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

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

Commission File Number 1-584

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES o NO o

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

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

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 June 30, 2010, there were 86,129,962 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 20
Item 3 Quantitative and Qualitative Disclosures about Market Risk		Page 31
Item 4 Controls and Procedures		Page 32
PART II
Item 1 Legal Proceedings		Page 33
Item 1A Risk Factors		Page 33
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds		Page 33
Item 3 Defaults Upon Senior Securities		Page 33
Item 4 (Removed and Reserved)		Page 33
Item 5 Other Information		Page 33
Item 6 Exhibits		Page 33
Exhibit 10.1
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 Operations

		Three months ended								Six months ended
		June 30,								June 30,
		2010				2009				2010				2009
		(Dollars in thousands,
		except per share amounts)
Net sales		$	543,485			$	399,277			$	1,036,350			$	757,086
Cost of sales			421,155				334,048				807,086				636,611
Gross profit			122,330				65,229				229,264				120,475
Selling, general and administrative expenses			69,852				62,480				140,800				130,608
Impairment charges			—				—				2,202				—
Restructuring charges			21,205				(309	)			32,335				1,089
Other expense (income):
Interest expense			13,766				17,190				26,677				28,364
Interest earned			(133	)			(205	)			(464	)			(473	)
Foreign currency (gains) losses, net			(302	)			1,100				3,246				2,929
Miscellaneous (income) expense, net			(3,571	)			321				(4,822	)			854
Income (loss) before income taxes			21,513				(15,348	)			29,290				(42,896	)
Income tax expense (benefit)			13,919				(4,276	)			22,508				(12,095	)
Income (loss) from continuing operations			7,594				(11,072	)			6,782				(30,801	)
Loss on disposal of discontinued operations, net of income taxes			—				(116	)			—				(358	)
Net income (loss)			7,594				(11,188	)			6,782				(31,159	)
Less: Net income (loss) attributable to noncontrolling interests			494				620				(250	)			984
Net income (loss) attributable to Ferro Corporation			7,100				(11,808	)			7,032				(32,143	)
Dividends on preferred stock			(165	)			(199	)			(330	)			(370	)
Net income (loss) attributable to Ferro Corporation common shareholders		$	6,935			$	(12,007	)		$	6,702			$	(32,513	)
Amounts attributable to Ferro Corporation:
Income (loss) from continuing operations, net of tax		$	7,100			$	(11,692	)		$	7,032			$	(31,785	)
Loss from discontinued operations, net of tax			—				(116	)			—				(358	)
		$	7,100			$	(11,808	)		$	7,032			$	(32,143	)
Per common share data
Basic and diluted income (loss) attributable to Ferro Corporation common shareholders:
From continuing operations		$	0.08			$	(0.27	)		$	0.08			$	(0.72	)
From discontinued operations			—				—				—				(0.01	)
		$	0.08			$	(0.27	)		$	0.08			$	(0.73	)
Cash dividends declared		$	—			$	—			$	—			$	0.01

See accompanying notes to condensed consolidated financial statements.

Ferro Corporation and Consolidated Subsidiaries
Condensed Consolidated Balance Sheets

		June 30,				December 31,
		2010				2009
		(Dollars in thousands)
ASSETS
Current assets
Cash and cash equivalents		$	29,732			$	18,507
Accounts and trade notes receivable, net			320,711				285,638
Inventories			197,788				180,700
Deposits for precious metals			55,808				112,434
Deferred income taxes			19,277				19,618
Other receivables			39,460				27,795
Other current assets			6,416				7,180
Total current assets			669,192				651,872
Other assets
Property, plant and equipment, net			384,940				432,405
Goodwill			216,326				221,044
Amortizable intangible assets, net			12,443				10,610
Deferred income taxes			132,249				133,705
Other non-current assets			66,277				76,719
Total assets		$	1,481,427			$	1,526,355
LIABILITIES AND EQUITY
Current liabilities
Loans payable and current portion of long-term debt		$	5,066			$	24,737
Accounts payable			206,172				196,038
Income taxes			21,937				7,241
Accrued payrolls			30,581				20,894
Accrued expenses and other current liabilities			92,940				72,039
Total current liabilities			356,696				320,949
Other liabilities
Long-term debt, less current portion			347,707				398,720
Postretirement and pension liabilities			198,606				203,743
Deferred income taxes			1,286				1,124
Other non-current liabilities			26,342				31,897
Total liabilities			930,637				956,433
Series A convertible preferred stock (approximates redemption value)			9,427				9,427
Equity
Ferro Corporation shareholders’ equity:
Common stock			93,436				93,436
Paid-in capital			330,388				331,376
Retained earnings			363,830				357,128
Accumulated other comprehensive loss			(87,085	)			(60,147	)
Common shares in treasury, at cost			(168,729	)			(171,567	)
Total Ferro Corporation shareholders’ equity			531,840				550,226
Noncontrolling interests			9,523				10,269
Total equity			541,363				560,495
Total liabilities and equity		$	1,481,427			$	1,526,355

See accompanying notes to condensed consolidated financial statements.

