UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

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

Commission File Number 1-584

FERRO CORPORATION

(Exact name of registrant as specified in its charter)

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

216-641-8580
(Telephone Number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o NO þ

At June 30, 2011, there were 86,569,287 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			17
Item 3. Quantitative and Qualitative Disclosures about Market Risk			28
Item 4. Controls and Procedures			29
PART II
Item 1. Legal Proceedings			30
Item 1A. Risk Factors			30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			30
Item 3. Defaults Upon Senior Securities			30
Item 4. (Removed and Reserved)			30
Item 5. Other Information			30
Item 6. Exhibits			30
Exhibit 10.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I — FINANCIAL INFORMATION

Item 1.		Financial Statements (Unaudited)

Ferro Corporation and Subsidiaries
Condensed Consolidated Statements of Income

		Three months ended								Six months ended
		June 30,								June 30,
		2011				2010				2011				2010
		(Dollars in thousands, except per share amounts)
Net sales		$	593,974			$	543,485			$	1,166,983			$	1,036,350
Cost of sales			479,627				421,155				932,310				807,086
Gross profit			114,347				122,330				234,673				229,264
Selling, general and administrative expenses			73,548				69,852				150,366				140,800
Restructuring and impairment charges			1,545				21,205				3,175				34,537
Other expense (income):
Interest expense			7,352				13,766				14,178				26,677
Interest earned			(69	)			(133	)			(143	)			(464	)
Foreign currency losses (gains), net			1,013				(302	)			2,323				3,246
Miscellaneous (income) expense, net			(124	)			(3,571	)			394				(4,822	)
Income before income taxes			31,082				21,513				64,380				29,290
Income tax expense			11,461				13,919				21,568				22,508
Net income			19,621				7,594				42,812				6,782
Less: Net income (loss) attributable to noncontrolling interests			232				494				533				(250	)
Net income attributable to Ferro Corporation			19,389				7,100				42,279				7,032
Dividends on preferred stock			—				(165	)			(165	)			(330	)
Net income attributable to Ferro Corporation common shareholders		$	19,389			$	6,935			$	42,114			$	6,702
Earnings per share attributable to Ferro Corporation common shareholders:
Basic earnings per share		$	0.23			$	0.08			$	0.49			$	0.08
Diluted earnings per share			0.22				0.08				0.48				0.08
Dividends per share of common stock			—				—				—				—

See accompanying notes to condensed consolidated financial statements.

Ferro Corporation and Subsidiaries
Condensed Consolidated Balance Sheets

		June 30,				December 31,
		2011				2010
		(Dollars in thousands)
ASSETS
Current assets
Cash and cash equivalents		$	27,368			$	29,035
Accounts receivable, net			383,026				302,448
Inventories			253,107				202,067
Deposits for precious metals			—				28,086
Deferred income taxes			26,413				24,924
Other receivables			32,151				27,762
Other current assets			14,157				7,432
Total current assets			736,222				621,754
Other assets
Property, plant and equipment, net			393,729				391,496
Goodwill			219,842				219,716
Amortizable intangible assets, net			11,767				11,869
Deferred income taxes			123,370				121,640
Other non-current assets			84,289				67,880
Total assets		$	1,569,219			$	1,434,355
LIABILITIES AND EQUITY
Current liabilities
Loans payable and current portion of long-term debt		$	61,270			$	3,580
Accounts payable			240,378				207,770
Income taxes			18,026				8,823
Accrued payrolls			35,908				49,590
Accrued expenses and other current liabilities			77,836				75,912
Total current liabilities			433,418				345,675
Other liabilities
Long-term debt, less current portion			291,324				290,971
Postretirement and pension liabilities			184,292				189,058
Deferred income taxes			2,459				2,211
Other non-current liabilities			23,078				22,833
Total liabilities			934,571				850,748
Series A convertible preferred stock (approximates redemption value)			—				9,427
Equity
Ferro Corporation shareholders’ equity:
Common stock			93,436				93,436
Paid-in capital			317,522				323,015
Retained earnings			404,278				362,164
Accumulated other comprehensive loss			(37,646	)			(50,949	)
Common shares in treasury, at cost			(153,674	)			(164,257	)
Total Ferro Corporation shareholders’ equity			623,916				563,409
Noncontrolling interests			10,732				10,771
Total equity			634,648				574,180
Total liabilities and equity		$	1,569,219			$	1,434,355

See accompanying notes to condensed consolidated financial statements.

