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		34-0217820
(State of Corporation)		(IRS Employer Identification No.)
6060 Parkland Boulevard
Mayfield Heights, OH		44124
(Address of Principal executive offices)		(Zip Code)

216-875-5600
(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 þ 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 September 30, 2011, there were 86,570,567 shares of Ferro Common Stock, par value $1.00, outstanding.

 

 

TABLE OF CONTENTS

		Page
PART I
Item 1. Financial Statements (Unaudited)			3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3. Quantitative and Qualitative Disclosures about Market Risk			30
Item 4. Controls and Procedures			31
PART II
Item 1. Legal Proceedings			32
Item 1A. Risk Factors			32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			32
Item 3. Defaults Upon Senior Securities			32
Item 4. (Removed and Reserved)			32
Item 5. Other Information			32
Item 6. Exhibits			33
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Ferro Corporation and Subsidiaries
Condensed Consolidated Statements of Operations

		Three months ended								Nine months ended
		September 30,								September 30,
		2011				2010				2011				2010
		(Dollars in thousands, except per share amounts)
Net sales		$	546,114			$	528,564			$	1,713,097			$	1,564,914
Cost of sales			442,304				408,268				1,374,614				1,215,354
Gross profit			103,810				120,296				338,483				349,560
Selling, general and administrative expenses			67,530				74,835				217,896				215,635
Restructuring and impairment charges			869				9,570				4,044				44,107
Other expense (income):
Interest expense			7,030				10,519				21,208				37,196
Interest earned			(50	)			(78	)			(193	)			(542	)
Losses on extinguishment of debt			—				19,331				—				19,331
Foreign currency losses, net			1,726				398				4,049				3,644
Miscellaneous expense, net			64				7,345				458				2,523
Income (loss) before income taxes			26,641				(1,624	)			91,021				27,666
Income tax expense			8,419				738				29,987				23,246
Net income (loss)			18,222				(2,362	)			61,034				4,420
Less: Net income attributable to noncontrolling interests			40				983				573				733
Net income (loss) attributable to Ferro Corporation			18,182				(3,345	)			60,461				3,687
Dividends on preferred stock			—				(165	)			(165	)			(495	)
Net income (loss) attributable to Ferro Corporation common shareholders		$	18,182			$	(3,510	)		$	60,296			$	3,192
Earnings (loss) per share attributable to Ferro Corporation common shareholders:
Basic earnings (loss) per share		$	0.21			$	(0.04	)		$	0.70			$	0.04
Diluted earnings (loss) per share			0.21				(0.04	)			0.69				0.04
Dividends per share of common stock			—				—				—				—

See accompanying notes to condensed consolidated financial statements.

Ferro Corporation and Subsidiaries
Condensed Consolidated Balance Sheets

		September 30,				December 31,
		2011				2010
		(Dollars in thousands)
ASSETS
Current assets
Cash and cash equivalents		$	21,900			$	29,035
Accounts receivable, net			365,383				302,448
Inventories			243,321				202,067
Deposits for precious metals			—				28,086
Deferred income taxes			24,284				24,924
Other receivables			29,051				27,762
Other current assets			24,670				7,432
Total current assets			708,609				621,754
Other assets
Property, plant and equipment, net			388,636				391,496
Goodwill			219,606				219,716
Amortizable intangible assets, net			11,363				11,869
Deferred income taxes			117,991				121,640
Other non-current assets			81,603				67,880
Total assets		$	1,527,808			$	1,434,355
LIABILITIES AND EQUITY
Current liabilities
Loans payable and current portion of long-term debt		$	58,397			$	3,580
Accounts payable			210,250				207,770
Income taxes			16,637				8,823
Accrued payrolls			32,793				49,590
Accrued expenses and other current liabilities			66,047				75,912
Total current liabilities			384,124				345,675
Other liabilities
Long-term debt, less current portion			304,716				290,971
Postretirement and pension liabilities			171,789				189,058
Deferred income taxes			2,263				2,211
Other non-current liabilities			20,417				22,833
Total liabilities			883,309				850,748
Series A convertible preferred stock (approximates redemption value)			—				9,427
Equity
Ferro Corporation shareholders’ equity:
Common stock			93,436				93,436
Paid-in capital			318,606				323,015
Retained earnings			422,460				362,164
Accumulated other comprehensive loss			(47,024	)			(50,949	)
Common shares in treasury, at cost			(153,574	)			(164,257	)
Total Ferro Corporation shareholders’ equity			633,904				563,409
Noncontrolling interests			10,595				10,771
Total equity			644,499				574,180
Total liabilities and equity		$	1,527,808			$	1,434,355

See accompanying notes to condensed consolidated financial statements.

Ferro Corporation and Subsidiaries
Condensed Consolidated Statements of Equity

		Ferro Corporation Shareholders
																						Accumulated
		Common Shares																				Other				Non-
		in Treasury								Common				Paid-in				Retained				Comprehensive				controlling				Total
		Shares				Amount				Stock				Capital				Earnings				Income (Loss)				Interests				Equity
		(In thousands)
Balances at December 31, 2009			7,375			$	(171,567	)		$	93,436			$	331,376			$	357,128			$	(60,147	)		$	10,269			$	560,495
Net income																			3,687								733				4,420
Other comprehensive income (loss), net of tax:
Foreign currency translation																							(1,319	)			101				(1,218	)
Postretirement benefit liabilities																							(4,167	)							(4,167	)
Raw material commodity swaps																							(107	)							(107	)
Interest rate swaps																							6,121								6,121
Total comprehensive income																															5,049
Cash dividends:
Preferred																			(495	)											(495	)
Income tax benefit															11																11
Redemption of Convertible Notes															(3,025	)															(3,025	)
Stock-based compensation transactions			(122	)			4,905								(2,029	)															2,876
Distributions to noncontrolling interests																											(527	)			(527	)
Balances at September 30, 2010			7,253			$	(166,662	)		$	93,436			$	326,333			$	360,320			$	(59,619	)		$	10,576			$	564,384
Balances at December 31, 2010			7,242			$	(164,257	)		$	93,436			$	323,015			$	362,164			$	(50,949	)		$	10,771			$	574,180
Net income																			60,461								573				61,034
Other comprehensive income (loss), net of tax:
Foreign currency translation																							(751	)			189				(562	)
Postretirement benefit liabilities																							4,676								4,676
Total comprehensive income																															65,148
Cash dividends:
Preferred																			(165	)											(165	)
Stock-based compensation transactions			(377	)			10,683								(4,409	)															6,274
Distributions to noncontrolling interests																											(938	)			(938	)
Balances at September 30, 2011			6,865			$	(153,574	)		$	93,436			$	318,606			$	422,460			$	(47,024	)		$	10,595			$	644,499

See accompanying notes to condensed consolidated financial statements.