Ferro Corporation and Consolidated Subsidiaries
Condensed Consolidated Statements of Equity and Comprehensive Income (Loss)

		Ferro Corporation Shareholders
																						Accumulated
																						Other
		Common Shares																				Comprehensive				Non-
		in Treasury								Common				Paid-in				Retained				Income				controlling				Total
		Shares				Amount				Stock				Capital				Earnings				(Loss)				Interests				Equity
		(In thousands)
Balances at December 31, 2008			8,432			$	(197,524	)		$	52,323			$	178,420			$	401,186			$	(98,436	)		$	9,755			$	345,724
Net (loss) income																			(32,143	)							984				(31,159	)
Other comprehensive income (loss), net of tax:
Foreign currency translation																							4,977				(4	)			4,973
Postretirement benefit liabilities																							661								661
Raw material commodity swaps																							559								559
Interest rate swaps																							2,125								2,125
Total comprehensive loss																															(22,841	)
Cash dividends:
Common																			(437	)											(437	)
Preferred																			(199	)											(199	)
Income tax benefit															1																1
Stock-based compensation transactions			(1,059	)			25,586								(22,295	)															3,291
Distributions to noncontrolling interests																											(1,275	)			(1,275	)
Balances at June 30, 2009			7,373			$	(171,938	)		$	52,323			$	156,126			$	368,407			$	(90,114	)		$	9,460			$	324,264
Balances at December 31, 2009			7,375			$	(171,567	)		$	93,436			$	331,376			$	357,128			$	(60,147	)		$	10,269			$	560,495
Net income (loss)																			7,032								(250	)			6,782
Other comprehensive income (loss), net of tax:
Foreign currency translation																							(25,726	)			31				(25,695	)
Postretirement benefit liabilities																							(3,035	)							(3,035	)
Raw material commodity swaps																							(107	)							(107	)
Interest rate swaps																							1,930								1,930
Total comprehensive loss																															(20,125	)
Cash dividends:
Preferred																			(330	)											(330	)
Stock-based compensation transactions			(70	)			2,838								(988	)															1,850
Distributions to noncontrolling interests																											(527	)			(527	)
Balances at June 30, 2010			7,305			$	(168,729	)		$	93,436			$	330,388			$	363,830			$	(87,085	)		$	9,523			$	541,363

See accompanying notes to condensed consolidated financial statements.

Ferro Corporation and Consolidated Subsidiaries
Condensed Consolidated Statements of Cash Flows

		Six months ended
		June 30,
		2010				2009
		(Dollars in thousands)
Cash flows from operating activities
Net cash provided by (used for) operating activities		$	91,772			$	(40,486	)
Cash flows from investing activities
Capital expenditures for property, plant and equipment			(16,298	)			(22,969	)
Proceeds from business combination			5,887				—
Proceeds from sale of assets			317				72
Net cash used for investing activities			(10,094	)			(22,897	)
Cash flows from financing activities
Net (repayments) borrowings under loans payable			(18,787	)			28,945
Proceeds from revolving credit facility			205,140				434,624
Principal payments on revolving credit facility			(206,840	)			(384,727	)
Principal payments on term loan facility			(50,000	)			(1,525	)
Debt issue costs			—				(9,367	)
Cash dividends paid			(330	)			(636	)
Other financing activities			974				2,135
Net cash (used for) provided by financing activities			(69,843	)			69,449
Effect of exchange rate changes on cash and cash equivalents			(610	)			1,235
Increase in cash and cash equivalents			11,225				7,301
Cash and cash equivalents at beginning of period			18,507				10,191
Cash and cash equivalents at end of period		$	29,732			$	17,492
Cash paid during the period for:
Interest		$	20,766			$	25,792
Income taxes		$	9,830			$	5,635

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, 2009. 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. 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 six months ended June 30, 2010, are not necessarily indicative of the results expected in subsequent quarters or for the full year.

2. Accounting Standards Adopted in the Six Months Ended June 30, 2010

On January 1, 2010, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2009-16, Accounting for Transfers of Financial Assets, (“ASU 2009-16”), which is codified in FASB Accounting Standards Codification^TM (“ASC”) Topic 860, Transfers and Servicing. This pronouncement provides guidance for derecognition of transferred financial assets. Adoption of ASU 2009-16 had no effect on our consolidated financial statements.

On January 1, 2010, we adopted ASU 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, (“ASU 2009-17”), which is codified in ASC Topic 810, Consolidations. This pronouncement amends the consolidation guidance that applies to variable interest entities. Adoption of ASU 2009-17 did not have a material effect on our consolidated financial statements.

On January 1, 2010, we adopted most of the provisions of ASU 2010-06, Improving Disclosures About Fair Value Measurements, (“ASU 2010-06”), which is codified in ASC Topic 820, Fair Value Measurements, and Topic 715, Compensation — Retirement Benefits. The remaining provisions will be effective for our fiscal year that begins January 1, 2011. This pronouncement expands disclosures about fair value measurements. Adoption of ASU 2010-06 did not and will not have a material effect on our consolidated financial statements.

