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.)
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 þ		Accelerated filer o		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, 2009, there were 44,929,989 shares of Ferro Common Stock, par value $1.00, outstanding.

 

 

TABLE OF CONTENTS

PART I
Item 1 Financial Statements (Unaudited)		Page 3
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		Page 28
Item 3 Quantitative and Qualitative Disclosures about Market Risk		Page 42
Item 4 Controls and Procedures		Page 44
PART II
Item 1 Legal Proceedings		Page 45
Item 1A Risk Factors		Page 46
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds		Page 46
Item 3 Defaults Upon Senior Securities		Page 46
Item 4 Submission of Matters to a Vote of Security Holders		Page 46
Item 5 Other Information		Page 46
Item 6 Exhibits		Page 46
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,
		2009				2008				2009				2008
		(Dollars in thousands,
		except per share amounts)
Net sales		$	442,089			$	590,150			$	1,199,175			$	1,812,964
Cost of sales			348,920				479,807				985,531				1,474,382
Gross profit			93,169				110,343				213,644				338,582
Selling, general and administrative expenses			65,918				76,943				196,526				234,243
Impairment charges			8,225				—				8,225				—
Restructuring charges			2,842				9,042				3,931				22,280
Other expense (income):
Interest expense			17,891				12,424				46,255				38,747
Interest earned			(216	)			(213	)			(689	)			(484	)
Loss on extinguishment of debt			—				5,531				—				5,531
Foreign currency losses, net			104				1,647				3,033				756
Miscellaneous (income) expense, net			(655	)			237				199				3,231
(Loss) income before income taxes			(940	)			4,732				(43,836	)			34,278
Income tax (benefit) expense			(3,749	)			876				(15,844	)			14,290
Income (loss) from continuing operations			2,809				3,856				(27,992	)			19,988
Income from discontinued operations, net of income taxes			—				1,259				—				4,586
Gain (loss) on disposal of discontinued operations, net of income taxes			36				(57	)			(322	)			(73	)
Net income (loss)			2,845				5,058				(28,314	)			24,501
Less: Net income attributable to noncontrolling interests			728				448				1,712				1,386
Net income (loss) attributable to Ferro Corporation			2,117				4,610				(30,026	)			23,115
Dividends on preferred stock			(168	)			(225	)			(538	)			(675	)
Net income (loss) attributable to Ferro Corporation common shareholders		$	1,949			$	4,385			$	(30,564	)		$	22,440
Amounts attributable to Ferro Corporation:
Income (loss) from continuing operations, net of tax		$	2,081			$	3,408			$	(29,704	)		$	18,602
Income (loss) from discontinued operations, net of tax			36				1,202				(322	)			4,513
		$	2,117			$	4,610			$	(30,026	)		$	23,115
Per common share data
Basic and diluted earnings (loss) attributable to Ferro Corporation common shareholders:
From continuing operations		$	0.04			$	0.07			$	(0.68	)		$	0.41
From discontinued operations			0.00				0.03				(0.01	)			0.10
		$	0.04			$	0.10			$	(0.69	)		$	0.51
Cash dividends declared		$	0.00			$	0.145			$	0.01			$	0.435

See accompanying notes to condensed consolidated financial statements.

Ferro Corporation and Consolidated Subsidiaries
Condensed Consolidated Balance Sheets

		September 30,				December 31,
		2009				2008
		(Dollars in thousands)
ASSETS
Current assets
Cash and cash equivalents		$	14,271			$	10,191
Accounts and trade notes receivable, net			309,100				296,423
Inventories			181,249				256,411
Deposits for precious metals			92,330				—
Deferred income taxes			27,264				19,167
Other receivables			27,509				58,391
Other current assets			10,486				8,306
Total current assets			662,209				648,889
Other assets
Property, plant and equipment, net			443,160				456,549
Goodwill			222,403				229,665
Amortizable intangible assets, net			11,042				11,753
Deferred income taxes			150,985				134,361
Other non-current assets			68,504				62,900
Total assets		$	1,558,303			$	1,544,117
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Loans payable and current portion of long-term debt		$	38,491			$	8,883
Accounts payable			219,273				232,113
Income taxes			3,407				14,361
Accrued payrolls			19,979				18,695
Accrued expenses and other current liabilities			70,092				83,012
Total current liabilities			351,242				357,064
Other liabilities
Long-term debt, less current portion			582,536				561,613
Postretirement and pension liabilities			232,166				221,110
Deferred income taxes			11,778				13,011
Other non-current liabilities			32,797				34,047
Total liabilities			1,210,519				1,186,845
Series A convertible preferred stock (approximates redemption value)			9,544				11,548
Shareholders’ equity
Ferro Corporation shareholders’ equity:
Common stock			52,323				52,323
Paid-in capital			156,505				178,420
Retained earnings			370,524				401,186
Accumulated other comprehensive loss			(78,628	)			(98,436	)
Common shares in treasury, at cost			(171,914	)			(197,524	)
Total Ferro Corporation shareholders’ equity			328,810				335,969
Noncontrolling interests			9,430				9,755
Total equity			338,240				345,724
Total liabilities and shareholders’ equity		$	1,558,303			$	1,544,117

See accompanying notes to condensed consolidated financial statements.

Ferro Corporation and Consolidated Subsidiaries
Condensed Consolidated Statements of Shareholders’ 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, 2007			8,753			$	(202,855	)		$	52,323			$	166,391			$	468,190			$	(7,765	)		$	9,896			$	486,180
Net income																			23,115								1,386				24,501
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment																							(15,014	)			290				(14,724	)
Postretirement benefit liability adjustments																							2,676								2,676
Raw material commodity swap adjustments																							454								454
Interest rate swap adjustments																							456								456
Total comprehensive income																															13,363
Cash dividends:
Common																			(18,883	)											(18,883	)
Preferred																			(675	)											(675	)
Income tax expense															32																32
Stock-based compensation transactions			(173	)			2,606								682																3,288
Issuance of Convertible Notes															12,406																12,406
Distributions to noncontrolling interests																											(1,254	)			(1,254	)
Adjustment to initially apply FAS No. 158 as of January 1, 2008																			(505	)			366								(139	)
Balances at September 30, 2008			8,580			$	(200,249	)		$	52,323			$	179,511			$	471,242			$	(18,827	)		$	10,318			$	494,318
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 adjustment																							17,541				(1	)			17,540
Postretirement benefit liability adjustments																							163								163
Raw material commodity swap adjustments																							577								577
Interest rate swap adjustments																							1,527								1,527
Total comprehensive loss																															(8,507	)
Cash dividends:
Common																			(437	)											(437	)
Preferred																			(199	)											(199	)
Income tax expense															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

See accompanying notes to condensed consolidated financial statements.