Ferro Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows

		Nine months ended
		September 30,
		2011				2010
		(Dollars in thousands)
Cash flows from operating activities
Net cash (used for) provided by operating activities		$	(17,370	)		$	180,455
Cash flows from investing activities
Capital expenditures for property, plant and equipment			(51,923	)			(27,733	)
Proceeds from sale of businesses			—				5,887
Proceeds from sale of assets			2,374				7,425
Other investing activities			193				139
Net cash used for investing activities			(49,356	)			(14,282	)
Cash flows from financing activities
Net borrowings (repayments) under loans payable			55,496				(22,500	)
Proceeds from long-term debt			530,174				576,740
Principal payments on long-term debt			(517,065	)			(336,502	)
Extinguishment of debt			—				(326,687	)
Debt issue costs			—				(10,460	)
Redemption of convertible preferred stock			(9,427	)			—
Cash dividends paid			(165	)			(495	)
Other financing activities			(180	)			(788	)
Net cash provided by (used for) financing activities			58,833				(120,692	)
Effect of exchange rate changes on cash and cash equivalents			758				1,368
(Decrease) increase in cash and cash equivalents			(7,135	)			46,849
Cash and cash equivalents at beginning of period			29,035				18,507
Cash and cash equivalents at end of period		$	21,900			$	65,356
Cash paid during the period for:
Interest		$	24,620			$	30,291
Income taxes			20,646				15,723

See accompanying notes to condensed consolidated financial statements.

Ferro Corporation and 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 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, 2010. 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 nine months ended September 30, 2011, are not necessarily indicative of the results expected in subsequent quarters or for the full year.

2. Recent Accounting Pronouncements

Accounting Standards Adopted in the Nine Months Ended September 30, 2011

On January 1, 2011, we prospectively adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2009-13, Multiple Deliverable Revenue Arrangements, (“ASU 2009-13”) and ASU 2010-17, Revenue Recognition—Milestone Method, (“ASU 2010-17”). ASU 2009-13 applies to all deliverables in contractual arrangements in which a vendor will perform multiple revenue-generating activities. ASU 2010-17 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 FASB Accounting Standards Codification^TM (“ASC”) Topic 605, Revenue Recognition. Adoption of these pronouncements did not have a material effect on our consolidated financial statements.

New Accounting Pronouncements Not Yet Adopted

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, (“ASU 2011-04”), which is codified in ASC Topic 820, Fair Value Measurement. This pronouncement changes certain fair value measurement guidance and expands certain disclosure requirements. ASU 2011-04 will be effective for our fiscal year that begins January 1, 2012, and is to be applied prospectively. We do not expect that adoption of this pronouncement on January 1, 2012, will have a material effect on our consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, (“ASU 2011-05”), which is codified in ASC Topic 220, Comprehensive Income. This pronouncement requires companies to present items of net income, items of other comprehensive income and total comprehensive income in one continuous statement or two separate but consecutive statements and will be effective for our fiscal year that begins January 1, 2012. ASU 2011-05 is to be applied retrospectively, and early adoption is permitted. Adoption of this pronouncement will not have a material effect on our consolidated financial statements.

In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment, (“ASU 2011-08”), which is codified in ASC Topic 350, Intangibles — Goodwill and Other. This pronouncement permits companies testing goodwill for impairment to first assess qualitative factors to determine whether the two-step impairment test is required. ASU 2011-08 is effective for our fiscal year that begins January 1, 2012, but early adoption is permitted. We expect to early adopt this pronouncement in the fourth quarter of 2011. We do not expect that adoption of this pronouncement will have a material effect on our consolidated financial statements.

3. Inventories

Inventories consisted of the following:

		September 30,				December 31,
		2011				2010
		(Dollars in thousands)
Raw materials		$	82,672			$	63,856
Work in process			47,276				38,684
Finished goods			113,373				99,527
Total inventories		$	243,321			$	202,067

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 $2.6 million and $1.3 million for the three months ended September 30, 2011 and 2010, respectively, and $7.3 million and $3.7 million for the nine months ended September 30, 2011 and 2010, respectively, and were charged to cost of sales. We had on hand precious metals owned by participants in our precious metals consignment program of $225.5 million at September 30, 2011, and $205.7 million at December 31, 2010, measured at fair value based on market prices for identical assets. At December 31, 2010, we had delivered $28.1 million in cash collateral as a result of the market value of the precious metals under consignment exceeding the credit lines provided by some of the financial institutions. At September 30, 2011, no cash collateral was outstanding.

4. Property, Plant and Equipment

Property, plant and equipment is reported net of accumulated depreciation of $612.4 million at September 30, 2011, and $594.3 million at December 31, 2010. Unpaid capital expenditure liabilities, which are noncash investing activities, were $9.4 million at September 30, 2011, and $7.1 million at September 30, 2010.