3. Newly Issued Accounting Pronouncements

In October 2009, the FASB issued ASU 2009-13, Multiple Deliverable Revenue Arrangements, (“ASU 2009-13”), which applies to all deliverables in contractual arrangements in which a vendor will perform multiple revenue-generating activities. In April 2010, the FASB issued ASU 2010-17, Revenue Recognition—Milestone Method, (“ASU 2010-17”), which defines a milestone and determines when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. These pronouncements are codified in ASC Topic 605, Revenue Recognition, and will be effective for our fiscal year that begins January 1, 2011. These pronouncements may be applied prospectively or retrospectively, and early adoption is permitted. We are evaluating the impact that adoption of ASU 2009-13 and ASU 2010-17 may have on our consolidated financial statements.

4. Inventories

Inventories consisted of the following:

		June 30,				December 31,
		2010				2009
		(Dollars in thousands)
Raw materials		$	64,810			$	54,481
Work in process			40,240				37,449
Finished goods			92,738				88,770
Total		$	197,788			$	180,700

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 $1.3 million and $1.2 million for the three months ended June 30, 2010 and 2009, respectively, and $2.4 million and $2.5 million for the six months ended June 30, 2010 and 2009, respectively, and were charged to cost of sales. We had on hand precious metals owned by participants in our precious metals program of $63.9 million at June 30, 2010, and $101.4 million at December 31, 2009, measured at fair value based on market prices for identical assets. In 2009, several participants in our precious metals program renewed their requirement for us to deliver cash collateral to secure our obligations arising under the consignment agreements. We had delivered $55.8 million at June 30, 2010, and $112.4 million at December 31, 2009, in cash collateral to those financial institutions.

5. Property, Plant and Equipment

Property, plant and equipment is reported net of accumulated depreciation of $629.4 million at June 30, 2010, and $643.9 million at December 31, 2009. Unpaid capital expenditure liabilities, which are noncash investing activities, were $6.1 million at June 30, 2010, and $9.3 million at June 30, 2009.

In the first quarter of 2010, we discontinued manufacturing activities at our Limoges, France, plant, which indicated a possible impairment of the plant’s real estate assets. We estimated the fair value of these assets at $4.0 million based upon a third-party purchase offer (a Level 3 measurement within the fair value hierarchy) and recorded $2.2 million of impairment charges.

In the second quarter of 2010, we initiated restructuring activities at our Uden, Netherlands, facility. The restructuring action and planned closure of this facility triggered an impairment of the carrying values of the facility’s property, plant and equipment. We estimated the fair value of these assets primarily based on third-party appraisals (a Level 3 measurement within the fair value hierarchy) and recorded an impairment of $2.3 million as part of the restructuring charges.

6. Financing and Long-term Debt

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

		June 30,				December 31,
		2010				2009
		(Dollars in thousands)
Loans payable to banks		$	4,230			$	5,891
Accounts receivable asset securitization program			—				17,762
Current portion of long-term debt			836				1,084
Total		$	5,066			$	24,737

Long-term debt consisted of the following:

		June 30,				December 31,
		2010				2009
		(Dollars in thousands)
$172.5 million 6.50% Convertible Senior Notes, net of unamortized discounts		$	158,745			$	156,896
Revolving credit facility			—				1,700
Term loan facility			181,385				231,385
Capitalized lease obligations			5,374				5,669
Other notes			3,039				4,154
			348,543				399,804
Less current portion			(836	)			(1,084	)
Total		$	347,707			$	398,720

In June 2010, we made an early principal payment of $50 million on our outstanding term loans and wrote off $1.5 million of related unamortized fees.

We have an asset securitization program for Ferro’s U.S. trade accounts receivable. In June 2010, we extended the maturity of that facility until May 2011. We maintain several international programs to sell trade accounts receivable to financial institutions. Ferro had received net proceeds under the international programs of $2.6 million at June 30, 2010, and $10.3 million at December 31, 2009, for outstanding receivables.

7. Financial Instruments

The carrying amounts of the following assets and liabilities meeting the definition of a financial instrument approximate their fair values due to the short period to maturity of the instruments:

•

Cash and cash equivalents;

•

Notes receivable;

•

Deposits;

•

Miscellaneous receivables; and

•

Short-term loans payable to banks.

Long-term Debt

The following financial instruments are measured at fair value for disclosure purposes:

		June 30, 2010								December 31, 2009
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
		(Dollars in thousands)
$172.5 million 6.50% Convertible Senior Notes		$	158,745			$	164,608			$	156,896			$	157,191
Revolving credit facility			—				—				1,700				1,747
Term loan facility			181,385				185,910				231,385				237,047
Other notes			3,039				2,256				4,154				3,084

The fair values of the Convertible Notes are based on a third party’s estimated bid price. The fair values of the revolving credit facility, the term loan facility, and the other long-term notes are based on the present value of expected future cash flows and assumptions about current interest rates and the creditworthiness of the Company that market participants would use in pricing the debt.