Ferro Corporation and Subsidiaries
Condensed Consolidated Statements of Equity

		Ferro Corporation Shareholders
																						Accumulated
		Common Shares																				Other				Non-
		in Treasury								Common				Paid-in				Retained				Comprehensive				controlling				Total
		Shares				Amount				Stock				Capital				Earnings				Income (Loss)				Interests				Equity
		(In thousands)
Balances at December 31, 2009			7,375			$	(171,567	)		$	93,436			$	331,376			$	357,128			$	(60,147	)		$	10,269			$	560,495
Net income (loss)																			7,032								(250	)			6,782
Other comprehensive income (loss), net of tax:
Foreign currency translation																							(25,726	)			31				(25,695	)
Postretirement benefit liabilities																							(3,035	)							(3,035	)
Raw material commodity swaps																							(107	)							(107	)
Interest rate swaps																							1,930								1,930
Total comprehensive loss																															(20,125	)
Cash dividends:
Preferred																			(330	)											(330	)
Stock-based compensation transactions			(70	)			2,838								(988	)															1,850
Distributions to noncontrolling interests																											(527	)			(527	)
Balances at June 30, 2010			7,305			$	(168,729	)		$	93,436			$	330,388			$	363,830			$	(87,085	)		$	9,523			$	541,363
Balances at December 31, 2010			7,242			$	(164,257	)		$	93,436			$	323,015			$	362,164			$	(50,949	)		$	10,771			$	574,180
Net income																			42,279								533				42,812
Other comprehensive income (loss), net of tax:
Foreign currency translation																							10,335				116				10,451
Postretirement benefit liabilities																							2,968								2,968
Total comprehensive income																															56,231
Cash dividends:
Preferred																			(165	)											(165	)
Stock-based compensation transactions			(376	)			10,583								(5,493	)															5,090
Distributions to noncontrolling interests																											(688	)			(688	)
Balances at June 30, 2011			6,866			$	(153,674	)		$	93,436			$	317,522			$	404,278			$	(37,646	)		$	10,732			$	634,648

See accompanying notes to condensed consolidated financial statements.

Ferro Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows

		Six months ended
		June 30,
		2011				2010
		(Dollars in thousands)
Cash flows from operating activities
Net cash (used for) provided by operating activities		$	(20,758	)		$	91,772
Cash flows from investing activities
Capital expenditures for property, plant and equipment			(31,817	)			(16,298	)
Proceeds from sale of businesses			—				5,887
Proceeds from sale of assets			2,374				317
Other investing activities			193				—
Net cash used for investing activities			(29,250	)			(10,094	)
Cash flows from financing activities
Net borrowings (repayments) under loans payable			57,570				(18,787	)
Proceeds from long-term debt			382,219				205,140
Principal payments on long-term debt			(381,771	)			(256,840	)
Redemption of convertible preferred stock			(9,427	)			—
Cash dividends paid			(165	)			(330	)
Other financing activities			(856	)			974
Net cash provided by (used for) financing activities			47,570				(69,843	)
Effect of exchange rate changes on cash and cash equivalents			771				(610	)
(Decrease) increase in cash and cash equivalents			(1,667	)			11,225
Cash and cash equivalents at beginning of period			29,035				18,507
Cash and cash equivalents at end of period		$	27,368			$	29,732
Cash paid during the period for:
Interest		$	12,575			$	20,766
Income taxes			14,715				9,830

See accompanying notes to condensed consolidated financial statements.

Ferro Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements

1. Basis of Presentation

Ferro Corporation (“Ferro,” “we,” “us” or “the Company”) prepared these unaudited condensed consolidated financial statements of Ferro Corporation and subsidiaries in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and, therefore, should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2010. The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the timing and amount of assets, liabilities, equity, revenues and expenses reported and disclosed. Actual amounts could differ from our estimates. In our opinion, we made all adjustments that are necessary for a fair presentation, and those adjustments are of a normal recurring nature unless otherwise noted. Due to differing business conditions, our various initiatives, and some seasonality, the results for the three and six months ended June 30, 2011, 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 income to conform the presentation to the current period.