5. Financing and Long-term Debt

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

		September 30,				December 31,
		2011				2010
		(Dollars in thousands)
Loans payable to banks		$	809			$	709
Domestic accounts receivable asset securitization program			45,000				—
International accounts receivable sales programs			9,659				—
Current portion of long-term debt			2,929				2,871
Total loans payable and current portion of long-term debt		$	58,397			$	3,580

Long-term debt consisted of the following:

		September 30,				December 31,
		2011				2010
		(Dollars in thousands)
7.875% Senior Notes		$	250,000			$	250,000
6.50% Convertible Senior Notes, net of unamortized discounts			34,007				33,368
Revolving credit facility			13,110				—
Capitalized lease obligations			5,161				6,177
Other notes			5,367				4,297
Total long-term debt			307,645				293,842
Less current portion			(2,929	)			(2,871	)
Total long-term debt, less current portion		$	304,716			$	290,971

Receivable Sales Programs

We have an asset securitization program for Ferro’s U.S. trade accounts receivable. In May 2011, we made certain modifications to and extended the maturity of this credit facility through May 2012. We sell interests in our domestic receivables to various purchasers, and we may obtain up to $50.0 million in the form of cash or letters of credit. Advances received under this program are accounted for as borrowings secured by the receivables and included in net cash provided by financing activities. At September 30, 2011, advances received of $45.0 million were secured by $115.9 million of accounts receivable. The interest rate under this program is the sum of (A) either (1) commercial paper rates, (2) LIBOR rates, or (3) the federal funds rate plus 0.5% or the prime rate and (B) a fixed margin. At September 30, 2011, the interest rate was 0.6%. We had no borrowings under this program at December 31, 2010.

In 2011, we entered into several international programs to sell with recourse trade accounts receivable to financial institutions. Advances received under these programs are accounted for as borrowings secured by the receivables and included in net cash provided by financing activities. At September 30, 2011, the commitments supporting these programs totaled $18.7 million, the advances received were secured by $11.8 million of accounts receivable, and no additional borrowings were available under the programs. The interest rates under these programs are based on EURIBOR rates plus 1.75%. At September 30, 2011, the weighted-average interest rate was 3.2%.

Prior to 2011, we maintained several international programs to sell without recourse trade accounts receivable to financial institutions. Advances received under these programs were accounted for as proceeds from the sales of receivables and included in net cash provided by operating activities. In the first quarter of 2011, these programs expired or were terminated. Ferro had received net proceeds under these programs of $3.4 million at December 31, 2010, for outstanding receivables.

7.875% Senior Notes

The Senior Notes were issued in 2010 at par, bear interest at a rate of 7.875% per year, payable semi-annually in arrears on February 15 and August 15 of each year, beginning February 15, 2011, and mature on August 15, 2018. We may redeem some or all of the Senior Notes beginning August 15, 2014, at prices ranging from 100% to 103.938% of the principal amount. In addition, through August 15, 2013, we may redeem up to 35% of the Senior Notes at a price equal to 107.875% of the principal amount using proceeds of certain equity offerings. We may also redeem some or all of the Senior Notes prior to August 15, 2014, at a price equal to the principal amount plus a defined applicable premium. The applicable premium on any redemption date is the greater of 1.0% of the principal amount of the note or the excess of (1) the present value at such redemption date of the redemption price of the note at August 15, 2014, plus all required interest payments due on the note through August 15, 2014, computed using a discount rate equal to the Treasury Rate as of the redemption date plus 50 basis points; over (2) the principal amount of the note.

The Senior Notes are unsecured obligations and rank equally in right of payment with any other unsecured, unsubordinated obligations. The Senior Notes contain certain affirmative and negative covenants customary for high-yield debt securities, including, but not limited to, restrictions on our ability to incur additional debt, create liens, pay dividends or make other distributions or repurchase our common stock and sell assets outside the ordinary course of business. At September 30, 2011, we were in compliance with the covenants under the Senior Notes’ indenture.

6.50% Convertible Senior Notes

The Convertible Notes were issued in 2008, bear interest at a rate of 6.5% per year, payable semi-annually in arrears on February 15th and August 15th of each year, and mature on August 15, 2013. We separately account for the liability and equity components of the Convertible Notes in a manner that, when interest cost is recognized in subsequent periods, will reflect our nonconvertible debt borrowing rate at the time the Convertible Notes were issued. The effective interest rate on the liability component is 9.5%. Under certain circumstances, holders of the Convertible Notes may convert their notes prior to maturity. The Convertible Notes are unsecured obligations and rank equally in right of payment with any other unsecured, unsubordinated obligations. The principal amount outstanding was $35.8 million at September 30, 2011, and $35.8 million at December 31, 2010. At September 30, 2011, we were in compliance with the covenants under the Convertible Notes’ indenture.

2010 Credit Facility

In 2010, we entered into the Third Amended and Restated Credit Agreement with a group of lenders for a five-year, $350 million multi-currency senior revolving credit facility (the “2010 Credit Facility”). The interest rate under the 2010 Credit Facility is the sum of (A) either (1) LIBOR or (2) the higher of the Federal Funds Rate plus 0.5%, the Prime Rate, or LIBOR plus 1.0% and (B) a variable margin based on the Company’s leverage. At September 30, 2011, the interest rate was 3.0%. We had no borrowings under this facility at December 31, 2010. The 2010 Credit Facility matures on August 24, 2015, and is secured by substantially all of Ferro’s assets.

We are subject to a number of financial covenants under our 2010 Credit Facility, which are discussed in Note 6 within Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. At September 30, 2011, we were in compliance with the covenants of the 2010 Credit Facility.

Our ability to pay common stock dividends is limited by certain covenants in our 2010 Credit Facility and the bond indenture governing the Senior Notes. The covenant in our 2010 Credit Facility is the more limiting of the two covenants and is described in Note 6 within Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

6. 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;
	•		Other receivables; and
	•		Short-term loans payable.