Ferro Corporation and Consolidated Subsidiaries
Condensed Consolidated Statements of Cash Flows

		Nine months ended
		September 30,
		2009				2008
		(Dollars in thousands)
Cash flows from operating activities
Net (loss) income		$	(28,314	)		$	24,501
Depreciation and amortization			63,501				55,596
Precious metals deposits			(92,330	)			—
Accounts and trade notes receivable			(5,531	)			(13,270	)
Inventories			77,477				(45,980	)
Accounts payable			(10,758	)			(2,781	)
Other changes in current assets and liabilities, net			8,774				(3,147	)
Other adjustments, net			(18,263	)			(15,249	)
Net cash used for continuing operations			(5,444	)			(330	)
Net cash (used for) provided by discontinued operations			(325	)			2,168
Net cash (used for) provided by operating activities			(5,769	)			1,838
Cash flows from investing activities
Capital expenditures for property, plant and equipment of continuing operations			(30,704	)			(49,695	)
Capital expenditures for property, plant and equipment of discontinued operations			—				(2,110	)
Expenditures for other assets			—				(3,400	)
Proceeds from sale of assets and businesses			104				586
Dividends received from affiliates			169				336
Net cash used for investing activities			(30,431	)			(54,283	)
Cash flows from financing activities
Net borrowings under short-term facilities			29,128				2,102
Proceeds from convertible notes			—				172,500
Proceeds from revolving credit facility			561,624				756,440
Entinguishment of 9 1/8% notes			—				(205,269	)
Principal payments on revolving credit facility			(542,027	)			(638,227	)
Principal payments on term loan facility			(2,287	)			(8,689	)
Debt issue costs			(9,367	)			(5,462	)
Cash dividends paid			(636	)			(19,558	)
Other financing activities			748				1,522
Net cash provided by financing activities			37,183				55,359
Effect of exchange rate changes on cash and cash equivalents			3,097				(415	)
Increase in cash and cash equivalents			4,080				2,499
Cash and cash equivalents at beginning of period			10,191				12,025
Cash and cash equivalents at end of period		$	14,271			$	14,524
Cash paid during the period for:
Interest		$	37,985			$	46,247
Income taxes		$	8,221			$	8,379

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, 2008. The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the timing and amount of assets, liabilities, equity, revenues and expenses reported and disclosed. Actual amounts could differ from our estimates, resulting in changes in revenues or costs that could have a material impact on the Company’s results of operations, financial position, or cash flows. In our opinion, we made all adjustments that are necessary for a fair presentation, and those adjustments are of a normal recurring nature unless otherwise noted. Due to differing business conditions, our various initiatives, and some seasonality, the results for the three and nine months ended September 30, 2009, are not necessarily indicative of the results expected in subsequent quarters or for the full year. We evaluated subsequent events through October 26, 2009, when the financial statements were issued.

2. Accounting Standards Adopted in the Nine Months Ended September 30, 2009

On January 1, 2009, we adopted Financial Accounting Standards Board (“FASB”) Statement No. 141(R), Business Combinations, (“FAS No. 141(R)”) and FASB Staff Position (“FSP”) No. FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise From Contingencies, which are codified in FASB Accounting Standards Codification^TM (“ASC”) Topic 805, Business Combinations. These statements require more acquired assets and assumed liabilities to be measured at fair value as of the acquisition date, liabilities related to contingent consideration to be remeasured at fair value in each subsequent reporting period, and all acquisition-related costs in preacquisition periods to be expensed. We will apply these standards to any business combination beginning in 2009 and therefore, adoption of these standards did not have an effect on our consolidated financial statements.

On January 1, 2009, we adopted Emerging Issues Task Force (“EITF”) Issue No. 08-7, Accounting for Defensive Intangible Assets, (“EITF No. 08-7”), which is codified in ASC Subtopic 350-30, General Intangibles Other than Goodwill. This pronouncement requires us to prospectively account for an acquired defensive asset as a separate unit of accounting and assign it a useful life based on the period during which the asset would diminish in value. With our adoption of FAS No. 141(R) also on January 1, 2009, we will assign an acquired defensive asset a fair value based on what a willing market participant would pay for such an asset and amortize it over the time period that a market participant would derive cash flows from the asset. Impairment testing will be performed on defensive assets with finite lives under ASC Topic 360, Property, Plant, and Equipment, and those with infinite lives under ASC Topic 350, Intangibles – Goodwill and Other. We will apply this standard to any business combination or any acquisition of a defensive asset beginning in 2009 and therefore, the adoption of EITF No. 08-7 did not have an effect on our consolidated financial statements.

On January 1, 2009, we adopted FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets, (“FSP No. FAS 142-3”), which is codified primarily in ASC Subtopic 350-30, General Intangibles Other than Goodwill. This pronouncement prospectively amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under ASC Topic 350, Intangibles – Goodwill and Other. We amended our policies to establish the useful life of intangible assets considering the period of expected cash flows to be received from the intangible asset based on the expected use of the asset and our historical experience in renewing or extending similar arrangements. In the absence of that experience, we consider the assumptions that market participants would use about renewal or extension consistent with the highest and best use of the asset by market participants. Annually, we will disclose our accounting policy for costs incurred to extend or renew recognized intangible assets and the weighted-average period prior to the next renewal or extension by major intangible class. Adoption of FSP No. FAS 142-3 did not have a material effect on our consolidated financial statements.

On January 1, 2009, we adopted FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51, (“FAS No. 160”), which is codified in ASC Topic 810, Consolidation. Under this statement, noncontrolling interests (e.g., minority interests) in subsidiaries are measured initially at fair value and classified as a separate component of equity and the amount of net income attributable to noncontrolling interests is included in consolidated net income. FAS No. 160 requires entities to apply the measurement requirements prospectively and to apply the presentation and disclosure requirements retrospectively to comparative financial statements. As a result, we classified minority interests in consolidated subsidiaries of $9.4 million at September 30, 2009, and $9.8 million at December 31, 2008, in equity, and included net income attributable to minority interests of $0.7 million and $0.5 million for the three months ended September 30, 2009 and 2008, respectively, and $1.7 million and $1.4 million for the nine months ended September 30, 2009 and 2008, respectively, in consolidated net income.

On January 1, 2009, we adopted FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133, which is codified in ASC Topic 815, Derivatives and Hedging. This Statement requires enhanced disclosures about an entity’s derivative and hedging activities and encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The additional disclosures about our derivative and hedging activities did not have a material impact on our consolidated financial statements.