2. Recent Accounting Pronouncements

Accounting Standards Adopted in the Six Months Ended June 30, 2011

On January 1, 2011, we prospectively adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2009-13, Multiple Deliverable Revenue Arrangements, (“ASU 2009-13”) and ASU 2010-17, Revenue Recognition—Milestone Method, (“ASU 2010-17”). ASU 2009-13 applies to all deliverables in contractual arrangements in which a vendor will perform multiple revenue-generating activities. ASU 2010-17 defines a milestone and determines when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. These pronouncements are codified in FASB Accounting Standards Codification^TM (“ASC”) Topic 605, Revenue Recognition. Adoption of these pronouncements did not have a material effect on our consolidated financial statements.

New Accounting Pronouncements Not Yet Adopted

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

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

3. Inventories

Inventories consisted of the following:

		June 30,				December 31,
		2011				2010
		(Dollars in thousands)
Raw materials		$	86,548			$	63,856
Work in process			48,069				38,684
Finished goods			118,490				99,527
Total inventories		$	253,107			$	202,067

In the production of some of our products, we use precious metals, some of which we obtain from financial institutions under consignment agreements with terms of one year or less. The financial institutions retain ownership of the precious metals and charge us fees based on the amounts we consign. These fees were $2.7 million and $1.3 million for the three months ended June 30, 2011 and 2010, respectively, and $4.7 million and $2.4 million for the six months ended June 30, 2011 and 2010, respectively, and were charged to cost of sales. We had on hand precious metals owned by participants in our precious metals consignment program of $269.1 million at June 30, 2011, and $205.7 million at December 31, 2010, measured at fair value based on market prices for identical assets. At December 31, 2010, we had delivered $28.1 million in cash collateral as a result of the market value of the precious metals under consignment exceeding the credit lines provided by some of the financial institutions. At June 30, 2011, no cash collateral was outstanding.

4. Property, Plant and Equipment

Property, plant and equipment is reported net of accumulated depreciation of $622.4 million at June 30, 2011, and $594.3 million at December 31, 2010. Unpaid capital expenditure liabilities, which are noncash investing activities, were $7.3 million at June 30, 2011, and $6.1 million at June 30, 2010.

5. Financing and Long-term Debt

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

		June 30,				December 31,
		2011				2010
		(Dollars in thousands)
Loans payable to banks		$	2,313			$	709
Domestic accounts receivable asset securitization program			45,000				—
International accounts receivable sales programs			11,003				—
Current portion of long-term debt			2,954				2,871
Total loans payable and current portion of long-term debt		$	61,270			$	3,580

Long-term debt consisted of the following:

		June 30,				December 31,
		2011				2010
		(Dollars in thousands)
7.875% Senior Notes		$	250,000			$	250,000
6.50% Convertible Senior Notes, net of unamortized discounts			33,789				33,368
Revolving credit facility			448				—
Capitalized lease obligations			5,721				6,177
Other notes			4,320				4,297
Total long-term debt			294,278				293,842
Less current portion			(2,954	)			(2,871	)
Total long-term debt, less current portion		$	291,324			$	290,971

Receivable Sales Programs

We have an asset securitization program for Ferro’s U.S. trade accounts receivable. In May 2011, we made certain modifications to and extended the maturity of this $50.0 million facility through May 2012. We sell interests in our domestic receivables to various purchasers, and we may obtain up to $50.0 million in the form of cash or, under the current program, letters of credit. Advances received under this program are accounted for as borrowings secured by the receivables and included in net cash provided by financing activities. At June 30, 2011, advances received of $45.0 million were secured by $114.5 million of accounts receivable. The interest rate under this program is the sum of (A) either (1) commercial paper rates, (2) LIBOR rates, or (3) the federal funds rate plus 0.5% or the prime rate and (B) a fixed margin. At June 30, 2011, the interest rate was 0.6%. We had no borrowings under this program at December 31, 2010.