Derivative Instruments

All derivative instruments are recognized as either assets or liabilities at fair value. For derivative instruments that are designated and qualify as cash flow hedges, the gain or loss on the derivative is reported as a component of other comprehensive income (“OCI”) and reclassified from accumulated other comprehensive income (“AOCI”) into earnings when the hedged transaction affects earnings. For derivatives that are not designated as hedges, the gain or loss on the derivative is recognized in current earnings.

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 through June 2011. These swaps are designated and qualify as cash flow hedges. The fair value of these 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. The estimated net amount of existing losses at June 30, 2010, that is expected to be recognized in earnings within the next twelve months is $6.5 million.

Foreign currency forward contracts. We manage foreign currency risks principally by entering into forward contracts to mitigate the impact of currency fluctuations on transactions. These forward contracts are not formally designated as hedges. The fair value of these contracts is based on market prices for comparable contracts. We had foreign currency forward contracts with a notional amount of $170.4 million at June 30, 2010, and $178.9 million at December 31, 2009.

The following table presents the fair value of derivative instruments on our consolidated balance sheets:

		June 30,				December 31,
		2010				2009				Balance Sheet Location
		(Dollars in thousands)
Derivatives designated as hedging instruments:
Liability derivatives:
Interest rate swaps		$	(6,527	)		$	(9,516	)		Other non-current liabilities
Derivatives not designated as hedging instruments:
Asset derivatives:
Foreign currency forward contracts		$	4,650			$	899			Other receivables
Liability derivatives:
Foreign currency forward contracts		$	(571	)		$	(176	)		Other receivables

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 classifications within the fair value hierarchy of these financial instruments were as follows:

		June 30, 2010																December 31,
		Level 1				Level 2				Level 3				Total				2009
		(Dollars in thousands)
Assets
Foreign currency forward contracts		$	—				4,079			$	—			$	4,079			$	723
Liabilities
Interest rate swaps		$	—			$	(6,527	)		$	—			$	(6,527	)		$	(9,516	)

The following table presents the effect of derivative instruments on our consolidated financial performance for the six months ended June 30:

										Amount of Loss
		Amount of (Loss) Gain								Reclassified from AOCI								Location of Gain (Loss)
		Recognized in OCI								into Income								Reclassified from
		2010				2009				2010				2009				AOCI into Income
		(Dollars in thousands)
Derivatives in Cash Flow Hedging Relationships:
Interest rate swaps		$	(996	)		$	119			$	(3,985	)		$	(3,180	)		Interest expense

		Amount of Gain (Loss)
		Recognized in Income
		2010				2009				Location of Gain (Loss) in Income
		(Dollars in thousands)
Derivatives Not Designated as Hedging Instruments:
Foreign currency forward contracts		$	14,684			$	(4,089	)			Foreign currency losses, net

8. Income Taxes

Income tax expense for the six months ended June 30, 2010, was $22.5 million, or 76.9% of pre-tax income. In the prior-year period, we recorded an income tax benefit of $12.1 million, or 28.2% of pre-tax loss. The increase in the effective tax rate resulted primarily from a $1.5 million tax charge for the elimination of future tax deductions related to Medicare Part D subsidies as a result of The Patient Protection and Affordable Care Act signed into law in the U.S. during the first quarter of 2010, a charge of $1.8 million for valuation allowances recorded in the current quarter on deferred assets in Italy, and not recognizing a $9.0 million tax benefit on current losses incurred in jurisdictions with full valuation allowances. Going forward we will continue to monitor both positive and negative evidence in determining whether valuation allowances need to be established or released.

9. Contingent Liabilities

In May 2004, the Company was named in an indirect purchaser class action lawsuit seeking monetary damages and injunctive relief relating to alleged violations of the antitrust laws by the Company and others participating in the plastics additives industry. In August 2005, the Company was named in another indirect purchaser class action. In June 2008, the Company was named in four more indirect purchaser class action lawsuits. All of these cases contain similar allegations. The Company intends to vigorously defend these six civil actions, which are all in their early stages. As a result, the Company cannot determine the outcome of these lawsuits at this time.

There are various other lawsuits and claims pending against the Company and its consolidated subsidiaries. We do not currently expect the ultimate liabilities, if any, and expenses related to such lawsuits and claims to materially affect the consolidated financial position, results of operations, or cash flows of the Company.