On January 1, 2009, we adopted FSP No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), (“FSP No. APB 14-1”), which is codified primarily in ASC Subtopic 470-20, Debt with Conversion and Other Options. This pronouncement specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP No. APB 14-1 is to be applied retrospectively. As a result, the carrying value of the liability component of the 6.50% Convertible Senior Notes was reduced by $16.5 million and $19.0 million at September 30, 2009, and December 31, 2008, respectively. Related deferred tax liabilities were increased by $7.0 million and $7.0 million, paid-in capital was increased by $12.4 million and $12.4 million, and retained earnings was decreased by $2.3 million and $0.7 million at September 30, 2009, and December 31, 2008, respectively. Loss from continuing operations was increased by $0.6 million and $0.2 million, net loss was increased by $0.6 million and $0.2 million, and basic and diluted loss per share was increased by $0.01 and $0.01 for the three months ended September 30, 2009 and 2008, respectively. Loss from continuing operations was increased by $1.6 million and $0.2 million, net loss was increased by $1.6 million and $0.2 million, and basic and diluted loss per share was increased by $0.03 and $0.01 for the nine months ended September 30, 2009 and 2008, respectively.

On January 1, 2009, we adopted EITF Issue No. 07-5, Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity’s Own Stock, (“EITF No. 07-5”), which is codified primarily in ASC Subtopic 815-40, Contracts in Entity’s Own Equity. ASC Topic 815, Derivatives and Hedging, specifies that a contract issued or held by a company that is both indexed to its own stock and classified in stockholders’ equity is not considered a derivative instrument for purposes of applying this topic. EITF No. 07-5 provides further guidance in requiring that both an instrument’s contingency exercise provisions and its settlement provisions be evaluated for determining whether the instrument (or embedded feature) is indexed solely to an entity’s own stock. Adoption of EITF No. 07-5 did not change the conclusions we reached in the adoption of FSP No. APB 14-1 and, therefore, did not have an effect on our consolidated financial statements.

On January 1, 2009, we adopted EITF Issue No. 08-6, Equity Method Investment Accounting Considerations, (“EITF No. 08-6”), which is codified in ASC Topic 323, Investments – Equity Method and Joint Ventures. This pronouncement changes the way we account for equity method investments. Among other things, it requires us to determine the initial carrying value of an equity method investment by applying the cost accumulation model and to account for share issuances by the investee as a proportionate sale of its investment. EITF No. 08-6 is to be applied prospectively, and its adoption did not have an effect on our consolidated financial statements.

On January 1, 2009, we adopted FSP No. FAS 132(R)-1, Employers’ Disclosures About Postretirement Benefit Plan Assets, which is codified in ASC Subtopic 715-20, Defined Benefit Plans - General. This pronouncement requires for annual periods more detailed disclosures about employers’ plan assets, including employers’ investment strategies, major categories of plan assets, concentrations of risk within plan assets, and valuation techniques used to measure the fair value of plan assets. Other than for some additional disclosures in our Annual Report on Form 10-K, adoption of this FASB Staff Position will not have an effect on our consolidated financial statements.

On January 1, 2009, we adopted the provisions of FASB Statement No. 157, Fair Value Measurements, for all nonrecurring fair value measurements of nonfinancial assets and nonfinancial liabilities, which had been delayed by FSP No. FAS 157-2, Effective Date of FASB Statement No. 157. Both pronouncements are codified in ASC Topic 820, Fair Value Measurements and Disclosures. Adoption of these provisions had no effect on our consolidated financial statements.

On January 1, 2009, we adopted FSP No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, which is codified in ASC Topic 260, Earnings Per Share. This pronouncement establishes that unvested share-based payment awards that contain nonforfeitable rights to dividends are participating securities and shall be included in the computation of earnings per share under the two-class method. Adoption of this FASB Staff Position did not have a material effect on our consolidated financial statements.

On January 1, 2009, we early adopted FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, (“FSP No. FAS 157-4”), which is codified in ASC Topic 820, Fair Value Measurements and Disclosures. This pronouncement provides guidance on (1) estimating the fair value of an asset or liability when the volume and level of activity for the asset or liability have significantly decreased and (2) identifying transactions that are not orderly. FSP No. FAS 157-4 requires entities to disclose in interim and annual periods the inputs and valuation techniques used to measure fair value. Adoption of this FASB Staff Position did not have a material effect on our consolidated financial statements.

On January 1, 2009, we early adopted FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, which is codified in ASC Topic 825, Financial Instruments. This pronouncement expands the fair value disclosures for financial instruments to interim periods for publicly traded entities. It also requires disclosure of the methods and significant assumptions used to estimate the fair value of financial instruments and any changes of the methods and significant assumptions from prior periods. Adoption of this FASB Staff Position did not have a material effect on our consolidated financial statements.

On January 1, 2009, we early adopted FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, which is codified in ASC Topic 320, Investments – Debt and Equity Securities. This pronouncement modifies the existing other-than-temporary impairment model for investments in debt securities and amends disclosure provisions for investments in debt and equity securities. Adoption of this FASB Staff Position did not have an effect on our consolidated financial statements.

On April 1, 2009, we adopted FASB Statement No. 165, Subsequent Events, (“FAS No. 165”), which is codified in ASC Topic 855, Subsequent Events. This statement establishes principles and requirements for management’s evaluation of events or transactions occurring after the balance sheet date for potential recognition or disclosure, the circumstances under which those events or transactions are recognized, and the related disclosures. Adoption of FAS No. 165 did not have a material effect on our consolidated financial statements.

On September 30, 2009, we adopted FASB Accounting Standards Update (“ASU”) 2009-01, Topic 105 – Generally Accepted Accounting Principles, (“ASU 2009-01”). This pronouncement establishes the ASC as the source of authoritative accounting principles recognized by the FASB to be used by nongovernmental entities in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in the United States. Adoption of ASU 2009-01 did not have a material effect on our consolidated financial statements.

On September 30, 2009, we early adopted ASU 2009-05, Fair Value Measurements and Disclosures – Measuring Liabilities at Fair Value, (“ASU 2009-05”), which is codified in ASC Topic 820, Fair Value Measurements and Disclosures. ASU 2009-05 requires that when a quoted price in an active market for the identical liability is not available, the liability’s fair value is measured with a valuation technique that uses the quoted price for the identical liability when traded as an asset or quoted prices for similar liabilities or similar liabilities when traded as assets or with another valuation technique consistent with the principles of ASC Topic 820. Adoption of ASU 2009-05 did not have an effect on our financial statements.

3. Newly Issued Accounting Pronouncements

In June 2009, the FASB issued Statement No. 166, Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140, (“FAS No. 166”), which is not yet codified. This pronouncement amends guidance in ASC Topic 860, Transfers and Servicing, for derecognition of transferred financial assets. FAS No. 166 is effective for financial asset transfers occurring after the beginning of our fiscal year that begins January 1, 2010. Early adoption of FAS No. 166 is prohibited. We are evaluating the impact that the adoption of FAS No. 166 may have on our consolidated financial statements.