In the first half of 2011, we entered into several international programs to sell with recourse trade accounts receivable to financial institutions. Advances received under these programs are accounted for as borrowings secured by the receivables and included in net cash provided by financing activities. At June 30, 2011, the commitments supporting these programs totaled $20.3 million, the advances received were secured by $13.3 million of accounts receivable, and no additional borrowings were available under the programs. The interest rates under these programs are based on EURIBOR rates plus 1.75%. At June 30, 2011, the weighted-average interest rate was 3.1%.

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

7.875% Senior Notes

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

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

6.50% Convertible Senior Notes

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

2010 Credit Facility

In 2010, we entered into the Third Amended and Restated Credit Agreement with a group of lenders for a five-year, $350 million multi-currency senior revolving credit facility (the “2010 Credit Facility”). The interest rate under the 2010 Credit Facility is the sum of (A) either (1) LIBOR or (2) the higher of the Federal Funds Rate plus 0.5%, the Prime Rate, or LIBOR plus 1.0% and (B) a variable margin based on the Company’s leverage. At June 30, 2011, the interest rate was 2.7%. We had no borrowings under this facility at December 31, 2010. The 2010 Credit Facility matures on August 24, 2015, and is secured by substantially all of Ferro’s assets.

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

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

6. Financial Instruments

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

	•		Cash and cash equivalents;
	•		Notes receivable;
	•		Deposits;
	•		Miscellaneous receivables; and
	•		Short-term loans payable.

Long-term Debt

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

		June 30, 2011								December 31, 2010
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
		(Dollars in thousands)
7.875% Senior Notes		$	250,000			$	260,625			$	250,000			$	266,563
6.50% Convertible Senior Notes, net of unamortized discounts			33,789				36,181				33,368				36,379
Revolving credit facility			448				448				—				—
Other notes			4,320				3,619				4,297				3,600

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

Derivative Instruments

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

Interest rate swaps. To reduce our exposure to interest rate changes on variable-rate debt, we entered into interest rate swap agreements in 2007. These swaps effectively converted $150 million of a former variable-rate term loan facility to a fixed rate through June 2011. These swaps were designated and qualified as cash flow hedges. The fair value of these swaps was based on the present value of expected future cash flows, which reflected assumptions about current interest rates and the creditworthiness of the Company that market participants would use in pricing the swaps. In the third quarter of 2010, in conjunction with repayment of our remaining outstanding term loans, we settled these swaps and reclassified $6.8 million from accumulated other comprehensive income to miscellaneous expense.

Foreign currency forward contracts. We manage foreign currency risks principally by entering into forward contracts to mitigate the impact of currency fluctuations on transactions. These forward contracts are not designated as hedging instruments. The fair value of these contracts is based on market prices for comparable contracts. We had foreign currency forward contracts with a notional amount of $277.6 million at June 30, 2011, and $187.3 million at December 31, 2010.

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

		June 30,				December 31,
		2011				2010				Balance Sheet Location
		(Dollars in thousands)
Asset derivatives:
Foreign currency forward contracts		$	1,372			$	1,261			Accrued expenses and other current liabilities
Liability derivatives:
Foreign currency forward contracts			(2,288	)			(1,501	)		Accrued expenses and other current liabilities

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

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

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

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

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

		June 30, 2011																December 31,
		Level 1				Level 2				Level 3				Total				2010
		(Dollars in thousands)
Liabilities:
Foreign currency forward contracts, net		$	—			$	(916	)		$	—			$	(916	)		$	(240	)

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

										Amount of Gain (Loss)								Location of Gain
		Amount of Gain (Loss)								Reclassified from AOCI								(Loss) Reclassified
		Recognized in OCI								into Income								from AOCI into
		2011				2010				2011				2010				Income
		(Dollars in thousands)
Derivatives in Cash Flow Hedging Relationships:
Interest rate swaps		$	—			$	(996	)		$	—			$	(3,985	)		Interest expense