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 June 30 is as follows:

		U.S. Pension Plans								Non-U.S. Pension Plans								Other Benefit Plans
		2010				2009				2010				2009				2010				2009
		(Dollars in thousands)
Components of net periodic cost:
Service cost		$	7			$	8			$	834			$	1,045			$	—			$	3
Interest cost			5,156				5,236				2,517				2,612				607				720
Expected return on plan assets			(4,491	)			(3,864	)			(1,759	)			(1,751	)			—				—
Amortization of prior service cost			24				25				(121	)			(101	)			(399	)			(437	)
Net amortization and deferral			3,456				3,845				193				260				(43	)			—
Curtailment and settlement effects			—				—				(3,839	)			—				—				—
Net periodic benefit cost		$	4,152			$	5,250			$	(2,175	)		$	2,065			$	165			$	286

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 six months ended June 30 is as follows:

		U.S. Pension Plans								Non-U.S. Pension Plans								Other Benefit Plans
		2010				2009				2010				2009				2010				2009
		(Dollars in thousands)
Components of net periodic cost:
Service cost		$	14			$	15			$	1,716			$	2,048			$	—			$	7
Interest cost			10,312				10,472				5,252				5,096				1,214				1,439
Expected return on plan assets			(8,982	)			(7,727	)			(3,658	)			(3,413	)			—				—
Amortization of prior service cost			48				49				(253	)			(198	)			(798	)			(874	)
Net amortization and deferral			6,912				7,690				340				506				(86	)			—
Curtailment and settlement effects			—				—				(4,565	)			—				—				—
Net periodic benefit cost		$	8,304			$	10,499			$	(1,168	)		$	4,039			$	330			$	572

In the second quarter of 2010, we recognized a $2.5 million curtailment gain related to our restructuring activities in the Netherlands, a $1.5 million settlement gain related to our restructuring activities in France, and a $0.2 million settlement loss related to the transfer of some pension obligations to another company in Germany. In the first quarter of 2010, we recognized a $0.7 million settlement gain due to the transfer of some pension obligations and related assets to a defined contribution plan in Japan. In addition, the improvement through December 2009 in the valuation of pension investments increased the amount of our expected return on plan assets and lowered the amount of amortization of our unrecognized net actuarial losses.

11. Stock-Based Compensation

On April 30, 2010, our shareholders approved the 2010 Long-Term Incentive Plan (the “Plan”), which was adopted by the Board of Directors on February 26, 2010, subject to such approval. The Plan’s purpose is to promote the Company’s long-term financial interests and growth by attracting, retaining and motivating high quality key employees and directors and aligning their interests with those of its shareholders. The Plan reserves 5,000,000 shares of common stock to be issued for grants of several different types of long-term incentives including stock options, stock appreciation rights, restricted shares, performance shares, other common-stock-based awards, and dividend equivalent rights. As of June 30, 2010, no grants had been made under the Plan.

The 2006 Long-Term Incentive Plan (the “Previous Plan”) was replaced by the Plan, and no future grants may be made under the Previous Plan. However, any outstanding awards or grants made under the Previous Plan will continue until the end of their specified terms.

The stock-based compensation transactions in equity consisted of the following for the six months ended June 30, 2010:

		Common Shares
		in Treasury								Paid-in
		Shares				Amount				Capital
		(In thousands)
Stock options			(16	)		$	422			$	570
Deferred stock units			(34	)			832				(554	)
Restricted shares			(131	)			3,232				(2,792	)
Performance shares, net			111				(995	)			1,135
Directors’ deferred compensation			—				(653	)			653
Preferred stock conversions			—				—				—
Total			(70	)		$	2,838			$	(988	)

12. Restructuring and Cost Reduction Programs

During the first half of 2010, we continued several restructuring programs and initiated new 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 our European operations. 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.

To date, we have made substantial progress on the restructuring activities, including exiting manufacturing facilities and eliminating positions. For the six months ended June 30, 2010 and 2009, total charges resulting from these activities were $34.2 million and $4.8 million, respectively, of which $1.9 million and $3.7 million, respectively, were recorded in cost of sales as they relate to accelerated depreciation of assets to be disposed, and the remaining $32.3 million and $1.1 million, respectively, were reported as restructuring charges.

The following restructuring programs had significant activities in the first half of 2010:

Restructuring Program in Limoges, France

In the first quarter of 2010, we discontinued manufacturing activities at our Color & Glass Performance Materials facility in Limoges, France. We expect the restructuring action will be completed by the end of 2010, at which time the Limoges site will be closed.

As previously disclosed, we expect to eliminate approximately 125 positions as a result of this restructuring. We expect to record pre-tax charges of approximately $29 million related to the actions. The expected charges include approximately $18 million for employee severance, approximately $7 million in site cleanup and other costs, and approximately $4 million in asset write-offs.

As of December 31, 2009, we had eliminated 55 employee positions. We had incurred approximately $9.3 million in total charges, including $0.6 million related to accelerated depreciation of assets to be disposed, $6.9 million for employee severances, and $1.8 million in other related costs.

During the six months ended June 30, 2010, we eliminated 46 additional employee positions. We incurred approximately $11.6 million in total charges, including $1.2 million related to accelerated depreciation of assets to be disposed. The remaining $10.4 million, including $10.9 million for employee severances and $0.9 million in other exit costs, partially offset by a $1.4 million pension settlement credit, was reported as restructuring charges.

Restructuring Program in Castanheira do Ribatejo, Portugal

In March 2010, we initiated restructuring activities at Castanheira do Ribatejo facility in Portugal. We plan to discontinue by the end of 2010 manufacturing operations for our Color & Glass Performance Materials and Specialty Plastics businesses located at this facility. Certain production capacity will be transferred to other European locations.