In June 2009, the FASB issued Statement No. 167, Amendments to FASB Interpretation No. 46(R), (“FAS No. 167”), which is not yet codified. This pronouncement amends the consolidation guidance that applies to variable interest entities (“VIEs”). FAS No. 167 is effective for our fiscal year that begins January 1, 2010, and early adoption is prohibited. We are evaluating the impact that the adoption of FAS No. 167 may have on our consolidated financial statements.

4. Inventories

Inventories consisted of the following:

		September 30,				December 31,
		2009				2008
		(Dollars in thousands)
Raw materials		$	52,245			$	82,837
Work in process			38,578				43,224
Finished goods			90,426				130,350
Total		$	181,249			$	256,411

In the production of some of our products, we use precious metals, some of which we obtain from financial institutions under consignment agreements with terms of one year or less. The financial institutions retain ownership of the precious metals and charge us fees based on the amounts we consign. These fees were $0.9 million and $1.1 million for the three months ended September 30, 2009 and 2008, respectively, and $3.4 million and $3.4 million for the nine months ended September 30, 2009 and 2008, respectively, and were charged to cost of sales. We had on hand precious metals owned by participants in our precious metals program of $82.0 million at September 30, 2009, and $104.2 million at December 31, 2008, measured at fair value based on market prices for identical assets.

5. Property, Plant and Equipment

Property, plant and equipment is reported net of accumulated depreciation of $643.8 million at September 30, 2009, and $579.8 million at December 31, 2008. Unpaid capital expenditure liabilities, representing noncash investing activities, were $8.8 million at September 30, 2009, and $11.7 million at September 30, 2008.

6. Goodwill and Other Intangible Assets

A summary of goodwill activity follows:

		(Dollars in
		thousands)
Balance at December 31, 2008		$	229,665
Impairment			(8,225	)
Currency translation adjustments			963
Balance at September 30, 2009		$	222,403

Details of amortizable intangible assets follow:

		September 30,				December 31,
		2009				2008
		(Dollars in thousands)
Patents		$	5,851			$	5,775
Other			14,492				14,451
Total gross amortizable intangible assets			20,343				20,226
Accumulated amortization			(9,301	)			(8,473	)
Amortizable intangible assets, net		$	11,042			$	11,753

Amortization expense for amortizable intangible assets was $0.3 million and $0.2 million for the three months ended September 30, 2009 and 2008, respectively, and $0.8 million and $0.7 million for the nine months ended September 30, 2009 and 2008, respectively. Aggregate amortization expense for intangible assets is expected to be $0.9 million annually in the years 2009 through 2013.

We test goodwill for impairment annually using October 31st as our annual assessment date, primarily due to the timing of our annual budgeting process, or more frequently if we believe indicators of impairment exist. ASC Subtopic 350-20, Goodwill, requires an assessment consisting of two steps. In the first step, we test goodwill for impairment by comparing the fair value of each reporting unit that has goodwill against its carrying value, including the allocation of certain corporate assets and liabilities. If the carrying value of the reporting unit exceeds its fair value, we perform a second step to measure impairment.

We estimate the fair values of all reporting units using the weighted average of both the income approach and the market approach, which we believe provides a reasonable estimate of a reporting unit’s fair value. The income approach uses projected cash flows attributable to the reporting unit over the useful life and discounted to its present value. The market approach estimates a price reasonably expected to be realized from the sale of similar businesses. Factors considered in both of these approaches included projections of our future operating results, anticipated future cash flows, comparable marketplace data adjusted for our industry grouping, and the cost of capital. These factors contain significant unobservable inputs (Level 3), primarily internally developed cash flow projections.

In 2008, our Tile Coating Systems and Specialty Plastics businesses had indicators of impairment but the step two analyses required to complete the measurement of the amount of goodwill impairment was not completed prior to the issuance of our December 31, 2008 financial statements. As a result, at December 31, 2008, we recorded estimated goodwill impairments of $41.4 million for the Tile Coating Systems business and $17.0 million related to the Specialty Plastics business. These impairments fully impaired the goodwill for each of these reporting units, based upon the available evidence and analysis performed to date and the amounts were included in impairment charges in the consolidated statements of operations for the year ended December 31, 2008. Upon completion of the step two analyses in 2009, there were no adjustments necessary.

The significant decrease in the market price of the Company’s common stock at the end of February 2009 was an indicator of potential goodwill impairment. At that time we compared the carrying value of all reporting units that had goodwill against their fair values and determined that all fair values exceeded the respective carrying values. We believe that the factors leading to the overall decline in market capitalization were primarily attributable to Ferro Corporation and unrelated to our reporting units.

In the third quarter of 2009, an indicator of potential goodwill impairment for our Pharmaceuticals business was triggered by changes made to the assumptions used to determine valuation under the market approach. We compared the carrying value of this reporting unit against its fair value, and determined that the carrying value exceeded the fair value. The step two analyses required to complete the measurement of the amount of goodwill impairment are not complete. As a result, at September 30, 2009, we recorded an estimated goodwill impairment charge of $8.2 million for the Pharmaceuticals business. We believe that this impairment charge, which fully impairs the goodwill for this business, is our best estimate based upon the available evidence and the analysis performed to date. The amount is included in impairment charges in the Condensed Consolidated Statements of Operations and may be adjusted upon the completion of the step two analyses in the fourth quarter of 2009.

7. Financing and Long-term Debt

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

		September 30,				December 31,
		2009				2008
		(Dollars in thousands)
Loans payable to banks		$	5,445			$	4,754
Accounts receivable asset securitization program			28,557				—
Current portion of long-term debt			4,489				4,129
Total		$	38,491			$	8,883

Long-term debt consisted of the following:

		September 30,				December 31,
		2009				2008
		(Dollars in thousands)
$172.5 million 6.50% Convertible Senior Notes, net of unamortized discounts		$	156,004			$	153,451
Revolving credit facility			131,400				111,803
Term loan facility			290,211				292,498
Capitalized lease obligations			6,637				6,447
Other notes			2,773				1,543
			587,025				565,742
Less current portion			(4,489	)			(4,129	)
Total		$	582,536			$	561,613

6.50% Convertible Senior Notes

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

The initial base conversion rate is 30.9253, equivalent to an initial base conversion price of $32.34 per share of our common stock. If the price of our common stock at conversion exceeds the base conversion price, the base conversion rate is increased by an additional number of shares. The base conversion rate and the additional number of shares are adjusted in certain events. Upon conversion of Convertible Notes, we will pay the conversion value in cash up to the aggregate principal amount of the Convertible Notes being converted and in shares of our common stock, for the remainder, if any. Upon a fundamental change, holders may require us to repurchase Convertible Notes for cash equal to the principal amount plus accrued and unpaid interest. The Convertible Notes are unsecured obligations and rank equally in right of payment with any other unsecured, unsubordinated obligations.