		Amount of Gain (Loss)
		Recognized in Income
		2011				2010				Location of Gain (Loss) in Income
		(Dollars in thousands)
Derivatives Not Designated as Hedging Instruments:
Foreign currency forward contracts		$	(13,422	)		$	14,684			Foreign currency losses, net

7. Income Taxes

During the first half of 2011, income tax expense was $21.6 million, or 33.5% of pre-tax income. In the first six months of 2010, we recorded income tax expense of $22.5 million, or 76.9% of pre-tax income. The reduction in the effective tax rate primarily resulted from a decrease in losses in jurisdictions with full valuation allowances, which resulted in unrecognized tax benefits of $9.0 million in the prior-year period as compared to $3.0 million in the first six months of 2011. In addition, the effective tax rate in the prior-year period was impacted by $3.3 million of tax charges, which resulted from the elimination of future tax deductions related to Medicare Part D subsidies and the recording of valuation allowances on certain deferred tax assets.

8. Contingent Liabilities

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

The Company has a non-operating facility in Brazil that is environmentally contaminated. We have recorded an undiscounted remediation liability because we believe the liability is incurred and the amount of contingent loss is reasonably estimable. The recorded liability associated with this facility was $10.4 million at June 30, 2011, and $9.8 million at December 31, 2010. The ultimate loss will depend on the extent of contamination found as the project progresses and acceptance by local authorities of remediation activities, including the time frame of monitoring involved.

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

9. Retirement Benefits

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

		U.S. Pension Plans								Non-U.S. Pension Plans								Other Benefit Plans
		2011				2010				2011				2010				2011				2010
		(Dollars in thousands)
Components of net periodic cost:
Service cost		$	8			$	7			$	562			$	834			$	—			$	—
Interest cost			5,120				5,156				1,492				2,517				483				607
Expected return on plan assets			(5,165	)			(4,491	)			(837	)			(1,759	)			—				—
Amortization of prior service cost			19				24				(34	)			(121	)			(101	)			(399	)
Net amortization and deferral			2,739				3,456				164				193				(160	)			(43	)
Curtailment and settlement effects			—				—				—				(3,839	)			—				—
Net periodic benefit cost		$	2,721			$	4,152			$	1,347			$	(2,175	)		$	222			$	165

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

		U.S. Pension Plans								Non-U.S. Pension Plans								Other Benefit Plans
		2011				2010				2011				2010				2011				2010
		(Dollars in thousands)
Components of net periodic cost:
Service cost		$	8			$	14			$	1,101			$	1,716			$	—			$	—
Interest cost			10,234				10,312				2,924				5,252				965				1,214
Expected return on plan assets			(10,301	)			(8,982	)			(1,647	)			(3,658	)			—				—
Amortization of prior service cost			37				48				(67	)			(253	)			(201	)			(798	)
Net amortization and deferral			5,974				6,912				325				340				(320	)			(86	)
Curtailment and settlement effects			—				—				—				(4,565	)			—				—
Net periodic benefit cost		$	5,952			$	8,304			$	2,636			$	(1,168	)		$	444			$	330

In our U.S. plans, improvement through December 2010 in the valuation of pension investments increased our 2011 expected return on plan assets, and a longer amortization period due to changes in the pattern of retirements decreased our 2011 net amortization and deferral costs. In our non-U.S. plans, various curtailments and settlements recorded in 2010 decreased our benefit obligations and plan assets, which in turn reduced our 2011 interest cost and expected return on plan assets. In the second quarter of 2010, we recognized $4.0 million of curtailment and settlement gains related to our restructuring activities in the Netherlands and France and a $0.2 million settlement loss related to the transfer of some pension obligations to another company in Germany. In the first quarter of 2010, we recognized a $0.7 million gain from the settlement of certain pension obligations in Japan.

10. Serial Convertible Preferred Stock

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

11. Stock-Based Compensation

In April 2010, our shareholders approved the 2010 Long-Term Incentive Plan (the “Plan”). The Plan’s purpose is to promote the Company’s and the shareholders’ long-term financial interests by attracting, retaining and motivating high-quality, key employees and directors and aligning their interests with those of the Company’s shareholders. The Plan reserves 5,000,000 shares of common stock to be issued for grants of several different types of long-term incentives including stock options, stock appreciation rights, deferred stock units, restricted shares, performance shares, other common-stock-based awards, and dividend equivalent rights. No future grants may be made under previous incentive plans. However, any outstanding awards or grants made under these plans will continue until the end of their specified terms.