Long-term Debt

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

		September 30, 2011								December 31, 2010
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
		(Dollars in thousands)
7.875% Senior Notes		$	250,000			$	250,000			$	250,000			$	266,563
6.50% Convertible Senior Notes, net of unamortized discounts			34,007				35,841				33,368				36,379
Revolving credit facility			13,110				13,119				—				—
Other notes			5,367				4,496				4,297				3,600

The fair values of the Senior Notes and the Convertible Notes are based on a third party’s estimated bid prices. The fair values of the revolving credit 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 a former variable-rate term loan facility to a fixed rate through June 2011. These swaps were designated and qualified as cash flow hedges. The fair value of these swaps was based on the present value of expected future cash flows, which reflected assumptions about current interest rates and the creditworthiness of the Company that market participants would use in pricing the swaps. In the third quarter of 2010, in conjunction with repayment of our remaining outstanding term loans, we settled these swaps and reclassified $6.8 million from accumulated other comprehensive income to miscellaneous expense.

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 designated as hedging instruments. 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 $278.5 million at September 30, 2011, and $187.3 million at December 31, 2010.

The following table presents the fair value on our consolidated balance sheets of our foreign currency forward contracts, which are not designated as hedging instruments:

		September 30,				December 31,
		2011				2010				Balance Sheet Location
		(Dollars in thousands)
Asset derivatives:
Foreign currency forward contracts		$	11,418			$	—			Other current assets
Foreign currency forward contracts			—				1,261			Accrued expenses and
										other current liabilities
Total		$	11,418			$	1,261
Liability derivatives:
Foreign currency forward contracts		$	(547	)		$	—			Other current assets
Foreign currency forward contracts			—				(1,501	)		Accrued expenses and
										other current liabilities
Total		$	(547	)		$	(1,501	)

The inputs to the valuation techniques used to measure fair value are classified into the following categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

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

		September 30, 2011																December 31,
		Level 1				Level 2				Level 3				Total				2010
		(Dollars in thousands)
Assets:
Foreign currency forward contracts, net		$	—			$	10,871			$	—			$	10,871			$	—
Liabilities:
Foreign currency forward contracts, net			—				—				—				—				(240	)

The following tables present the effect of derivative instruments on our consolidated financial performance for the nine months ended September 30:

										Amount of Gain (Loss)
		Amount of Gain (Loss)								Reclassified from AOCI								Location of Gain (Loss)
		Recognized in OCI								into Earnings								Reclassified from AOCI
		2011				2010				2011				2010				into Earnings
		(Dollars in thousands)
Derivatives in Cash Flow Hedging Relationships:
Interest rate swaps										$	—			$	(4,885	)		Interest expense
											—				(6,849	)		Miscellaneous expense,
																		net
Total		$	—			$	(2,218	)		$	—			$	(11,734	)

		Amount of Gain (Loss)
		Recognized in Earnings
		2011				2010				Location of Gain (Loss) in Earnings
		(Dollars in thousands)
Derivatives Not Designated as Hedging Instruments:
Foreign currency forward contracts		$	(5,162	)		$	3,020			Foreign currency losses, net

7. Income Taxes

Income tax expense for the nine months ended September 30, 2011, was $30.0 million, or 32.9% of pre-tax income. In the first nine months of 2010, we recorded income tax expense of $23.2 million, or 84.0% of pre-tax income. The reduction in the effective tax rate primarily resulted from a decrease in losses in jurisdictions with full valuation allowances, which resulted in unrecognized tax benefits of $4.0 million in the first nine months of 2011 as compared with $10.3 million in the prior-year period. In addition, the effective tax rate in the first nine months of 2011 included an income tax benefit of $1.7 million related to settlement of foreign tax matters. The effective tax rate in the prior-year period was impacted by $4.3 million of tax charges, which resulted from the elimination of future tax deductions related to Medicare Part D subsidies and the recording of valuation allowances on certain deferred tax assets.

8. Contingent Liabilities

There are various lawsuits and claims pending against the Company and its 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.

The Company has a non-operating facility in Brazil that is environmentally contaminated. We have recorded an undiscounted remediation liability because we believe the liability is incurred and the amount of contingent loss is reasonably estimable. The recorded liability associated with this facility was $8.6 million at September 30, 2011, and $9.8 million at December 31, 2010. The ultimate loss will depend on the extent of contamination found as the project progresses and acceptance by local authorities of remediation activities, including the time frame of monitoring involved.

On January 4, 2011, the Company received an administrative subpoena from the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”). OFAC has requested that the Company provide documents and information related to the possibility of direct or indirect transactions with or to a prohibited country. The Company is cooperating with OFAC in connection with the administrative subpoena. The Company cannot predict the length, scope or results of the inquiry from OFAC, or the impact, if any, on its business activities or results of operations.

9. 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 follows:

		U.S. Pension Plans								Non-U.S. Pension Plans								Other Benefit Plans
		2011				2010				2011				2010				2011				2010
		(Dollars in thousands)
Components of net periodic cost:
Service cost		$	4			$	3			$	556			$	833			$	—			$	—
Interest cost			5,117				5,098				1,466				2,387				482				607
Expected return on plan assets			(5,150	)			(4,622	)			(823	)			(1,587	)			—				—
Amortization of prior service cost			18				24				(36	)			(35	)			(100	)			251
Net amortization and deferral			1,762				2,561				161				189				(159	)			(43	)
Curtailment and settlement effects			—				—				—				(180	)			—				—
Net periodic benefit cost		$	1,751			$	3,064			$	1,324			$	1,607			$	223			$	815

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

		U.S. Pension Plans								Non-U.S. Pension Plans								Other Benefit Plans
		2011				2010				2011				2010				2011				2010
		(Dollars in thousands)
Components of net periodic cost:
Service cost		$	12			$	17			$	1,657			$	2,549			$	—			$	—
Interest cost			15,351				15,410				4,390				7,639				1,447				1,821
Expected return on plan assets			(15,451	)			(13,604	)			(2,470	)			(5,245	)			—				—
Amortization of prior service cost			55				72				(103	)			(288	)			(301	)			(547	)
Net amortization and deferral			7,736				9,473				486				529				(479	)			(129	)
Curtailment and settlement effects			—				—				—				(4,745	)			—				—
Net periodic benefit cost		$	7,703			$	11,368			$	3,960			$	439			$	667			$	1,145