We separately account for the liability and equity components of the Convertible Notes in a manner that will reflect our nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The effective interest rate on the liability component is 9.5%. Contractual interest was $2.8 million and $1.3 million and amortization of the liability discount was $0.9 million and $0.4 million for the three months ended September 30, 2009 and 2008, respectively. Contractual interest was $8.4 million and $1.3 million and amortization of the liability discount was $2.6 million and $0.4 million for the nine months ended September 30, 2009 and 2008, respectively. At September 30, 2009, the remaining period over which the liability discount will be amortized was 3.9 years. The unamortized liability discount was $16.5 million at September 30, 2009, and $19.0 million at December 31, 2008. The carrying amount of the equity component was $12.4 million at September 30, 2009, and $12.4 million at December 31, 2008.

Revolving Credit and Term Loan Facilities

In 2006, we entered into an agreement with a group of lenders for a $700 million credit facility, consisting of a multi-currency senior revolving credit facility and a senior term loan facility, which replaced a former revolving credit facility that would have expired later that year. In 2007, we cancelled the unused portion of the term loan facility and amended the credit facility (the “2007 Amended Credit Facility”) primarily to increase the size of the revolving credit facility, reduce interest rates, and increase operating flexibility. On March 11, 2009, we amended the 2007 Amended Credit Facility (the “2009 Amended Credit Facility”) primarily to provide additional operating flexibility and to change pricing to more accurately reflect current market interest rates. The amendment was filed as Exhibit 10.1 to our Annual Report on Form 10-K for the year ended December 31, 2008. The primary effects of the 2009 Amended Credit Facility were to:

•

Increase the interest rates and commitment fees payable thereunder pursuant to a grid structure based on our leverage ratio,

•

Increase the maximum permitted quarterly leverage ratio and decrease the minimum permitted quarterly fixed charge coverage ratio,

•

Add a minimum cumulative EBITDA requirement for each quarter in 2009,

•

Restrict the Company’s ability to engage in acquisitions and make investments,

•

Limit the amount of cash and cash equivalent collateral the Company is permitted to deliver to participants in our precious metals program to secure our obligations arising under the precious metals consignment agreements,

•

Require additional financial reporting by the Company to the lenders,

•

Increase the amount of the annual excess cash flow required to be used to repay term loans,

•

Require application of the net proceeds of certain dispositions, but excluding the first $20 million of such net proceeds, to be applied to repay debt outstanding under the revolving credit facility and term loans and to permanently reduce availability under the revolving loan facility on a dollar for dollar basis, provided that we are not required to reduce the commitments under the revolving credit facility to below $150 million,

•

Eliminate our ability to request an increase of $50 million in the revolving credit facility,

•

Add provisions governing the obligations of the Company and the lenders if one or more lenders under the revolving credit facility fails to satisfy its funding obligations or otherwise becomes a defaulting lender, and

•

Restrict our ability to make payments with respect to our capital securities. The 2009 Amended Credit Facility effectively prohibits us from paying dividends on our preferred and common stock beginning in the second quarter of 2009.

The 2009 Amended Credit Facility currently includes a $300.0 million revolving credit facility, which matures in 2011. We had $161.7 million at September 30, 2009, and $180.0 million at December 31, 2008, available under the revolving credit facility, after reductions for standby letters of credit secured by this facility. At September 30, 2009, the 2009 Amended Credit Facility also included a term loan facility with an outstanding principal balance of $290.2 million, which matures in 2012. We make periodic principal payments on the term loans. We are required to make minimum quarterly principal payments of $0.8 million from October 2009 to July 2011. During the last year of the loan’s life, we are required to repay the remaining balance of the term loans in four quarterly installments. Currently, those last four payments will be $71.0 million each. In addition to the minimum quarterly payments, each April we may be required to make an additional principal payment. The amount of this additional payment is dependent on the Company’s leverage and certain cash flow metrics. Any additional payment that is required reduces, on a dollar-for-dollar basis, the amount due in the last four quarterly payments. We were not required to make an additional principal payment in April 2009.

The interest rates under the 2009 Amended Credit Facility are 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) for the revolving credit facility, a variable margin based on the Company’s leverage, or for the term loan facility, a fixed margin. As part of the 2007 amendments, $175 million of borrowings under the term loan facility were restricted to using three-month LIBOR in determining their interest rates. This change was made in connection with interest rate swap agreements executed in 2007. These swap agreements effectively fixed the interest rate through June 2011 on $150 million of borrowings under the term loan facility. At September 30, 2009, the average interest rate for revolving credit borrowings was 6.5%, and the effective interest rate for term loan borrowings after adjusting for the interest rate swaps was 9.1%. At December 31, 2008, the average interest rate was 2.6% for revolving credit borrowings and 6.5% for term loan borrowings.

We are subject to a number of restrictive covenants under our credit facilities, which could affect our flexibility to fund ongoing operations and strategic initiatives, and, if we are unable to maintain compliance with such covenants, could lead to significant challenges in meeting our liquidity requirements. Continued weak economic conditions could impact our financial performance, making it more challenging to comply with the financial covenants. At September 30, 2009, we were in compliance with the covenants of the 2009 Amended Credit Facility.

On October 26, 2009, we amended our 2009 Amended Credit Facility, the effectiveness of which is conditioned upon, among other things, receipt of gross proceeds of at least $150.0 million from an offering of common stock. See Note 18, Subsequent Event.

Receivable Sales Programs

We have several programs to sell, on an ongoing basis, pools of our trade accounts receivable. These programs accelerate cash collections at favorable financing costs and help us manage the Company’s liquidity requirements. The costs associated with these programs were $1.6 million and $1.4 million for the three months ended September 30, 2009 and 2008, respectively, and $2.4 million and $5.1 million for the nine months ended September 30, 2009 and 2008, respectively, and are reported as interest expense.

We have an asset securitization program for substantially all of Ferro’s U.S. trade accounts receivable. This program accelerates cash collections at favorable financing costs and helps us manage the Company’s liquidity requirements. In June 2009, we replaced the prior program with a new program that expires in June 2010 and reduced the program’s size from $75 million to $50 million.

We legally sell these trade accounts receivable to Ferro Finance Corporation (“FFC”), which finances its acquisition of trade receivable assets by selling undivided variable percentage interests in the receivables to certain purchasers under the program. Advances by the purchasers are secured by, and repaid through collections on, the receivables owned by FFC. FFC and the purchasers have no recourse to Ferro’s other assets for failure of payment of the receivables as a result of the lack of creditworthiness or financial inability to pay of the related obligor. FFC is a wholly-owned subsidiary, which until December 2008 was a qualified special purpose entity (“QSPE”) and, therefore, was not consolidated. In December 2008, FFC ceased to meet the requirements of a QSPE and is included in our consolidated financial statements. As a result, this program is now accounted for as an on balance sheet arrangement.