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

		Common Shares in Treasury								Paid-in
		Shares				Amount				Capital
		(In thousands)
Stock options			(205	)		$	5,099			$	(1,208	)
Deferred stock units			(80	)			2,013				(1,709	)
Restricted shares			(128	)			3,445				(2,475	)
Performance shares			37				(537	)			462
Directors’ deferred compensation, net			—				563				(563	)
Preferred stock conversions			—				—				—
Total			(376	)		$	10,583			$	(5,493	)

12. Restructuring and Cost Reduction Programs

During the first half of 2011, we continued to wind down our restructuring programs. Current period charges primarily relate to facility closing and exit costs in Limoges, France; Casiglie, Italy; and Castanheira do Ribatejo, Portugal.

For the six months ended June 30, 2011 and 2010, total charges resulting from these activities were $3.6 million and $36.4 million, respectively, of which $0.4 million and $1.9 million, respectively, were recorded in cost of sales as they related to accelerated depreciation on assets to be disposed, and the remaining $3.2 million and $34.5 million, respectively, were reported as restructuring and impairment charges. For the six months ended June 30, 2011, restructuring and impairment charges of $3.2 million consisted of gross charges of $5.7 million, partially offset by a gain on the sale of a building of $1.1 million and a reduction of accrued rent previously included in restructuring charges of $1.4 million.

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

		Employee								Asset
		Severance				Other Costs				Impairment				Total
		(Dollars in thousands)
Balance at December 31, 2010		$	2,429			$	5,863			$	—			$	8,292
Restructuring charges			1,814				1,358				3				3,175
Cash payments			(3,384	)			(2,967	)			—				(6,351	)
Currency translation adjustment			136				417				—				553
Non-cash items			(27	)			(109	)			(3	)			(139	)
Balance at June 30, 2011		$	968			$	4,562			$	—			$	5,530

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

13. Earnings Per Share

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

		Three months ended								Six months ended
		June 30,								June 30,
		2011				2010				2011				2010
		(In thousands, except per share amounts)
Basic earnings per share computation:
Net income attributable to Ferro Corporation common shareholders		$	19,389			$	6,935			$	42,114			$	6,702
Weighted-average common shares outstanding			86,159				85,783				86,067				85,809
Basic earnings per share attributable to Ferro Corporation common shareholders		$	0.23			$	0.08			$	0.49			$	0.08
Diluted earnings per share computation:
Net income attributable to Ferro Corporation common shareholders		$	19,389			$	6,935			$	42,114			$	6,702
Plus: Convertible preferred stock dividends, net of tax			—				—				103				—
Total		$	19,389			$	6,935			$	42,217			$	6,702
Weighted-average common shares outstanding			86,159				85,783				86,067				85,809
Assumed exercise of stock options			268				212				293				225
Assumed satisfaction of deferred stock unit conditions			38				88				51				71
Assumed satisfaction of restricted share conditions			403				347				383				325
Assumed conversion of convertible notes			—				—				—				—
Assumed conversion of convertible preferred stock			—				—				264				—
Weighted-average diluted shares outstanding			86,868				86,430				87,058				86,430
Diluted earnings per share attributable to Ferro Corporation common shareholders		$	0.22			$	0.08			$	0.48			$	0.08

Securities that could potentially dilute basic earnings per share in the future but were not included in the computation of diluted earnings per share because to do so would have been antidilutive represented 5.3 million common shares for the three and six months ended June 30, 2011, and 13.0 million common shares for the three and six months ended June 30, 2010.