In our U.S. plans, improvement through December 2010 in the valuation of pension investments increased our 2011 expected return on plan assets, and longer amortization periods decreased our 2011 net amortization and deferral costs. The longer amortization periods were due to all participants in certain U.S. plans being inactive and to changes in the pattern of retirements. In our non-U.S. plans, various curtailments and settlements recorded in 2010 decreased our benefit obligations and plan assets, which in turn reduced our 2011 interest cost and expected return on plan assets. In the third quarter of 2010, we recognized $0.7 million of prior service cost amortization related to a temporary change in our postretirement health care benefit plan and a $0.2 million curtailment gain related to our restructuring activities in the Netherlands. In the second quarter of 2010, we recognized $4.0 million of curtailment and settlement gains related to our restructuring activities in the Netherlands and 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 gain from the settlement of certain pension obligations in Japan.

10. Serial Convertible Preferred Stock

We are authorized to issue up to 2,000,000 shares of serial convertible preferred stock without par value. In 1989, Ferro issued 1,520,215 shares of 7% Series A ESOP Convertible Preferred Stock (“Series A Preferred Stock”) to the Trustee of the Ferro Employee Stock Ownership Plan (“ESOP”) at a price of $46.375 per share for a total consideration of $70.5 million. Subsequently, all shares of the Series A Preferred Stock were allocated to participating individual employee accounts, and most of the shares were redeemed or converted by the Trustee to provide for distributions to, loans to, or withdrawals by participants or to satisfy an investment election provided to participants. At December 31, 2010, there were 203,282 shares of Series A Preferred Stock outstanding. In the first quarter of 2011, we redeemed in cash all outstanding Series A Preferred Stock for $9.4 million plus earned but unpaid dividends.

11. Stock-Based Compensation

In April 2010, our shareholders approved the 2010 Long-Term Incentive Plan (the “Plan”). The Plan’s purpose is to promote the Company’s and the shareholders’ long-term financial interests by attracting, retaining and motivating high-quality, key employees and directors and aligning their interests with those of the Company’s 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, deferred stock units, restricted shares, performance shares, other common-stock-based awards, and dividend equivalent rights. No future grants may be made under previous incentive plans. However, any outstanding awards or grants made under these plans will continue until the end of their specified terms.

The stock-based compensation transactions in equity consisted of the following for the nine months ended September 30, 2011:

		Common Shares in Treasury
		Shares				Amount				Paid-in Capital
		(In thousands)
Stock options			(208	)		$	5,189			$	(478	)
Deferred stock units			(80	)			2,013				(1,559	)
Restricted shares			(126	)			3,427				(2,243	)
Performance shares			37				(537	)			462
Directors’ deferred compensation, net			—				591				(591	)
Preferred stock conversions			—				—				—
Total			(377	)		$	10,683			$	(4,409	)

12. Restructuring and Cost Reduction Programs

During the nine months of 2011, we continued to wind down our restructuring programs. Current period activity primarily relates to facility closing and exit costs in Limoges, France; Castanheira do Ribatejo, Portugal; and Frankfurt, Germany.

For the nine months ended September 30, 2011 and 2010, total charges resulting from these activities were $4.4 million and $47.4 million, respectively, of which $0.4 million and $3.3 million, respectively, were recorded in cost of sales as they related to accelerated depreciation on assets to be disposed, and the remaining $4.0 million and $44.1 million, respectively, were reported as restructuring and impairment charges. Restructuring and impairment charges for the nine months ended September 30, 2011, consisted of gross charges of $6.5 million, partially offset by a gain on the sale of a building of $1.1 million and a reduction of accrued rent previously included in restructuring charges of $1.4 million.

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

		Employee								Asset
		Severance				Other Costs				Impairment				Total
		(Dollars in thousands)
Balance at December 31, 2010		$	2,429			$	5,863			$	—			$	8,292
Restructuring charges			2,191				1,850				3				4,044
Cash payments			(3,694	)			(3,702	)			—				(7,396	)
Currency translation adjustment			62				67				—				129
Non-cash items			(27	)			(85	)			(3	)			(115	)
Balance at September 30, 2011		$	961			$	3,993			$	—			$	4,954

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

13. Earnings Per Share

Details of the calculation of basic and diluted earnings (loss) per share attributable to Ferro Corporation common shareholders are shown below:

		Three months ended								Nine months ended
		September 30,								September 30,
		2011				2010				2011				2010
		(In thousands, except per share amounts)
Basic earnings (loss) per share computation:
Net income (loss) attributable to Ferro Corporation common shareholders		$	18,182			$	(3,510	)		$	60,296			$	3,192
Weighted-average common shares outstanding			86,169				85,805				86,101				85,808
Basic earnings (loss) per share attributable to Ferro Corporation common shareholders		$	0.21			$	(0.04	)		$	0.70			$	0.04
Diluted earnings (loss) per share computation:
Net income (loss) attributable to Ferro Corporation common shareholders		$	18,182			$	(3,510	)		$	60,296			$	3,192
Plus: Convertible preferred stock dividends, net of tax			—				—				103				—
Total		$	18,182			$	(3,510	)		$	60,399			$	3,192
Weighted-average common shares outstanding			86,169				85,805				86,101				85,808
Assumed exercise of stock options			188				—				255				330
Assumed satisfaction of deferred stock unit conditions			38				—				46				77
Assumed satisfaction of restricted share conditions			402				—				389				324
Assumed conversion of convertible notes			—				—				—				—
Assumed conversion of convertible preferred stock			—				—				176				—
Weighted-average diluted shares outstanding			86,797				85,805				86,967				86,539
Diluted earnings (loss) per share attributable to Ferro Corporation common shareholders		$	0.21			$	(0.04	)		$	0.69			$	0.04

Securities that could potentially dilute basic earnings per share in the future but were not included in the computation of diluted earnings per share because to do so would have been antidilutive represented 5.3 million common shares for the three and nine months ended September 30, 2011, and 8.9 million and 8.0 million common shares for the three and nine months ended September 30, 2010, respectively.