As a result of these restructuring actions, we expect to eliminate approximately 126 positions. We expect to record pre-tax charges of approximately $14 million related to the actions. The expected charges include approximately $8 million for employee severance, approximately $2 million in site cleanup and other costs, and approximately $4 million in asset write-offs.

During the six months ended June 30, 2010, we eliminated 33 employee positions. We incurred approximately $7.5 million in total charges, of which $0.2 million was recorded in cost of sales as it relates to accelerated depreciation of assets to be disposed. The remaining $7.3 million, including $6.8 million for employee severance and $0.5 million in other costs, was reported as restructuring charges.

Restructuring Program in Rotterdam, Netherlands

In April 2010, we initiated additional restructuring actions to reduce costs related to the Company’s European Specialty Plastics manufacturing. As a result of this action, plastics manufacturing in Rotterdam, Netherlands, will be consolidated into our existing operations in Almazora, Spain, and the Rotterdam plant will be closed.

As a result of these restructuring actions, we expect to eliminate approximately 44 positions. We expect to record pre-tax charges of approximately $6 million related to the actions. The expected charges include approximately $6 million for employee severance and approximately $3 million in site cleanup and other exit costs, partially offset by a pension curtailment gain of approximately $3 million.

During the six months ended June 30, 2010, we eliminated 38 employee positions. We incurred approximately $3.3 million in total charges, of which $0.2 million was recorded in cost of sales as it relates to accelerated depreciation of assets to be disposed. The remaining $3.1 million, including $4.9 million for employee severance and $0.6 million in other costs, partially offset by a $2.4 million pension curtailment credit, was reported as restructuring charges.

Restructuring Program in Uden, Netherlands

In May 2010 after consulting with workers’ representatives, we initiated restructuring actions to reduce costs related to the Company’s European dielectrics manufacturing, which is part of our Electronic Materials business. As a result of this action, dielectrics products that are currently manufactured in Uden, Netherlands, will be transferred to other locations, and the Uden plant will be closed.

As a result of these restructuring actions, we expect to eliminate approximately 120 positions. We expect to record pre-tax charges of approximately $13 million related to the actions. The expected charges include approximately $9 million for employee severance and approximately $4 million in site cleanup and other exit costs. The restructuring actions are expected to be completed by the end of 2010.

During the six months ended June 30, 2010, we eliminated 3 employee positions. We incurred approximately $9.8 million in total charges, including $7.4 million for employee severance and $2.4 million in other costs primarily related to asset impairment. These costs were reported as restructuring charges.

The activities and accruals related to our restructuring and cost reduction programs were as follows:

		Employee				Other				Asset
		Severance				Costs				Impairment				Total
		(Dollars in thousands)
Balance at December 31, 2009		$	3,081			$	1,518			$	—			$	4,599
Restructuring charges			31,014				(1,021	)			2,342				32,335
Cash payments			(13,125	)			(2,321	)			—				(15,446	)
Currency translation adjustment			(1,096	)			(218	)			—				(1,314	)
Non-cash items			—				3,853				(2,342	)			1,511
Balance at June 30, 2010		$	19,874			$	1,811			$	—			$	21,685

13. Comprehensive Income (Loss)

The components of comprehensive income (loss) were as follows:

		Three months ended								Six months ended
		June 30,								June 30,
		2010				2009				2010				2009
		(Dollars in thousands)
Net income (loss)		$	7,594			$	(11,188	)		$	6,782			$	(31,159	)
Other comprehensive income (loss), net of tax:
Foreign currency translation			(14,685	)			22,637				(25,695	)			4,973
Postretirement benefit liabilities			(3,203	)			(1,156	)			(3,035	)			661
Raw material commodity swaps			—				135				(107	)			559
Interest rate swaps			1,206				1,719				1,930				2,125
Total comprehensive (loss) income			(9,088	)			12,147				(20,125	)			(22,841	)
Less: Comprehensive income (loss) attributable to noncontrolling interests			524				592				(219	)			980
Comprehensive (loss) income attributable to Ferro Corporation		$	(9,612	)		$	11,555			$	(19,906	)		$	(23,821	)

14. Per Share Amounts from Continuing Operations

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

		Three months ended								Six months ended
		June 30,								June 30,
		2010				2009				2010				2009
		(In thousands,
		except per share amounts)
Basic income (loss) per share computation:
Net income (loss) attributable to Ferro Corporation common shareholders		$	6,935			$	(12,007	)		$	6,702			$	(32,513	)
Adjustment for loss from discontinued operations			—				116				—				358
		$	6,935			$	(11,891	)		$	6,702			$	(32,155	)
Weighted-average common shares outstanding			85,783				44,701				85,809				44,533
Basic income (loss) per share from continuing operations attributable to Ferro Corporation common shareholders		$	0.08			$	(0.27	)		$	0.08			$	(0.72	)
Diluted income (loss) per share computation:
Net income (loss) attributable to Ferro Corporation common shareholders		$	6,935			$	(12,007	)		$	6,702			$	(32,513	)
Adjustment for loss from discontinued operations			—				116				—				358
Plus: Convertible preferred stock			—				—				—				—
		$	6,935			$	(11,891	)		$	6,702			$	(32,155	)
Weighted-average common shares outstanding			85,783				44,701				85,809				44,533
Assumed exercise of stock options			212				—				225				—
Assumed satisfaction of deferred stock unit conditions			88				—				71				—
Assumed satisfaction of restricted share conditions			347				—				325				—
Assumed conversion of convertible notes			—				—				—				—
Assumed conversion of convertible preferred stock			—				—				—				—
Weighted-average diluted shares outstanding			86,430				44,701				86,430				44,533
Diluted income (loss) per share from continuing operations attributable to Ferro Corporation common shareholders		$	0.08			$	(0.27	)		$	0.08			$	(0.72	)

