UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2010

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

For the transition period from                      to                     

FERRO CORPORATION

(Exact name of registrant as specified in its charter)

Ohio		34-0217820
(State of Corporation)		(IRS Employer Identification No.)
1000 Lakeside Avenue
Cleveland, OH		44114
(Address of Principal executive offices)		(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 September 30, 2010, there were 86,182,577 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			21
Item 3. Quantitative and Qualitative Disclosures about Market Risk			34
Item 4. Controls and Procedures			35
PART II
Item 1. Legal Proceedings			36
Item 1A. Risk Factors			36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			37
Item 3. Defaults Upon Senior Securities			37
Item 4. (Removed and Reserved)			37
Item 5. Other Information			37
Item 6. Exhibits			37
Exhibit 3.4
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								Nine months ended
		September 30,								September 30,
		2010				2009				2010				2009
		(Dollars in thousands, except per share amounts)
Net sales		$	528,564			$	442,089			$	1,564,914			$	1,199,175
Cost of sales			408,268				348,920				1,215,354				985,531
Gross profit			120,296				93,169				349,560				213,644
Selling, general and administrative expenses			74,835				65,918				215,635				196,526
Restructuring and impairment charges			9,570				11,067				44,107				12,156
Other expense (income):
Interest expense			10,519				17,891				37,196				46,255
Interest earned			(78	)			(216	)			(542	)			(689	)
Losses on extinguishment of debt			19,331				—				19,331				—
Foreign currency losses, net			398				104				3,644				3,033
Miscellaneous expense (income), net			7,345				(655	)			2,523				199
(Loss) income before income taxes			(1,624	)			(940	)			27,666				(43,836	)
Income tax expense (benefit)			738				(3,749	)			23,246				(15,844	)
(Loss) income from continuing operations			(2,362	)			2,809				4,420				(27,992	)
Income (loss) on disposal of discontinued operations, net of income taxes			—				36				—				(322	)
Net (loss) income			(2,362	)			2,845				4,420				(28,314	)
Less: Net income attributable to noncontrolling interests			983				728				733				1,712
Net (loss) income attributable to Ferro Corporation			(3,345	)			2,117				3,687				(30,026	)
Dividends on preferred stock			(165	)			(168	)			(495	)			(538	)
Net (loss) income attributable to Ferro Corporation common shareholders		$	(3,510	)		$	1,949			$	3,192			$	(30,564	)
Amounts attributable to Ferro Corporation:
(Loss) income from continuing operations, net of tax		$	(3,345	)		$	2,081			$	3,687			$	(29,704	)
Income (loss) from discontinued operations, net of tax			—				36				—				(322	)
		$	(3,345	)		$	2,117			$	3,687			$	(30,026	)
Per common share data
Basic and diluted income (loss) attributable to Ferro Corporation common shareholders:
From continuing operations		$	(0.04	)		$	0.04			$	0.04			$	(0.68	)
From discontinued operations			—				—				—				(0.01	)
		$	(0.04	)		$	0.04			$	0.04			$	(0.69	)
Cash dividends declared		$	—			$	—			$	—			$	0.01

See accompanying notes to condensed consolidated financial statements.

Ferro Corporation and Consolidated Subsidiaries
Condensed Consolidated Balance Sheets