14. Comprehensive Income (Loss)

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

		Three months ended								Six months ended
		June 30,								June 30,
		2011				2010				2011				2010
		(Dollars in thousands)
Net income		$	19,621			$	7,594			$	42,812			$	6,782
Other comprehensive income (loss), net of tax:
Foreign currency translation			4,872				(14,685	)			10,451				(25,695	)
Postretirement benefit liabilities			3,459				(3,203	)			2,968				(3,035	)
Raw material commodity swaps			—				—				—				(107	)
Interest rate swaps			—				1,206				—				1,930
Total comprehensive income (loss)			27,952				(9,088	)			56,231				(20,125	)
Less: Comprehensive income (loss) attributable to noncontrolling interests			301				524				649				(219	)
Comprehensive income (loss) attributable to Ferro Corporation		$	27,651			$	(9,612	)		$	55,582			$	(19,906	)

15. Reporting for Segments

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

The accounting policies of our segments are consistent with those described for our consolidated financial statements in the summary of significant accounting policies contained in our Annual Report on Form 10-K for the year ended December 31, 2010. We measure segment income for internal reporting purposes by excluding unallocated corporate expenses, restructuring and impairment charges, other expenses, net, and income taxes. Unallocated corporate expenses consist primarily of corporate employment costs and professional services.

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

		Three months ended								Six months ended
		June 30,								June 30,
		2011				2010				2011				2010
		(Dollars in thousands)
Electronic Materials		$	180,362			$	174,528			$	382,709			$	321,761
Performance Coatings			163,481				142,137				300,181				270,328
Color and Glass Performance Materials			106,476				97,697				206,281				197,029
Polymer Additives			91,271				79,664				177,133				154,140
Specialty Plastics			46,510				43,359				89,139				81,732
Pharmaceuticals			5,874				6,100				11,540				11,360
Total net sales		$	593,974			$	543,485			$	1,166,983			$	1,036,350

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

		Three months ended								Six months ended
		June 30,								June 30,
		2011				2010				2011				2010
		(Dollars in thousands)
Electronic Materials		$	23,914			$	37,397			$	56,503			$	65,879
Performance Coatings			11,329				14,422				18,734				23,904
Color and Glass Performance Materials			11,201				9,982				21,031				17,265
Polymer Additives			4,331				2,836				10,782				6,827
Specialty Plastics			2,810				3,503				4,719				5,322
Pharmaceuticals			759				(271	)			1,915				(146	)
Total segment income			54,344				67,869				113,684				119,051
Unallocated corporate expenses			13,545				15,391				29,377				30,587
Restructuring and impairment charges			1,545				21,205				3,175				34,537
Other expense, net			8,172				9,760				16,752				24,637
Income before income taxes		$	31,082			$	21,513			$	64,380			$	29,290

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

Overview

Overall sales grew during the quarter, driven primarily by changes in product pricing. Aggregate customer demand was relatively stable, although demand for conductive pastes from customers who manufacture solar cells declined.

Net sales increased by 9% in the three months ended June 30, 2011, compared with the prior-year quarter. Increased precious metal costs, which are passed through to customers with little gross margin contribution, were one driver of the increased sales. Sales increased in all business segments except Pharmaceuticals, where sales declined slightly. In aggregate, changes in product prices and mix contributed approximately 11 percentage points to the growth in net sales compared to the second quarter of 2010. Changes in foreign currency exchange rates contributed an additional 5 percentage points to sales growth. Lower sales volumes, primarily driven by lower sales of conductive pastes and the effects of products that we no longer sell, reduced sales growth by approximately 7 percentage points.

Raw material costs, in aggregate, increased during the quarter by approximately $45 million compared with the prior-year quarter, reflecting widespread commodity cost increases in the global economy. A number of raw materials ended the quarter higher than in the prior-year period but below the peak levels that were reached during the quarter. Changes in product pricing kept pace with increasing raw material costs across the business as a whole. Increasing prices to fully cover raw materials cost increases was the most challenging in the Performance Coatings and Specialty Plastics businesses.

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

Selling, general and administrative (“SG&A”) expenses increased compared with the prior-year period. The increased SG&A spending included expenses associated with our initiative to standardize business processes and improve management information systems and the effects of changes in foreign currency exchange rates.

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

Interest expense declined in the second quarter as a result of lower borrowing levels and reduced amortization of debt issuance costs.

We recorded increased net income in the 2011 second quarter compared with the second quarter of 2010. The increased income was driven by lower restructuring and impairment charges and reduced interest expense, partially offset by reduced gross profit and increased SG&A expenses.

