inappropriate accounting entries in our Polymer Additives business. As part of the settlement, and without admitting or denying any wrongdoing, we agreed to the entry of an administrative order by the SEC directing the Company to cease and desist from committing or causing violations of certain of the reporting provisions of Federal securities laws and related SEC rules. The SEC’s order contains no finding of securities fraud or violation of any antifraud provision of Federal securities laws or related SEC rules. The Company was not required to pay any monetary penalty or fine in connection with the resolution of this matter.

     In October 2004, the Belgian Ministry of Economic Affairs’ Commercial Policy Division (the “Ministry”) served on our Belgian subsidiary a mandate requiring the production of certain documents related to an alleged cartel among producers of butyl benzyl phthalate (“BBP”) from 1983 to 2002. Subsequently, German and Hungarian authorities initiated their own national investigations related to the same allegations. Our Belgian subsidiary acquired its BBP business from Solutia Europe S.A./N.V. (“SOLBR”) in August 2000. We promptly notified SOLBR of the Ministry’s actions and requested SOLBR to indemnify and defend the Company and its Belgian subsidiary with respect to these investigations. In response to our notice, SOLBR exercised its right under the 2000 acquisition agreement to take over the defense and settlement of these matters. In December 2005, the Hungarian authorities imposed a de minimis fine on our Belgian subsidiary and in October 2007, the German authorities imposed a fine of approximately €0.4 million. We expect the Belgian authorities also to assess fines for the alleged conduct. We cannot predict the amount of the Belgian fine that will ultimately be assessed and cannot predict the degree to which SOLBR will indemnify Ferro’s Belgian subsidiary for these various fines.

     In February 2007, we discovered that some of the values shown on certificates of analysis provided to customers by a plant in our Specialty Plastics segment were inaccurate. The faulty procedures and practices that resulted in the inaccurate values have been investigated and corrected. We have worked with the customers of the Specialty Plastics business to provide those customers with products that meet their performance requirements and are accurately described on the corresponding certificates of analysis. While it is possible some customers may assert claims relating to this issue, we cannot predict at this time the financial effect of any resulting claims.

     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 $17.1 million at September 30, 2007, and $20.8 million at December 31, 2006. These agreements primarily relate to Ferro’s insurance programs, natural gas contracts, 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
		2007				2006				2007				2006				2007				2006
		(Dollars in thousands)
Components of net periodic cost:
Service cost		$	317			$	461			$	1,663			$	1,724			$	124			$	140
Interest cost			5,026				4,973				2,359				1,891				836				807
Expected return on plan assets			(5,140	)			(4,735	)			(1,871	)			(1,487	)			—				—
Amortization of prior service cost			39				46				27				36				(349	)			(293	)
Net amortization and deferral			1,456				1,249				148				238				—				—
Curtailment and settlement effects			—				150				—				—				(814	)			—
Special termination benefits			—				—				2,189				—				—				—
Net periodic benefit cost		$	1,698			$	2,144			$	4,515			$	2,402			$	(203	)		$	654