		September 30,				December 31,
		2010				2009
		(Dollars in thousands)
ASSETS
Current assets
Cash and cash equivalents		$	65,356			$	18,507
Accounts and trade notes receivable, net			334,298				285,638
Inventories			211,892				180,700
Deposits for precious metals			—				112,434
Deferred income taxes			20,888				19,618
Other receivables			29,583				27,795
Other current assets			9,431				7,180
Total current assets			671,448				651,872
Other assets
Property, plant and equipment, net			384,471				432,405
Goodwill			216,701				221,044
Amortizable intangible assets, net			12,883				10,610
Deferred income taxes			135,749				133,705
Other non-current assets			73,922				76,719
Total assets		$	1,495,174			$	1,526,355
LIABILITIES AND EQUITY
Current liabilities
Loans payable and current portion of long-term debt		$	1,646			$	24,737
Accounts payable			225,774				196,038
Income taxes			16,916				7,241
Accrued payrolls			35,766				20,894
Accrued expenses and other current liabilities			93,127				72,039
Total current liabilities			373,229				320,949
Other liabilities
Long-term debt, less current portion			323,924				398,720
Postretirement and pension liabilities			198,632				203,743
Deferred income taxes			3,550				1,124
Other non-current liabilities			22,028				31,897
Total liabilities			921,363				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			326,333				331,376
Retained earnings			360,320				357,128
Accumulated other comprehensive loss			(59,619	)			(60,147	)
Common shares in treasury, at cost			(166,662	)			(171,567	)
Total Ferro Corporation shareholders’ equity			553,808				550,226
Noncontrolling interests			10,576				10,269
Total equity			564,384				560,495
Total liabilities and equity		$	1,495,174			$	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																			(30,026	)							1,712				(28,314	)
Other comprehensive income (loss), net of tax:
Foreign currency translation																							17,541				(1	)			17,540
Postretirement benefit liabilities																							163								163
Raw material commodity swaps																							577								577
Interest rate swaps																							1,527								1,527
Total comprehensive loss																															(8,507	)
Cash dividends:
Common																			(437	)											(437	)
Preferred																			(199	)											(199	)
Income tax benefit															1																1
Stock-based compensation transactions			(1,038	)			25,610								(21,916	)															3,694
Distributions to noncontrolling interests																											(2,036	)			(2,036	)
Balances at September 30, 2009			7,394			$	(171,914	)		$	52,323			$	156,505			$	370,524			$	(78,628	)		$	9,430			$	338,240
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 loss																															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

See accompanying notes to condensed consolidated financial statements.

Ferro Corporation and Consolidated Subsidiaries
Condensed Consolidated Statements of Cash Flows

		Nine months ended
		September 30,
		2010				2009
		(Dollars in thousands)
Cash flows from operating activities
Net cash provided by (used for) operating activities		$	180,455			$	(5,769	)
Cash flows from investing activities
Capital expenditures for property, plant and equipment			(27,733	)			(30,704	)
Proceeds from business combination			5,887				—
Proceeds from sale of assets			7,425				104
Dividends received from affiliates			139				169
Net cash used for investing activities			(14,282	)			(30,431	)
Cash flows from financing activities
Net (repayments) borrowings under loans payable			(22,500	)			29,128
Proceeds from Senior Notes			250,000				—
Proceeds from revolving credit facility			23,350				—
Proceeds from former revolving credit facility			303,390				561,624
Principal payments on revolving credit facility			(23,350	)			—
Principal payments on former revolving credit facility			(229,590	)			(542,027	)
Principal payments on term loan facility			(83,562	)			(2,287	)
Extinguishment of debt			(326,687	)			—
Debt issue costs			(10,460	)			(9,367	)
Cash dividends paid			(495	)			(636	)
Other financing activities			(788	)			748
Net cash (used for) provided by financing activities			(120,692	)			37,183
Effect of exchange rate changes on cash and cash equivalents			1,368				3,097
Increase in cash and cash equivalents			46,849				4,080
Cash and cash equivalents at beginning of period			18,507				10,191
Cash and cash equivalents at end of period		$	65,356			$	14,271
Cash paid during the period for:
Interest		$	30,291			$	37,985
Income taxes			15,723				8,221

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 nine months ended September 30, 2010, are not necessarily indicative of the results expected in subsequent quarters or for the full year. We combined the captions for impairment charges and restructuring charges in the prior-period statements of operations to conform the presentation to the current period.

2. Accounting Standards Adopted in the Nine Months Ended September 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:

		September 30,				December 31,
		2010				2009
		(Dollars in thousands)
Raw materials		$	66,875			$	54,481
Work in process			43,362				37,449
Finished goods			101,655				88,770
Total		$	211,892			$	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 $0.9 million for the three months ended September 30, 2010 and 2009, respectively, and $3.7 million and $3.4 million for the nine months ended September 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 $136.9 million at September 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. At December 31, 2009, we had delivered $112.4 million in cash collateral to those financial institutions. At September 30, 2010, cash collateral required under the consignment agreements was $-0-.