15. Reporting for Segments

The Company has six reportable segments: Electronic Materials, Performance Coatings, Color and Glass Performance Materials, Polymer Additives, Specialty Plastics and Pharmaceuticals. We have combined our Tile Coating Systems and Porcelain Enamel business units into one reportable segment, Performance Coatings, because of their similar economic and operating characteristics.

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, 2009. We measure segment income for internal reporting purposes as income from continuing operations before unallocated corporate expenses, impairment charges, 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								Six months ended
		June 30,								June 30,
		2010				2009				2010				2009
		(Dollars in thousands)
Electronic Materials		$	174,528			$	100,570			$	321,761			$	183,059
Performance Coatings			142,137				117,333				270,328				225,921
Color and Glass Performance Materials			97,697				76,350				197,029				143,766
Polymer Additives			79,664				62,998				154,140				122,445
Specialty Plastics			43,359				36,934				81,732				71,793
Pharmaceuticals			6,100				5,092				11,360				10,102
Total net sales		$	543,485			$	399,277			$	1,036,350			$	757,086

Each segment’s income (loss) and reconciliations to income (loss) before taxes from continuing operations follow:

		Three months ended								Six months ended
		June 30,								June 30,
		2010				2009				2010				2009
		(Dollars in thousands)
Electronic Materials		$	37,397			$	6,387			$	65,879			$	8,804
Performance Coatings			14,422				6,225				23,904				5,626
Color and Glass Performance Materials			9,982				2,223				17,265				(232	)
Polymer Additives			2,836				1,588				6,827				3,477
Specialty Plastics			3,503				2,709				5,322				4,171
Pharmaceuticals			(271	)			214				(146	)			327
Total segment income			67,869				19,346				119,051				22,173
Unallocated corporate expenses			15,391				16,597				30,587				32,306
Impairment charges			—				—				2,202				—
Restructuring charges			21,205				(309	)			32,335				1,089
Interest expense			13,766				17,190				26,677				28,364
Other (income) expense, net			(4,006	)			1,216				(2,040	)			3,310
Income (loss) before income taxes from continuing operations		$	21,513			$	(15,348	)		$	29,290			$	(42,896	)

16. Business Combination

On April 30, 2010, Ferro Corporation and Heraeus of Hanau, Germany, acquired from each other certain business lines concerning decoration materials for ceramic and glass products. We acquired Heraeus’ ceramic color business, which advances our position in the ceramic colors industry, while Heraeus acquired assets related to our business operations in precious metal preparations and lustres for the decoration of glass, ceramics, porcelain and tiles. Ferro recognized a pre-tax gain of $7.8 million consisting of a $5.6 million gain from remeasuring to fair value the assets transferred to Heraeus and a $5.6 million bargain purchase gain from the fair value of the net assets acquired exceeding the fair value of the consideration transferred, less a $3.4 million write-off of related goodwill. The gain is included in miscellaneous income, net, for the three months ended June 30, 2010.

The following table summarizes the consideration transferred to Heraeus and the amounts of the assets acquired and liabilities assumed at the acquisition date:

		(Dollars in
		thousands)
Fair value of consideration transferred
Inventories		$	1,089
Property, plant and equipment			164
Amortizable intangible assets			5,417
		$	6,670
Recognized amounts of identifiable assets acquired and liabilities assumed
Cash		$	5,887
Accounts receivable			1,399
Inventories			3,676
Property, plant and equipment			700
Amortizable intangible assets			2,544
Current liabilities			(1,895	)
		$	12,311

The final determination of fair values and certain working capital, pension liability, and net asset adjustments have not been finalized due to the recent closing date, but any adjustments are not expected to be material.

Changes in the Company’s revenues and earnings from this business combination for the three and six months ended June 30, 2010, and changes in the Company’s revenues and earnings as if this business combination had occurred on January 1, 2009, are immaterial.

17. Miscellaneous Income and Expense

For the three and six months ended June 30, 2010, miscellaneous income and expense includes a gain of $7.8 million as a result of a business combination, in which Ferro Corporation and Heraeus acquired from each other certain business lines related to decoration materials for ceramic and glass products, and a charge of $3.5 million for an increased reserve for environmental remediation costs related to a non-operating facility in Brazil.