14. Comprehensive Income

The components of comprehensive income were as follows:

		Three months ended								Nine months ended
		September 30,								September 30,
		2011				2010				2011				2010
		(Dollars in thousands)
Net income (loss)		$	18,222			$	(2,362	)		$	61,034			$	4,420
Other comprehensive income (loss), net of tax:
Foreign currency translation			(11,013	)			24,477				(562	)			(1,218	)
Postretirement benefit liabilities			1,708				(1,132	)			4,676				(4,167	)
Raw material commodity swaps			—				—				—				(107	)
Interest rate swaps			—				4,191				—				6,121
Total comprehensive income			8,917				25,174				65,148				5,049
Less: Comprehensive income attributable to noncontrolling interests			113				1,053				762				834
Comprehensive income attributable to Ferro Corporation		$	8,804			$	24,121			$	64,386			$	4,215

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 aggregated our Tile Coating Systems and Porcelain Enamel operating segments into one reportable segment, Performance Coatings, based on 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, 2010. We measure segment income for internal reporting purposes by excluding unallocated corporate expenses, restructuring and impairment charges, other expenses, net, and income taxes. Unallocated corporate expenses consist primarily of corporate employment costs and professional services.

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

		Three months ended								Nine months ended
		September 30,								September 30,
		2011				2010				2011				2010
		(Dollars in thousands)
Electronic Materials		$	156,081			$	166,953			$	538,790			$	488,714
Performance Coatings			153,365				144,218				453,546				414,546
Color and Glass Performance Materials			100,525				91,167				306,806				288,196
Polymer Additives			85,634				77,291				262,767				231,431
Specialty Plastics			43,606				42,633				132,745				124,365
Pharmaceuticals			6,903				6,302				18,443				17,662
Total net sales		$	546,114			$	528,564			$	1,713,097			$	1,564,914

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

		Three months ended								Nine months ended
		September 30,								September 30,
		2011				2010				2011				2010
		(Dollars in thousands)
Electronic Materials		$	17,754			$	31,394			$	74,257			$	97,273
Performance Coatings			11,728				11,322				30,462				35,226
Color and Glass Performance Materials			8,758				9,192				29,789				26,457
Polymer Additives			4,025				6,970				14,807				13,797
Specialty Plastics			2,662				4,253				7,381				9,575
Pharmaceuticals			1,062				534				2,977				388
Total segment income			45,989				63,665				159,673				182,716
Unallocated corporate expenses			9,709				18,204				39,086				48,791
Restructuring and impairment charges			869				9,570				4,044				44,107
Other expense, net			8,770				37,515				25,522				62,152
Income (loss) before income taxes		$	26,641			$	(1,624	)		$	91,021			$	27,666

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

Overview

Overall sales grew during the quarter, driven primarily by changes in foreign currency exchange rates. Customer demand showed signs of slowing, as some customer orders were delayed toward the end of the quarter. Demand from customers who purchase conductive pastes for solar applications continued to be weak as a result of lower market demand and excess inventory of products in solar power end markets. Demand for other products that are used in electronics industry applications also declined during the third quarter.

Net sales increased by 3% in the three months ended September 30, 2011, compared with the third quarter of 2010. Changes in foreign currency exchange rates were the primary driver of the increased sales. Increased precious metal costs, which are passed through to customers with little gross profit contribution, were also a contributor to the increased sales. Sales increased in all business segments except Electronic Materials where sales declined due to weak demand for conductive pastes that are used in solar applications. In aggregate, changes in product prices and mix contributed approximately 12 percentage points to the growth in net sales compared to the third quarter of 2010. Changes in foreign currency exchange rates contributed an additional 3 percentage points to sales growth. Lower sales volumes, primarily driven by lower sales of conductive pastes and the effects of products that we no longer sell, reduced sales growth by approximately 12 percentage points.

Raw material costs, in aggregate, increased during the quarter by approximately $35 million compared with the same quarter last year, reflecting widespread commodity cost increases in the global economy. The costs of some raw materials have now declined from the peak costs experienced earlier in 2011. Changes in product pricing kept pace with increasing raw materials across the business as a whole. Securing price increases to fully cover raw materials cost increases continued to be challenging in our Polymer Additives business and portions of our Performance Coatings business.

Gross profit declined in the third quarter compared with the third quarter of 2010. The reduction was driven by declines in sales of conductive pastes for solar cells in our Electronic Materials business. Higher sales of precious metals did not add significantly to gross profit during the quarter because precious metal costs are passed through to customers with little gross profit contribution. In addition, increased sales due to product price increases that reflected rising raw material costs did not result in significant incremental gross profit during the quarter.

Selling, general and administrative (“SG&A”) expenses declined compared with the prior-year period. The decline in SG&A expenses was driven by reduced charges related to manufacturing rationalization and employee severance, along with reduced incentive compensation expense. Offsetting some of the decline were higher expenses for an initiative to standardize business processes and improve management information systems, as well as increased expenses due to changes in foreign currency exchange rates.

Restructuring and impairment charges declined significantly compared with the third quarter of 2010. The major operational activities related to our restructuring initiatives, started in 2006, were completed during 2010. The current restructuring charges are primarily related to residual costs at manufacturing sites where production activities have been concluded.

Interest expense declined in the third quarter primarily as a result of lower average interest rates and reduced average borrowing levels, as well as reduced amortization of debt issuance costs.

During the third quarter of 2010, we recorded losses on extinguishment of debt as a result of debt refinancing. This charge did not recur in 2011.

We recorded net income during the 2011 third quarter compared with a net loss in the third quarter of 2010. The improvement was driven by the absence of losses on extinguishment of debt, reduced restructuring and impairment charges, reduced SG&A expenses and lower interest expense. These contributions to improved income were partially offset by reduced gross profit and increased income tax expense.