5. Property, Plant and Equipment

Property, plant and equipment is reported net of accumulated depreciation of $610.3 million at September 30, 2010, and $643.9 million at December 31, 2009. Unpaid capital expenditure liabilities, which are noncash investing activities, were $7.1 million at September 30, 2010, and $8.8 million at September 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 restructuring and 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 indicated a possible impairment 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 $2.3 million of restructuring and impairment charges.

In the third quarter of 2010, we commenced a plan to sell the property, plant and equipment at our Toccoa, Georgia, facility. The plan to sell this facility indicated a possible impairment of these assets. 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 $2.2 million of restructuring and impairment charges. We classified these assets as held for sale and measured them at fair value less costs to sell.

In the third quarter of 2010, as part of the restructuring programs initiated in the Netherlands, we sold the property, plant and equipment at our Specialty Plastics facility in Rotterdam, Netherlands. As a result, we recorded a gain of $2.4 million in restructuring and impairment charges. We also sold a portion of the property, plant and equipment at our Uden, Netherlands, facility. As a result, we recorded a loss of $1.7 million in restructuring and impairment charges, classified the remaining assets as held for sale, and measured them at fair value less costs to sell. We estimated the fair value of these assets primarily based on third-party appraisals (a Level 3 measurement within the fair value hierarchy).

At September 30, 2010, we had assets held for sale totaling $9.5 million and classified as other non-current assets. These assets are primarily land and building at our Toccoa, Georgia, facility; the Porcelain Enamel facility in Rotterdam, Netherlands; and the remaining portion of our Uden, Netherlands, facility.

6. Financing and Long-term Debt

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

		September 30,				December 31,
		2010				2009
		(Dollars in thousands)
Loans payable to banks		$	693			$	5,891
Accounts receivable asset securitization program			—				17,762
Current portion of long-term debt			953				1,084
Total		$	1,646			$	24,737

Long-term debt consisted of the following:

		September 30,				December 31,
		2010				2009
		(Dollars in thousands)
7.875% Senior Notes		$	250,000			$	—
6.50% Convertible Senior Notes, net of unamortized discounts			66,426				156,896
Former revolving credit facility			—				1,700
Former term loan facility			—				231,385
Capitalized lease obligations			4,902				5,669
Other notes			3,549				4,154
			324,877				399,804
Less current portion			(953	)			(1,084	)
Total		$	323,924			$	398,720

7.875% Senior Notes

In August 2010, we issued $250 million of 7.875% Senior Notes due 2018 (the “Senior Notes”). We used portions of the proceeds from the offering to repay all of the remaining term loans and revolving borrowings outstanding under a credit facility originally entered into in 2006 and as amended and restated through November 2009 (the “2009 Amended and Restated Credit Facility”). We also used portions of the proceeds from the offering to repurchase the 6.50% Convertible Senior Notes (the “Convertible Notes”) that were tendered pursuant to a related tender offer. The Senior Notes were issued at par and 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.

The Senior Notes 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 definition can be found in the indenture governing the Senior Notes, which was filed as Exhibit 4.1 to our Current Report on Form 8-K dated August 24, 2010.

The Senior Notes do not contain any financial covenants. However, the Senior Notes do contain certain affirmative and negative covenants customary for high-yield debt securities, including, without limitation, restrictions on our ability to incur debt, create liens, pay dividends or make other distributions or repurchase our common stock and sell assets outside the ordinary course of business.

6.50% Convertible Senior Notes

In July 2010, we commenced a cash tender offer to purchase all of our Convertible Notes. In August 2010, we purchased $100.5 million of the Convertible Notes, which were tendered pursuant to the offer. In September 2010, we purchased $0.3 million of the Convertible Notes on the open market. In connection with these transactions, we recognized a loss on extinguishment of debt of $9.4 million consisting of unamortized fees and the difference between the carrying value and the fair value of these notes. At par value, Convertible Notes outstanding totaled $71.7 million at September 30, 2010, and $172.5 million at December 31, 2009.