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

Overview

Customer demand increased during the 2010 second quarter reflecting a continuing, gradual recovery from the economic downturn in 2009. Demand has improved sequentially in each quarter since the first quarter of 2009.

Net sales increased by 36% in the three months ended June 30, 2010, compared with the prior-year period. The primary driver of the increased sales was higher sales volume, including increased volume of precious metals. Increased sales volume contributed approximately 30 percentage points of the increased sales. Changes in product mix and prices contributed an additional 8 percentage points to the sales increase, while changes in foreign currency exchange rates reduced sales by approximately 2 percentage points. Sales increased in all regions, compared with the prior-year quarter.

Raw material costs, in aggregate, increased by approximately $14 million in the first quarter compared with costs in the second quarter of 2009. Changes in product pricing fully offset the increased raw material costs.

Selling, general and administrative (“SG&A”) expense declined as a percentage of sales from the prior-year quarter while increasing in total dollars. The primary drivers of the increase in SG&A expense were increased incentive compensation accruals and higher special charges that were primarily related to manufacturing rationalization projects. Increased SG&A expense was partially offset by lower compensation and benefit expense due to reduced staffing.

Restructuring charges were $21.2 million for the quarter, compared with a small net benefit in the second quarter of 2009. The charges were primarily the result of restructuring initiatives in Europe, including projects that will result in closing manufacturing operations at sites in the Netherlands and France. Restructuring expenses are expected to continue during 2010 as we complete a number of projects that are intended to lower manufacturing costs and reduce SG&A expense.

Interest expense declined during the second quarter compared with the second quarter of 2009. During the 2010 second quarter, lower average borrowing levels were the primary driver of the lower interest expense with additional contribution from lower average interest rates. These benefits were partially offset by higher amortization of fees and discounts. The 2010 second quarter interest expense also included a noncash write-off of unamortized fees and expenses related to a pay down of $50 million of our term loan debt.

As a part of our miscellaneous income and expense for the second quarter, we recorded a net gain related to a business combination involving the acquisition of a decorative colors business in Germany. In addition, we recorded a charge for an increased reserve for environment remediation costs related to a non-operating facility in Brazil.

We recorded income from continuing operations during the second quarter, compared with a loss from continuing operations in the prior-year period as a result of increased gross profit, a gain on the business combination related to decorative colors and lower interest expense. These improvements were partially offset by higher restructuring charges, increased income tax expense and higher SG&A expense.

Outlook

Demand for our products is expected to improve during 2010 compared with 2009, leading to an increase in net sales for the year. We expect our 2010 quarterly sales to reflect a pattern consistent with our historical seasonality with higher sales in the first half of the year compared with the second half. The reduction in sales in the final six months of the year is normally primarily the result of reduced sales during August in Europe, when the traditional period of vacations reduces customer demand, and reduced sales of building-related materials in the final three months of the year as construction activity declines.

We expect to record restructuring charges associated with our current and future restructuring programs during the remaining months of 2010. The restructuring programs are intended to further rationalize our manufacturing operations in Europe, align our worldwide operations to the current customer demand, and lower our SG&A expense. We expect the resulting lower cost of goods sold and SG&A expense will further reduce our fixed costs and improve profitability, assuming a fixed sales level and a constant product mix.

Subsequent to June 30, 2010, we signed an agreement to purchase a newly constructed manufacturing plant for frits and glazes in Fayoum, Egypt. The acquisition will allow us to cost-effectively serve the growing tile manufacturing market in Egypt, the Middle East and North Africa. The closing of the transaction is subject to governmental approvals and the satisfaction or waiver of other customary closing conditions. Closing is expected in the third quarter of 2010.

Factors that could adversely affect our future financial performance are described under the heading “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2009.

Results of Operations

Comparison of the three months ended June 30, 2010 and 2009

		Three months ended
		June 30,
		2010				2009				$ Change				% Change
		(Dollars in thousands,
		except per share amounts)
Net sales		$	543,485			$	399,277			$	144,208				36.1	%
Cost of sales			421,155				334,048				87,107				26.1	%
Gross profit			122,330				65,229				57,101				87.5	%
Gross profit percentage			22.5	%			16.3	%
Selling, general and administrative expenses			69,852				62,480				7,372				11.8	%
Restructuring charges			21,205				(309	)			21,514
Other expense (income):
Interest expense			13,766				17,190				(3,424	)
Interest earned			(133	)			(205	)			72
Foreign currency (gains) losses, net			(302	)			1,100				(1,402	)
Miscellaneous (income) expense, net			(3,571	)			321				(3,892	)
Income (loss) before income taxes			21,513				(15,348	)			36,861
Income tax expense (benefit)			13,919				(4,276	)			18,195
Income (loss) from continuing operations			7,594				(11,072	)			18,666
Loss on disposal of discontinued operations, net of income taxes			—				(116	)			116
Net income (loss)		$	7,594			$	(11,188	)		$	18,782
Diluted income (loss) per share		$	0.08			$	(0.27	)		$	0.35