Ferro’s consolidated balance sheet includes outstanding trade accounts receivable legally transferred to FFC of $95.3 million at September 30, 2009, and $90.3 million at December 31, 2008, and short-term debt from advances by the purchasers for their interests in those receivables of $28.6 million at September 30, 2009, and $-0- at December 31, 2008. After reductions for non-qualifying receivables, availability under the program was $-0- at September 30, 2009, and $56.8 million at December 31, 2008.

Activity from this program for the nine months ended September 30, 2008, when this program was accounted for as an off balance sheet arrangement, is detailed below:

		(Dollars in
		thousands)
Trade accounts receivable sold to FFC		$	840,151
Cash proceeds from FFC			840,405
Trade accounts receivable collected and remitted to FFC and the conduits			820,027
Servicing fees from FFC			444

In addition, we maintain several international programs to sell trade accounts receivable to financial institutions. The commitments supporting these programs can be withdrawn at any time and totaled $72.5 million at September 30, 2009, and $81.7 million at December 31, 2008. The amount of outstanding receivables sold under the international programs was $17.6 million at September 30, 2009, and $30.5 million at December 31, 2008. Ferro had received net proceeds under the international programs of $13.2 million at September 30, 2009, and $16.7 million at December 31, 2008, for outstanding receivables. Based on available and qualifying receivables, availability under these programs was $-0- at September 30, 2009, and $26.4 million at December 31, 2008. Ferro provides normal collection and administration services for the trade accounts receivable sold to certain financial institutions. Servicing fees are not material.

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

		2009				2008
		(Dollars in thousands)
Trade accounts receivable sold to financial institutions		$	84,675			$	186,054
Cash proceeds from financial institutions			93,853				184,628
Trade accounts receivable collected and remitted to financial institutions for programs where we provide collection and administrative services			27,394				60,863

8. 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. The carrying values of these instruments may or may not be their fair values.

		September 30, 2009								December 31, 2008
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
		(Dollars in thousands)
$172.5 million 6.50% Convertible Senior Notes		$	156,004			$	150,705			$	153,451			$	84,725
Revolving credit facility			131,400				126,102				111,803				88,757
Term loan facility			290,211				275,221				292,498				225,731
Other notes			2,773				1,752				1,543				975

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

Derivative Instruments

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

Interest rate swaps. To reduce our exposure to interest rate changes on variable-rate debt, we entered into interest rate swap agreements in 2007. These swaps effectively converted $150 million of our variable-rate term loan facility to a fixed rate. These swaps are designated and qualify as cash flow hedges. The fair value of these swaps is based on the present value of expected future cash flows, which reflects assumptions about current interest rates and the creditworthiness of the Company that market participants would use in pricing the swaps. The interest rate swaps were moved to Level 3 within the fair value hierarchy as of the beginning of the second quarter of 2009 because the assumption about the creditworthiness of the Company was not an observable market-based input nor an unobservable input that could be corroborated by market data for sufficiently similar financial instruments. We based our assumption about the creditworthiness of the Company on the assumption implicit in the bid price of our Convertible Notes, adjusted by us for differences between these financial instruments in their conversion, security and liquidity features. The estimated net amount of existing losses at September 30, 2009, that is expected to be recognized in earnings within the next twelve months is $5.4 million.

Foreign currency forward contracts. We manage foreign currency risks principally by entering into forward contracts to mitigate the impact of currency fluctuations on transactions. These forward contracts are not formally designated as hedges. The fair value of these contracts is based on market prices for comparable contracts. We had foreign currency forward contracts with a notional amount of $190.2 million at September 30, 2009, and $156.8 million at December 31, 2008.

Raw material commodity swaps. We reduce our exposure to changes in the pricing of certain raw material commodities principally using swap arrangements that allow us to fix the price of a portion of these commodities that will be purchased during the next twelve months. These swaps are designated and qualify as cash flow hedges. The fair value of these swaps is based on market prices for comparable contracts. We had raw material commodity swap arrangements for 75 metric tons of base metals at September 30, 2009, and 330 metric tons at December 31, 2008. The estimated net amount of existing gains at September 30, 2009, that is expected to be recognized in earnings within the next twelve months is not material.

Precious metals forward contracts. We enter into forward purchase arrangements with precious metals suppliers to completely cover the value of fixed price sales contracts for products with precious metal content. Most of these agreements are designated as normal purchase contracts, which are not considered to be derivatives, and had purchase commitments totaling $15.3 million at September 30, 2009, and $5.5 million at December 31, 2008. Any remaining precious metal contracts are considered to be derivatives, but are not formally designated as hedges. The fair value of these precious metal derivatives is based on market prices for comparable contracts. We had no precious metal derivatives at September 30, 2009, and we had precious metal derivatives for 129 troy ounces at December 31, 2008.

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

		September 30,				December 31,
		2009				2008				Balance Sheet Location
		(Dollars in thousands)
Derivatives designated as hedging instruments:
Asset derivatives:
Raw material commodity swaps		$	42			$	—			Other receivables
Liability derivatives:
Interest rate swaps		$	(10,352	)		$	(12,724	)		Other non-current liabilities
Raw material commodity swaps			—				(576	)		Accrued expenses and other current liabilities
Total fair value		$	(10,352	)		$	(13,300	)
Derivatives not designated as hedging instruments:
Asset derivatives:
Foreign currency forward contracts		$	—			$	1,621			Other receivables
Foreign currency forward contracts			956				230			Accrued expenses and other current liabilities
Precious metals forward contracts			—				8			Other receivables
Total fair value		$	956			$	1,859
Liability derivatives:
Foreign currency forward contracts		$	—			$	(1,140	)		Other receivables
Foreign currency forward contracts			(1,650	)			(807	)		Accrued expenses and other current liabilities
Total fair value		$	(1,650	)		$	(1,947	)

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, 2009																December 31,
		Level 1				Level 2				Level 3				Total				2008
		(Dollars in thousands)
Assets
Foreign currency forward contracts		$	—			$	—			$	—			$	—			$	480
Raw material commodity swaps			—				42				—				42				—
Precious metals forward contracts			—				—				—				—				8
Total fair value		$	—			$	42			$	—			$	42			$	488
Liabilities
Interest rate swaps		$	—			$	—			$	(10,352	)		$	(10,352	)		$	(12,724	)
Foreign currency forward contracts			—				(694	)			—				(694	)			(576	)
Raw material commodity swaps			—				—				—				—				(576	)
Total fair value		$	—			$	(694	)		$	(10,352	)		$	(11,046	)		$	(13,876	)