2009 Amended and Restated Credit Facility

Our 2009 Amended and Restated Credit Facility included a senior term loan facility and a senior revolving credit facility. 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 to interest expense. In August 2010, we made another early principal payment of $33.6 million on our outstanding term loans and wrote off $0.8 million of related unamortized fees to interest expense. Also in August 2010, we amended the 2009 Amended and Restated Credit Facility and paid the remaining $147.8 million on our outstanding term loans and the remaining $75.5 million on our outstanding revolving borrowings. We treated the amendment as an extinguishment of the 2009 Amended and Restated Credit Facility and recognized losses on extinguishment of debt of $9.9 million, consisting of unamortized fees related to this facility.

2010 Credit Facility

In August 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”). At September 30, 2010, there were no borrowings under this facility. 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 restrictive covenants under this facility. These covenants include requirements for a minimum fixed charge coverage ratio and a maximum leverage ratio. Definitions of the covenants and our required performance can be found in our 2010 Credit Facility, which was filed as Exhibit 10.1 to our Current Report on Form 8-K dated August 24, 2010.

Receivable Sales Programs

We have an asset securitization program for Ferro’s U.S. trade accounts receivable. In June 2010, we extended the maturity of that facility through May 2011. We maintain several off balance sheet international programs to sell trade accounts receivable to financial institutions. Ferro had received net proceeds under the international programs of $2.8 million at September 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:

		September 30, 2010								December 31, 2009
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
		(Dollars in thousands)
7.875% Senior Notes		$	250,000			$	260,000			$	—			$	—
6.50% Convertible Senior Notes, net of unamortized discounts			66,426				71,387				156,896				157,191
Former revolving credit facility			—				—				1,700				1,747
Former term loan facility			—				—				231,385				237,047
Other notes			3,549				2,626				4,154				3,084

The fair values of the Senior Notes and the Convertible Notes are based on the price of the latest trade prior to the end of the period. The fair values of the former revolving credit facility, the former 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 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 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 $192.3 million at September 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:

		September 30,				December 31,
		2010				2009				Balance Sheet Location
		(Dollars in thousands)
Derivatives designated as hedging instruments:
Liability derivatives:
Interest rate swaps		$	—			$	(9,516	)		Other non-current liabilities
Derivatives not designated as hedging instruments:
Asset derivatives:
Foreign currency forward contracts		$	45			$	—			Accrued expenses and other current liabilities
			—				899			Other receivables
Total		$	45			$	899
Liability derivatives:
Foreign currency forward contracts		$	(4,800	)		$	—			Accrued expenses and other current liabilities
			—				(176	)		Other receivables
Total		$	(4,800	)		$	(176	)

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:

		September 30, 2010																December 31,
		Level 1				Level 2				Level 3				Total				2009
		(Dollars in thousands)
Assets
Foreign currency forward contracts		$	—			$	(4,755	)		$	—			$	(4,755	)		$	723
Liabilities
Interest rate swaps		$	—			$	—			$	—			$	—			$	(9,516	)

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

										Amount of Loss
		Amount of Loss								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										$	(4,885	)		$	(5,080	)		Interest expense
											(6,849	)			—			Miscellaneous expense
Total		$	(2,218	)		$	(2,708	)		$	(11,734	)		$	(5,080	)

		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		$	3,020			$	(12,970	)		Foreign currency losses, net

8. Income Taxes

Income tax expense for the nine months ended September 30, 2010, was $23.2 million, or 84.0% of pre-tax income. In the prior-year period, we recorded an income tax benefit of $15.8 million, or 36.1% 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 2010, a charge of $1.8 million for valuation allowances on deferred assets in Italy, a $0.6 million charge to adjust tax expense to reflect actual taxes on 2009 tax returns filed in jurisdictions worldwide, and not recognizing a $10.3 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 September 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		$	3			$	7			$	833			$	1,095			$	—			$	4
Interest cost			5,098				5,235				2,387				2,743				607				719
Expected return on plan assets			(4,622	)			(3,863	)			(1,587	)			(1,841	)			—				—
Amortization of prior service cost			24				24				(35	)			(107	)			251				(437	)
Net amortization and deferral			2,561				3,845				189				274				(43	)			—
Curtailment and settlement effects			—				—				(180	)			—				—				—
Net periodic benefit cost		$	3,064			$	5,248			$	1,607			$	2,164			$	815			$	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 nine months ended September 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		$	17			$	22			$	2,549			$	3,143			$	—			$	11
Interest cost			15,410				15,707				7,639				7,839				1,821				2,158
Expected return on plan assets			(13,604	)			(11,590	)			(5,245	)			(5,254	)			—				—
Amortization of prior service cost			72				73				(288	)			(305	)			(547	)			(1,311	)
Net amortization and deferral			9,473				11,535				529				780				(129	)			—
Curtailment and settlement effects			—				—				(4,745	)			—				—				—
Net periodic benefit cost		$	11,368			$	15,747			$	439			$	6,203			$	1,145			$	858