Outlook

Our ability to forecast future customer demand is very limited because of the uncertainty surrounding economic conditions in a number of regions and application markets around the world, particularly in Europe and the United States. Customers are placing orders only for the materials they need for near-term production requirements, and we have experienced order delays or cancellations due to recent deterioration in end market demand. In addition, customer orders for our conductive pastes have been negatively impacted by continuing excess inventory of completed solar power modules. The amount of excess module inventory remaining and the near-term demand for solar modules are difficult to forecast. Therefore, customers of our conductive pastes are not certain when their production requirements will recover.

We expect generally weak economic conditions to continue during the next several quarters. Because of the continued uncertainty in worldwide macroeconomic factors and the unknown effects of difficult credit markets, particularly in Europe, our ability to forecast future financial performance is more limited than usual.

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, 2010.

Results of Operations

Comparison of the three months ended September 30, 2011 and 2010

		Three months ended
		September 30,
		2011				2010				$ Change				% Change
		(Dollars in thousands, except per share amounts)
Net sales		$	546,114			$	528,564			$	17,550				3.3	%
Cost of sales			442,304				408,268				34,036				8.3	%
Gross profit			103,810				120,296				(16,486	)			(13.7	)%
Gross profit percentage			19.0	%			22.8	%
Selling, general and administrative expenses			67,530				74,835				(7,305	)			(9.8	)%
Restructuring and impairment charges			869				9,570				(8,701	)
Other expense (income):
Interest expense			7,030				10,519				(3,489	)
Interest earned			(50	)			(78	)			28
Losses on extinguishment of debt			—				19,331				(19,331	)
Foreign currency losses, net			1,726				398				1,328
Miscellaneous expense, net			64				7,345				(7,281	)
Income (loss) before income taxes			26,641				(1,624	)			28,265
Income tax expense			8,419				738				7,681
Net income (loss)		$	18,222			$	(2,362	)		$	20,584
Diluted earnings (loss) per share		$	0.21			$	(0.04	)		$	0.25

Net sales increased by 3% in the three months ended September 30, 2011, compared with the third quarter of 2010, driven by changes in foreign currency exchange rates. Increased sales of precious metals in our Electronic Materials segment, driven by higher prices for silver, also contributed to the overall growth in sales. Sales were higher in all segments except Electronic Materials, where reduced demand for conductive pastes used in the manufacture of solar sales led to a decline in sales. Higher product prices and mix accounted for approximately 12 percentage points of sales growth in the quarter, and changes in foreign currency exchange rates added an additional 3 percentage points to the growth. Lower sales volume reduced sales growth by approximately 12 percentage points. Nearly three quarters of the reduction in sales due to volume was attributable to the Electronic Materials segment. Higher precious metals sales, resulting from higher silver prices partially offset by lower precious metals sales volume, contributed $8.6 million to the overall sales increase during the quarter.

Gross profit declined primarily as a result of reduced sales volume of conductive pastes used in solar cell applications. In addition, increased raw material costs and product mix changes combined to reduce gross profit or to limit the growth in gross profit in those segments where sales increased. Gross profit percentage declined to 19.0% of sales from 22.8% of sales in the prior-year period. Charges that were primarily related to residual costs at closed manufacturing sites involved in restructuring initiatives reduced gross profit by $0.7 million during the third quarter of 2011. In the third quarter of 2010, gross profit also was reduced by $0.7 million due to charges for accelerated depreciation, severance costs and other costs associated with manufacturing rationalization activities.

Selling, general and administrative (“SG&A”) expenses declined by $7.3 million during the third quarter of 2011 compared with the prior-year quarter. SG&A expenses were 12.4% of net sales during the third quarter, down from 14.2% in the third quarter of 2010. The drivers of the reduced SG&A expenses were lower special charges, reduced pension expense and lower incentive compensation expense. Changes in foreign currency exchange rates offset some of the decline. In addition, SG&A spending in the third quarter included $1.6 million related to an initiative to streamline and standardize business processes and improve management information systems tools. SG&A expenses during the 2011 third quarter also included charges of $0.8 million that were primarily related to expenses at closed sites impacted by restructuring initiatives. In the prior-year quarter, SG&A expenses included $5.5 million in special charges, primarily driven by expenses related to manufacturing rationalization activities and employee severance expenses.

Restructuring and impairment charges declined to $0.9 million in the third quarter of 2011 compared with $9.6 million in the third quarter of 2010. The decline reflects the reduction in restructuring activities as we complete the final actions related to our multi-year manufacturing rationalization activities.

Interest expense declined by $3.5 million in the three months ended September 30, 2011, compared with the prior-year period. Lower average interest rates on borrowings, a decline in average borrowing levels and reduced amortization of debt issuance costs resulted in the decline in interest expense. In addition, interest expense in the 2010 third quarter included a $0.8 million noncash write-off of unamortized fees related to a repayment of term loans.

We recorded a $19.3 million charge for losses on extinguishment of debt during the 2010 third quarter related to debt refinancing. The charge included a write-off of unamortized fees and the difference between the carrying value and the fair market value of the portion of our 6.5% Convertible Notes purchased pursuant to a tender offer and a write-off of unamortized fees associated with our previous credit facility. We did not record any charges for extinguishment of debt in the third quarter of 2011.

We are exposed to the impact of exchange rate fluctuations on foreign currency positions arising from our international trade. We manage these currency risks principally by entering into forward contracts. The carrying value of the open contracts at quarter-end are adjusted to market value and the resulting gains or losses are charged to income or expense during the period, partially offsetting the effects of changes in foreign currency exchange rates on the underlying positions.

Net miscellaneous expense for the 2011 third quarter was $0.1 million compared with $7.3 million in the third quarter of 2010. During the third quarter of 2010, we recorded charges of $6.8 million to settle our interest rate swaps in connection with the extinguishment of term loans that were part of our previous credit facility.