A reconciliation of the beginning and ending balances of the financial instruments in Level 3 is as follows:

		Three				Nine
		months ended
		September 30, 2009
		(Dollars in thousands)
Beginning balance		$	(9,425	)		$	—
Total losses included in other comprehensive income			(2,827	)			(1,802	)
Settlements			1,900				3,544
Transfers in and/or out of Level 3			—				(12,094	)
Ending balance		$	(10,352	)		$	(10,352	)

The following table presents 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 Income								Reclassified from
		2009				2008				2009				2008				AOCI into Income
		(Dollars in thousands)
Derivatives in Cash Flow Hedging Relationships:
Interest rate swaps		$	(2,708	)		$	(1,707	)		$	(5,080	)		$	(2,415	)		Interest expense
Raw material commodity swaps			56				(1,681	)			(1,108	)			(2,420	)		Cost of sales
Total		$	(2,652	)		$	(3,388	)		$	(6,188	)		$	(4,835	)

		Amount of Gain (Loss)
		Recognized in Income								Location of Gain (Loss)
		2009				2008				in Income
		(Dollars in thousands)
Derivatives Not Designated as Hedging Instruments:
Foreign currency forward contracts		$	(12,970	)		$	2,925			Foreign currency gains (losses), net
Precious metals forward contracts			16				1,593			Cost of sales
Precious metals forward contracts			(8	)			(747	)		Miscellaneous income (expense), net
Total		$	(12,962	)		$	3,771

9. Income Taxes

Income tax benefit for the nine months ended September 30, 2009 was $15.8 million, or 36.1 percent of pre-tax loss, compared with income tax expense of $14.3 million, or 41.7 percent of pre-tax income, in the prior-year nine months ended September 2008. The primary reason for the decrease in the effective tax rate was a change in the mix of income and losses reported by country, partially offset by an increase to the deferred tax asset for research credits.

The Company has recorded deferred tax assets of $21.1 million for foreign net operating loss carryforwards and $45.0 million in credit carryforwards. While some of these assets have an indefinite expiration date, others will expire in varying amounts between 2011 and 2028. Realization of these assets is dependent on generating sufficient future taxable income and tax liabilities to offset the loss and credit carryforwards. Although realization is not assured, management believes it is more likely than not that all of these deferred tax assets will be utilized. The amount of these deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced. Additionally, under Section 382 of the Internal Revenue Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other tax attributes to offset its post-change income may be limited and may result in a partial or full write down of the related deferred tax assets. An ownership change is defined generally for these purposes as a greater than 50% change in ownership over a three-year period, taking into account shareholders that own 5% or more by value of the Company’s common stock. At September 30, 2009, the Company had reached a 40% threshold as calculated under Section 382 of the Internal Revenue Code. Accordingly, it is possible that a combination of past and future transactions involving the Company’s common stock will cause an ownership change to occur that would limit the Company’s ability to use its existing net operating loss carryforwards and other tax attributes. At September 30, 2009, the Company’s ability to use these attributes had not been limited.

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

10. Contingent Liabilities

The Company has been named in six indirect purchaser class action lawsuits seeking monetary damages and injunctive relief from alleged violations of the antitrust laws by the Company and others participating in the plastics additives industry. The United States Department of Justice had investigated possible antitrust violations in the plastics additive industry and closed its investigation without taking any action against the Company or any of its current or former employees. The Company was named in two direct purchaser lawsuits relating to the subject of the Department of Justice investigation, settled those suits without admitting to any of the alleged violations, and continues to deny any wrongdoing. The Company intends to vigorously defend these six remaining indirect purchaser civil actions, which are all in their early stages; therefore, 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. In our opinion, the ultimate liabilities, if any, and expenses resulting from such lawsuits and claims will not materially affect the consolidated financial position, results of operations, or cash flows of the Company.

The Company had bank guarantees and standby letters of credit issued by financial institutions, which totaled $13.1 million at September 30, 2009, and $13.9 million at December 31, 2008. These agreements primarily relate to Ferro’s insurance programs and foreign tax payments. If the Company fails to perform its obligations, the guarantees and letters of credit may be drawn down by their holders, and we would be liable to the financial institutions for the amounts drawn.

11. 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
		2009				2008				2009				2008				2009				2008
		(Dollars in thousands)
Components of net periodic cost:
Service cost		$	7			$	50			$	1,095			$	1,308			$	4			$	16
Interest cost			5,235				5,177				2,743				2,955				719				731
Expected return on plan assets			(3,863	)			(5,663	)			(1,841	)			(2,148	)			—				—
Amortization of prior service cost			24				25				(107	)			29				(437	)			(411	)
Net amortization and deferral			3,845				624				274				53				—				—
Curtailment and settlement effects			—				—				—				(133	)			—				—
Net periodic benefit cost		$	5,248			$	213			$	2,164			$	2,064			$	286			$	336

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
		2009				2008				2009				2008				2009				2008
		(Dollars in thousands)
Components of net periodic cost:
Service cost		$	22			$	150			$	3,143			$	4,366			$	11			$	48
Interest cost			15,707				15,531				7,839				8,934				2,158				2,193
Expected return on plan assets			(11,590	)			(16,989	)			(5,254	)			(6,484	)			—				—
Amortization of prior service cost			73				75				(305	)			78				(1,311	)			(1,233	)
Net amortization and deferral			11,535				1,872				780				165				—				—
Curtailment and settlement effects			—				—				—				(133	)			—				—
Net periodic benefit cost		$	15,747			$	639			$	6,203			$	6,926			$	858			$	1,008

The change in net periodic cost is due primarily to higher amortization of actuarial losses, which increased substantially last year from the decline in the valuation of plan investments in the global capital markets. In addition, our expected return on plan assets in 2009 is based on their lower valuation at December 31, 2008.