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 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.

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 nine months ended September 30, 2010:

		Common Shares
		in Treasury								Paid-in
		Shares				Amount				Capital
		(In thousands)
Stock options			(99	)		$	2,438			$	(932	)
Deferred stock units			(34	)			832				(355	)
Restricted shares			(107	)			3,284				(2,579	)
Performance shares, net			118				(1,045	)			1,233
Directors’ deferred compensation			—				(604	)			604
Preferred stock conversions			—				—				—
Total			(122	)		$	4,905			$	(2,029	)

12. Restructuring and Cost Reduction Programs

During the first nine months 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. To date, we have made substantial progress on these programs, including exiting manufacturing facilities and eliminating positions.

For the nine months ended September 30, 2010 and 2009, total charges resulting from these activities were $47.4 million and $7.8 million, respectively, of which $3.3 million and $3.9 million, respectively, were recorded in cost of sales as they relate to accelerated depreciation on assets to be disposed, and the remaining $44.1 million and $3.9 million, respectively, were reported as restructuring and impairment charges. 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.

The following restructuring programs had significant activities in the nine months ended September 30, 2010:

Restructuring Program in Limoges, France

In the first quarter of 2009, we initiated restructuring activities at our Color and Glass Performance Materials facility in Limoges, France. We discontinued manufacturing in the first quarter of 2010 and expect to have substantially completed the restructuring activities in 2011, at which time the Limoges site will be closed.

We expect to record pre-tax charges of approximately $33 million related to these actions, including approximately $22 million for employee severance, $6 million in site cleanup and other costs, and $5 million in asset write-offs.

As of December 31, 2009, we had incurred $9.3 million in total charges, of which $0.6 million was recorded in cost of sales as accelerated depreciation on assets to be disposed and the remaining $8.7 million, including $6.9 million for employee severance and $1.8 million in other related costs, was recorded in restructuring and impairment charges.

During the nine months ended September 30, 2010, we incurred $14.8 million in total charges, of which $1.7 million was recorded in cost of sales as accelerated depreciation on assets to be disposed and the remaining $13.1 million, including $10.9 million for employee severance, $2.2 million for asset impairment, and $1.4 million in other exit costs, partially offset by a $1.4 million pension settlement credit, was recorded in restructuring and impairment charges.

Restructuring Program in Castanheira do Ribatejo, Portugal

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

In September 2010, we initiated additional restructuring activities at our Castanheira do Ribatejo facility in Portugal to discontinue the remaining Color and Glass Performance Materials manufacturing located at this facility. We plan to close the facility by the end of 2010. As of September 30, 2010, we had ceased all manufacturing at this location.

We expect to record pre-tax charges of approximately $22 million related to these actions, including approximately $11 million for employee severance, $6 million in asset write-offs, and $5 million in site cleanup and other costs.

During the nine months ended September 30, 2010, we incurred $12.8 million in total charges, of which $0.2 million was recorded in cost of sales as accelerated depreciation on assets to be disposed and the remaining $12.6 million, including $9.4 million for employee severance, $1.7 million for asset impairment, and $1.5 million in other costs, was recorded in restructuring and impairment charges.

Restructuring Program in Rotterdam, Netherlands

In April 2010, we initiated additional restructuring actions to reduce costs related to our European Specialty Plastics manufacturing facility in Rotterdam, Netherlands. As of September 30, 2010, this restructuring program was substantially completed, since the manufacturing operation was consolidated into our existing operations in Almazora, Spain, and the property, plant, and equipment was sold.