During the third quarter of 2011, income tax expense was $8.4 million, or 31.6% of pre-tax income. In the 2010 third quarter, we recorded tax expense of $0.7 million despite consolidated pre-tax losses of $1.6 million. The change in the effective tax rate was primarily the result of a decrease in our losses in jurisdictions for which the benefits of these losses were not expected to be realized and a current period benefit of $1.0 million related to the settlement of foreign tax matters.

Net income increased to $18.2 million in the three months ended September 30, 2011, compared with a net loss of $2.4 million in the prior-year period. The improvement was driven by an absence of losses on extinguishment of debt, reduced restructuring and impairment charges, reduced SG&A expenses, reduced miscellaneous expense and lower interest expense. These improvements were partially offset by reduced gross profit and increased income tax expense.

		Three months ended
		September 30,
		2011				2010				$ Change				% Change
		(Dollars in thousands)
Segment Sales
Electronic Materials		$	156,081			$	166,953			$	(10,872	)			(6.5	)%
Performance Coatings			153,365				144,218				9,147				6.3	%
Color and Glass Performance Materials			100,525				91,167				9,358				10.3	%
Polymer Additives			85,634				77,291				8,343				10.8	%
Specialty Plastics			43,606				42,633				973				2.3	%
Pharmaceuticals			6,903				6,302				601				9.5	%
Total segment sales		$	546,114			$	528,564			$	17,550				3.3	%
Segment Income
Electronic Materials		$	17,754			$	31,394			$	(13,640	)			(43.4	)%
Performance Coatings			11,728				11,322				406				3.6	%
Color and Glass Performance Materials			8,758				9,192				(434	)			(4.7	)%
Polymer Additives			4,025				6,970				(2,945	)			(42.3	)%
Specialty Plastics			2,662				4,253				(1,591	)			(37.4	)%
Pharmaceuticals			1,062				534				528				98.9	%
Total segment income		$	45,989			$	63,665			$	(17,676	)			(27.8	)%

Electronic Materials Segment Results. Sales declined in Electronic Materials primarily as a result of reduced demand for conductive pastes used in solar cell applications. The decline in demand for these products continued from the second quarter of 2011 as a consequence of lower end-market demand and excess inventory of completed solar power modules and the resulting reduction in solar cell production by our customers. Lower sales volume reduced sales by approximately $40 million compared with the prior-year period. Changes in product pricing and mix offset approximately $26 million of the decline during the quarter, and changes in foreign currency exchange rates increased sales by an additional $3 million. Sales declines occurred in all regions. Operating income declined primarily due to a $13 million decrease in gross profit driven by the reduced sales volume of conductive pastes.

Performance Coatings Segment Results. Sales increased in Performance Coatings primarily due to higher product prices and changes in foreign currency exchange rates, partially offset by reduced sales volume. The higher product prices are primarily due to higher raw material costs compared with the prior-year period. Changes in product prices and mix contributed $14 million to the overall sales increase during the period. Changes in foreign currency exchange rates added an additional $6 million to sales growth. Lower sales volume offset approximately $11 million of the sales growth. Sales increases were primarily in Europe-Middle East-Africa, Asia and Latin America. Operating profit increased slightly during the quarter as a result of a $1.3 million improvement in gross profit that was partially offset by a $0.9 million increase in SG&A expense.

Color and Glass Performance Materials Segment Results. Sales increased in Color and Glass Performance Materials as a result of product prices, mix and foreign exchange rates, partially offset by reduced sales volume. Sales volume of certain metal oxide products was curtailed as a result of the closing of a manufacturing plant in Portugal, and sales volume was also lower due to reduced precious metal preparations sales as a result of a business divestiture. Changes in product price and mix accounted for approximately $11 million of the increased sales for the third quarter, and changes in foreign currency exchange rates contributed an additional $5 million to growth. Lower sales volume reduced sales growth by approximately $7 million in the quarter. The growth in sales was primarily driven by increased sales in Europe-Middle East-Africa and the United States. Operating profit declined as a result of a $1.1 million increase in SG&A expense that was partially offset by a $0.7 million increase in gross profit. The increase in gross profit was driven by the benefits from manufacturing rationalization activities completed in prior periods. During the quarter, both gross profit and SG&A expenses were impacted by costs associated with consolidating production from a plant in Austria to one of our existing plants in Germany.

Polymer Additives Segment Results. Sales increased in Polymer Additives primarily as a result of higher product prices. The higher product prices in the quarter largely reflected higher raw material costs compared with the prior-year period. Changes in product prices and mix increased sales by approximately $8 million. Increases in sales of $2 million due to changes in foreign currency exchange rates were offset by nearly equal sales reductions resulting from reduced sales volume. Sales increases occurred in the United States and Europe-Middle East-Africa, the primary markets for our polymer additive products. Operating income declined primarily as a result of a $3 million decline in gross profit caused by changes in product mix and increased manufacturing costs. SG&A expense was little changed from the prior-year period.

Specialty Plastics Segment Results. Sales increased in Specialty Plastics primarily as a result of changes in product pricing and mix that were largely offset by reduced sales volume. Changes in product prices and mix accounted for approximately $5 million of the overall sales increase, and changes in foreign currency exchange rates increased sales by an additional $1 million. Lower sales volume reduced sales by $5 million. Sales growth was primarily in the United States. Operating profit declined primarily as a result of a $2 million reduction in gross profit that was driven by reduced sales volume.

Pharmaceuticals Segment Results. Sales increased in Pharmaceuticals primarily as a result of changes in product mix compared with the prior-year quarter. Operating income increased due to a $0.3 million decline in SG&A expenses and a $0.2 million increase in gross profit. The gross profit improvement was driven by improved product mix.

		Three months ended
		September 30,
		2011				2010				$ Change				% Change
		(Dollars in thousands)
Geographic Revenues
United States		$	265,077			$	260,650			$	4,427				1.7	%
International			281,037				267,914				13,123				4.9	%
Total		$	546,114			$	528,564			$	17,550				3.3	%