12. Stock-Based Compensation

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

		2009				2008
		(Dollars in thousands)
Stock options		$	1,356			$	1,753
Performance shares			35				187
Deferred stock units			118				411
Restricted shares			371				307
Total		$	1,880			$	2,658

The following table contains information regarding the stock-based compensation as of and for the nine-month period ended September 30, 2009:

Aggregate

Weighted-

Grant Date

Remaining

Number of

Average Fair

Fair Value of

Service or

Shares or

Value per

Shares or

Performance

Units Granted

Share or Unit

Units Granted

Period

(Dollars in

thousands)

(In years)

Stock options

676,700

$

0.49

$

335

3.5

Deferred stock units

34,200

1.33

45

0.4

Restricted shares

142,100

1.37

194

2.4

The stock-based compensation transaction in shareholders’ equity consisted of the following for the nine months ended September 30, 2009:

		Common Shares
		in Treasury								Paid-in
		Shares				Amount				Capital
		(In thousands)
Stock options			—			$	—			$	1,356
Performance shares, net			181				(594	)			439
Deferred stock units			(34	)			835				(718	)
Directors’ deferred compensation			—				(757	)			757
Preferred stock conversions			(1,070	)			23,394				(21,389	)
Restricted shares			(115	)			2,732				(2,361	)
Total			(1,038	)		$	25,610			$	(21,916	)

13. Restructuring and Cost Reduction Programs

During the first nine months of 2009, we continued several restructuring programs across a number of our business segments with the objectives of leveraging our global scale, realigning and lowering our cost structure and optimizing capacity utilization. The programs are primarily associated with North America and Europe. Management continues to evaluate our business, and therefore, there may be supplemental provisions for new plan initiatives as well as changes in estimates to amounts previously recorded, as payments are made or actions are completed.

To date, we have made substantial progress on the restructuring activities, including exiting manufacturing facilities and eliminating positions, which resulted in total restructuring charges of $7.8 million and $23.0 million incurred in the first nine months of 2009 and 2008, respectively, with $3.9 million and $22.3 million, respectively, included in restructuring charges on the Condensed Consolidated Statements of Operations and the remaining $3.9 million and $0.7 million, respectively, recorded in cost of sales as it relates to accelerated depreciation of assets to be disposed.

The following restructuring programs had significant activities in the first nine months of 2009:

Restructuring Program in Rotterdam, Netherlands

In the second quarter of 2009, a full environmental investigation of the facility was conducted, and the result of the investigation significantly reduced our assessment of potential environmental liability by $3.7 million from the amount previously recorded in restructuring charges in 2007. As a result of this reduction in environmental reserve, a $3.2 million credit to restructuring charges was recorded at this facility in the first nine months of 2009. Included in property, plant and equipment is $1.4 million of assets classified as held for sale representing the building located on this Rotterdam site.

Restructuring Program in Limoges, France

In January 2009, we initiated additional restructuring activities within our Inorganic Specialties operations in Europe. We plan to discontinue smelting, milling and other manufacturing operations in Limoges, France. These activities will be consolidated at other Company facilities in St. Dizier, France; Frankfurt, Germany; Colditz, Germany; and Almazora, Spain. In addition, all sales, technical service and research and development activities currently being done in Limoges will be transferred to St. Dizier and Frankfurt. The restructuring action is expected to be substantially completed at the end of 2010. When the restructuring is completed, the Limoges site will be closed.

As a result of these restructuring actions, we expect to eliminate approximately 125 employee positions. We expect to record pre-tax charges of approximately $29 million related to the actions over the next seven quarters, although the exact timing of the charges cannot be determined at this time. The expected charges include approximately $18 million in cash costs for employee termination, approximately $7 million in site cleanup and other costs, and approximately $4 million of non-cash asset write-offs.

As of September 30, 2009, the Limoges restructuring resulted in a workforce reduction of 38 employees. For the nine months ended September 30, 2009, we incurred approximately $6.1 million in total restructuring charges at this facility, of which $0.4 million were recorded in cost of sales as it relates to accelerated depreciation of assets to be disposed. The remaining $5.7 million, primarily for employee severance costs, are included in restructuring charges.

Restructuring Program in Nules, Spain

In June 2009, we initiated additional restructuring activities at our Inorganic Specialty operation in Nules, Spain, and suspended the production of tile coatings at this site, with production consolidated at our facility in Almazora, Spain. As a result of the restructuring actions, we expect to eliminate 35 positions. We expect to record pre-tax charges of approximately $5.7 million. For the nine months ended September 30, 2009, we incurred $3.8 million in total restructuring charges at this facility, with $3.3 million recorded in cost of sales as it relates to accelerated depreciation of assets to be disposed. As of September 30, 2009, the restructuring activity resulted in a workforce reduction of seven employees, and the associated severance costs incurred were not material. The remaining $0.5 million, primarily for other costs, are included in restructuring charges.

Restructuring Program in Penn Yan, New York

In April 2009, we initiated additional restructuring activities within our Electronic Materials operation in Penn Yan, New York. The program is associated with planned elimination of some Multi-Layer Ceramic Capacitor (“MLCC”) research and testing capability in Penn Yan. As of September 30, 2009, the Penn Yan restructuring resulted in a workforce reduction of 13 employees, and we incurred costs of $0.4 million, primarily for employee severance.

Other Restructuring Programs

There have been no significant changes in remaining restructuring programs. In the first nine months of 2009, the charges from these programs totaled $0.5 million, primarily for additional severance and other costs.

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

		Employee
		Termination				Other
		Benefits				Costs				Total
		(Dollars in thousands)
Balance at December 31, 2008		$	1,206			$	5,102			$	6,308
Restructuring charges			5,222				(1,291	)			3,931
Cash payments			(6,194	)			(2,470	)			(8,664	)
Currency translation adjustment			(66	)			229				163
Non-cash items			5				—				5
Balance at September 30, 2009		$	173			$	1,570			$	1,743

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

14. Discontinued Operations

In the fourth quarter of 2008, we sold our Fine Chemicals business. The following operations of the Fine Chemicals business for the three and nine months ended September 30, 2008, were removed from continuing operations and included in discontinued operations in the Company’s Condensed Consolidated Statements of Operations.

		Three				Nine
		months ended
		September 30, 2008
		(Dollars in thousands)
Net sales		$	18,438			$	53,276
Cost of sales			14,770				41,144
Gross profit			3,668				12,132
Selling, general and administrative expenses			1,332				3,880
Other expense:
Interest expense			422				1,342
Foreign currency transactions, net			13				13
Miscellaneous expense, net			41				41
Income from discontinued operations before income taxes			1,860				6,856
Income tax expense			601				2,270
Income from discontinued operations, net of income taxes		$	1,259			$	4,586

Gain (loss) on disposal of discontinued operations consists of adjustments to the gross proceeds, net assets sold or transaction costs related to the sale of the Fine Chemicals business and residual legal and environmental costs directly related to the Powder Coatings, Petroleum Additives and Specialty Ceramics businesses, which were sold in 2002 and 2003.

		Three months ended								Nine months ended
		September 30,								September 30,
		2009				2008				2009				2008
		(Dollars in thousands)
Gain (loss) on disposal of discontinued operations before income tax expense (benefit)		$	63			$	(94	)		$	(519	)		$	(120	)
Income tax expense (benefit)			27				(37	)			(197	)			(47	)
Gain (loss) on disposal of discontinued operations, net of income tax expense (benefit)		$	36			$	(57	)		$	(322	)		$	(73	)