In the nine months ended September 30, 2010, we incurred $1.2 million in total charges, of which $0.2 million was recorded in cost of sales as accelerated depreciation on assets to be disposed and the remaining $1.0 million, including $4.9 million for employee severance and $0.9 million for other costs, partially offset by a $2.4 million pension curtailment credit and a $2.4 million gain on sale of the assets, was recorded in restructuring and impairment charges.

Restructuring Program in Uden, Netherlands

In May 2010, after finalizing the consultation process with workers’ representatives, we initiated restructuring actions to reduce costs related to our European dielectrics manufacturing, which is part of our Electronic Materials business. As a result of this action, dialectics products that were manufactured in Uden, Netherlands, were transferred to other locations and the Uden plant was closed.

We expect to record pre-tax charges of approximately $14 million related to the actions, including approximately $7 million in employee severance, $2 million in site cleanup and other costs, and $5 million in asset write-offs. The restructuring actions are expected to be completed by the end of 2010.

In the nine months ended September 30, 2010, we incurred $12.7 million in total charges, of which $0.2 million was recorded in cost of sales as accelerated depreciation on assets to be disposed and the remaining $12.5 million, including $7.5 million for employee severance, $4.6 million for asset impairment, and $0.6 million for other costs, partially offset by a $0.2 million pension curtailment credit, was recorded in restructuring and impairment charges.

Restructuring Program in Toccoa, Georgia

In the third quarter of 2010, as a continuation of our restructuring activities previous announced in 2008, we commenced a plan to sell the property, plant and equipment at our Color and Glass Performance Materials facility in Toccoa, Georgia. The plan to sell this facility triggered an impairment of the carrying values of these assets. As a result, we recorded a $2.2 million asset impairment in restructuring and impairment charges.

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

		Employee				Other				Asset
		Severance				Costs				Impairment				Total
		(Dollars in thousands)
Balance at December 31, 2009		$	3,081			$	1,518			$	—			$	4,599
Restructuring charges			34,273				(824	)			10,658				44,107
Cash payments			(28,840	)			(4,293	)			—				(33,133	)
Currency translation adjustment			529				49				—				578
Non-cash items			—				7,127				(10,658	)			(3,531	)
Balance at September 30, 2010		$	9,043			$	3,577			$	—			$	12,620

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. Per Share Amounts from Continuing Operations

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

		Three months ended								Nine months ended
		September 30,								September 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		$	(3,510	)		$	1,949			$	3,192			$	(30,564	)
Adjustment for (income) loss from discontinued operations			—				(36	)			—				322
		$	(3,510	)		$	1,913			$	3,192			$	(30,242	)
Weighted-average common shares outstanding			85,805				44,711				85,808				44,593
Basic (loss) income per share from continuing operations attributable to Ferro Corporation common shareholders		$	(0.04	)		$	0.04			$	0.04			$	(0.68	)
Diluted income (loss) per share computation
Net income (loss) attributable to Ferro Corporation common shareholders		$	(3,510	)		$	1,949			$	3,192			$	(30,564	)
Adjustment for (income) loss from discontinued operations			—				(36	)			—				322
Plus: Convertible preferred stock			—				—				—				—
		$	(3,510	)		$	1,913			$	3,192			$	(30,242	)
Weighted-average common shares outstanding			85,805				44,711				85,808				44,593
Assumed exercise of stock options			—				265				330				—
Assumed satisfaction of deferred stock unit conditions			—				20				77				—
Assumed satisfaction of restricted share conditions			—				—				324				—
Assumed conversion of convertible notes			—				—				—				—
Assumed conversion of convertible preferred stock			—				—				—				—
Weighted-average diluted shares outstanding			85,805				44,996				86,539				44,593
Diluted (loss) income per share from continuing operations attributable to Ferro Corporation common shareholders		$	(0.04	)		$	0.04			$	0.04			$	(0.68	)

14. Comprehensive Income (Loss)

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

		Three months ended								Nine months ended
		September 30,								September 30,
		2010				2009				2010				2009
		(Dollars in thousands)
Net (loss) income		$	(2,362	)		$	2,845			$	4,420			$	(28,314	)
Other comprehensive income (loss), net of tax:
Foreign currency translation			24,477				12,567				(1,218	)			17,540
Postretirement benefit liabilities			(1,132	)			(498	)			(4,167	)			163
Raw material commodity swaps			—				18				(107	)			577
Interest rate swaps			4,191				(598	)			6,121				1,527
Total comprehensive income (loss)			25,174				14,334				5,049				(8,507	)
Less: Comprehensive income attributable to noncontrolling interests			1,053				731				834				1,711
Comprehensive income (loss) attributable to Ferro Corporation		$	24,121			$	13,603			$	4,215			$	(10,218	)

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, restructuring and impairment charges, other expense (income) items such as interest expense, and income tax expense. Unallocated corporate expenses primarily consist of corporate employment costs and professional services.

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

		Three months ended								Nine months ended
		September 30,								September 30,
		2010				2009				2010				2009
						(Dollars in thousands)
Electronic Materials		$	166,953			$	113,210			$	488,714			$	296,269
Performance Coatings			144,218				129,499				414,546				355,420
Color and Glass Performance Materials			91,167				88,498				288,196				232,264
Polymer Additives			77,291				67,660				231,431				190,105
Specialty Plastics			42,633				39,040				124,365				110,833
Pharmaceuticals			6,302				4,182				17,662				14,284
Total net sales		$	528,564			$	442,089			$	1,564,914			$	1,199,175

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

		Three months ended								Nine months ended
		September 30,								September 30,
		2010				2009				2010				2009
		(Dollars in thousands)
Electronic Materials		$	31,394			$	13,129			$	97,273			$	21,933
Performance Coatings			11,322				14,518				35,226				20,144
Color and Glass Performance Materials			9,192				7,815				26,457				7,583
Polymer Additives			6,970				4,386				13,797				7,863
Specialty Plastics			4,253				2,977				9,575				7,148
Pharmaceuticals			534				(1,316	)			388				(989	)
Total segment income			63,665				41,509				182,716				63,682
Unallocated corporate expenses			18,204				14,258				48,791				46,564
Restructuring and impairment charges			9,570				11,067				44,107				12,156
Interest expense			10,519				17,891				37,196				46,255
Losses on extinguishment of debt			19,331				—				19,331				—
Other expense (income), net			7,665				(767	)			5,625				2,543
(Loss) income before income taxes from continuing operations		$	(1,624	)		$	(940	)		$	27,666			$	(43,836	)

16. Business Combination

On April 30, 2010, Ferro Corporation and W.C. Heraeus GmbH (“Heraeus”) acquired from each other certain business lines related to 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 expense (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

Subsequent adjustments to fair values, working capital and net assets were not material.

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

17. Miscellaneous Expense (Income), Net

For the three months ended June 30, 2010, miscellaneous expense (income), net 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. For the three months ended September 30, 2010, miscellaneous expense (income), net includes a charge of $6.8 million related to settlement of interest rate swaps.

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

Overview

Customer demand increased compared with the prior-year quarter reflecting a continuing, gradual recovery from the economic downturn in 2009. Demand has followed a normal seasonal pattern in 2010 and was lower in the quarter ended September 30 compared with the three months ended June 30, largely as the result of lower demand in Europe during the month of August.

Net sales increased by 20% in the three months ended September 30, 2010, compared with the prior-year period. The primary driver of the increased sales was higher sales volume, including increased sales of precious metals. Increased sales volume accounted for approximately 20 percentage points of the increased sales compared with the third quarter of 2009. Changes in product mix and prices contributed an additional 3 percentage points to the sales increase, while changes in foreign currency exchange rates reduced sales by approximately 3 percentage points. Sales increased in all regions during the third quarter.

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

Selling, general and administrative (“SG&A”) expenses declined as a percentage of sales from the prior-year quarter and increased in total dollars. One driver of the increase in SG&A expenses were higher incentive compensation accruals. In addition, higher special charges, primarily related to manufacturing rationalization projects, contributed to the higher SG&A expense during the quarter.

Restructuring and impairment charges were $9.6 million for the quarter, compared with $11.1 million in the third quarter of 2009. The charges were primarily the result of restructuring initiatives in Europe, including projects that will result in closing of certain manufacturing operations in Portugal and the Netherlands. In addition, we recorded a $2.2 million charge related to a reduction in the value of property at a manufacturing site that was closed in 2008. Our major restructuring projects are expected to be substantially completed by the end of 2010, although some charges may be recorded in 2011 depending on the provisions of social plans at affected sites and the termination dates for certain employee benefit plans.

Interest expense declined during the third quarter compared with the third quarter of 2009. Lower average borrowing levels were the primary driver of the lower interest expense. During the quarter, we purchased a portion of our outstanding 6.5% Convertible Notes pursuant to a tender offer, issued new Senior Notes and entered into a five-year revolving credit agreement that replaced an existing revolving credit and term loan facility. Interest expense is expected to be lower in future periods as a result of these refinancing actions.

During the 2010 third quarter we recorded losses on extinguishment of debt of $19.3 million. The charge included a write-off of unamortized fees and the difference between the carrying value and the fair value of the portion of our 6.5% Convertible Notes purchased pursuant to our tender offer and a write-off of unamortized fees associated with our previous credit facility.

As a part of our miscellaneous expense for the third quarter, we recorded a charge of $6.8 million to settle our interest rate swaps in connection with the extinguishment of term loans which were part of our previous credit facility.

Income from continuing operations declined in the third quarter compared with the prior-year quarter, primarily as a result of losses on extinguishment of debt, increased SG&A expenses and increased miscellaneous expense. The increased expenses were partially offset by increased gross profit resulting from higher sales, lower interest expense and reduced restructuring and impairment charges.

Outlook

We expect demand for our products to continue to improve during 2010 compared with 2009, leading to an increase in net sales for the year. In addition, we expect sales in the final three months of 2010 to reflect a pattern consistent with our historical seasonality. As a result of these factors, we expect net sales in the final quarter of 2010 to decline from the third quarter of 2010, while showing growth from the fourth quarter of 2009. The anticipated reduction in sales in the final three months of the year is a normal result of seasonally reduced sales of building-related materials as construction activity declines during the winter months in the northern hemisphere. The seasonal slowdown of building-related demand for our products is expected to extend to our electronic materials products that are used in solar cell manufacturing, as installations of solar panels is normally lower in the winter months.

We expect to record restructuring charges associated with our current restructuring programs during the remaining months of 2010. Some charges from these restructuring programs may be incurred in 2011, depending on the specific social plans at affected sites, the timing of terminations of certain employee benefit plans, and the accounting rules that govern the recognition of the associated charges. The restructuring programs are intended to further rationalize our manufacturing operations in Europe, align our worldwide operations to the current customer demand, and reduce certain SG&A expenses. 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.

In July 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 fourth 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, and in Item 1A of Part II of this Quarterly Report on Form 10-Q.

Results of Operations

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

		Three months ended
		September 30,
		2010				2009				$ Change				% Change
		(Dollars in thousands, except per share
		amounts)
Net sales		$	528,564			$	442,089			$	86,475				19.6	%
Cost of sales			408,268				348,920				59,348				17.0	%
Gross profit			120,296				93,169				27,127				29.1	%
Gross profit percentage			22.8	%			21.1	%
Selling, general and administrative expenses			74,835				65,918				8,917				13.5	%
Restructuring and impairment charges			9,570				11,067				(1,497	)
Other expense (income):
Interest expense			10,519				17,891				(7,372	)
Interest earned			(78	)			(216	)			138
Losses on extinguishment of debt			19,331				—				19,331
Foreign currency losses, net			398				104				294
Miscellaneous expense (income), net			7,345				(655	)			8,000
(Loss) income before income taxes			(1,624	)			(940	)			(684	)
Income tax expense (benefit)			738				(3,749	)			4,487
(Loss) income from continuing operations			(2,362	)			2,809				(5,171	)
Income on disposal of discontinued operations, net of income taxes			—				36				(36	)
Net (loss) income		$	(2,362	)		$	2,845			$	(5,207	)
Diluted (loss) income per share		$	(0.04	)		$	0.04			$	(0.08	)