Outlook

We expect normal seasonality across our businesses during the second half of 2011. Many of our businesses provide materials that are used in, or are influenced by, commercial and residential construction activities. The construction markets are generally more active in the spring and summer months, leading to strong demand for our products in the first half of the year.

However, sales of conductive pastes used in solar cells are subject to a variety of non-seasonal economic influences, including public policy decisions in various jurisdictions around the world, interest rates, and the prices and inventory levels of completed solar power modules. We believe that increased inventories of solar power modules are likely to continue to negatively affect demand for our conductive pastes in the near term. The time required for the solar power market to absorb the excess inventory of modules is difficult to forecast, but we expect a gradual recovery in demand for our products by late 2011. We continue to believe that there are attractive long-term growth opportunities for our metal pastes as a result of growth in the solar power market during the next several years.

Factors that could adversely affect our future financial performance are described under the heading “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2010.

Results of Operations

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

		Three months ended
		June 30,
		2011				2010				$ Change				% Change
		(Dollars in thousands, except per share amounts)
Net sales		$	593,974			$	543,485			$	50,489				9.3	%
Cost of sales			479,627				421,155				58,472				13.9	%
Gross profit			114,347				122,330				(7,983	)			(6.5)	%
Gross profit percentage			19.3	%			22.5	%
Selling, general and administrative expenses			73,548				69,852				3,696				5.3	%
Restructuring and impairment charges			1,545				21,205				(19,660	)
Other expense (income):
Interest expense			7,352				13,766				(6,414	)
Interest earned			(69	)			(133	)			64
Foreign currency losses (gains), net			1,013				(302	)			1,315
Miscellaneous (income) expense, net			(124	)			(3,571	)			3,447
Income before income taxes			31,082				21,513				9,569
Income tax expense			11,461				13,919				(2,458	)
Net income		$	19,621			$	7,594			$	12,027
Diluted earnings per share		$	0.22			$	0.08			$	0.14

Net sales increased by 9% in the three months ended June 30, 2011,compared with the prior-year period, reflecting higher prices for our products, partially offset by the effects of lower sales volume. Increased precious metal sales in our Electronic Materials segment, principally driven by higher prices for silver, were a driver of the overall growth in sales. Compared to the prior-year quarter, sales increased in all segments except Pharmaceuticals. Higher product prices and mix accounted for approximately 11 percentage points of sales growth compared with the prior-year period. Changes in foreign currency exchange rates contributed 5 percentage points to sales growth in the quarter. Reductions in sales volume, including changes due to products we no longer sell, reduced sales growth by 7 percentage points. These changes in product prices, mix and sales volume include the effects of increased sales of precious metals. Higher precious metal sales contributed approximately 5 percentage points to the overall sales increase during the quarter.

Gross profit declined as a result of reduced sales volume of conductive pastes used in solar cell applications. In addition, increased raw material costs and product mix changes combined to grow our cost of sales faster than the rate of growth of net sales. Gross profit percentage declined to 19.3% of sales from 22.5% of sales. Precious metal costs are passed through to customers with little gross margin, so increased precious metal sales during the quarter contributed to the reduced gross profit percentage. Charges, primarily related to residual costs at closed manufacturing sites involved in restructuring initiatives, reduced gross profit by $1.3 million during the second quarter of 2011. In the second quarter of 2010, gross profit was reduced by $2.5 million as a result of charges primarily due to accelerated depreciation and severance costs associated with manufacturing rationalization activities.

Selling, general and administrative (“SG&A”) expenses increased by $3.7 million in the 2011 second quarter compared with the prior-year period. SG&A expenses were 12.4% of net sales during the second quarter, down from 12.9% of net sales in the second quarter of 2010. The increased SG&A spending included $2.1 million related to an initiative to streamline and standardize business processes and improve management information systems tools. SG&A expenses in the second quarter of 2011 included charges of $1.4 million, primarily related to expenses at closed sites impacted by restructuring initiatives. SG&A expenses in the second quarter of 2010 included charges of $5.6 million that included costs related to expense reduction actions, manufacturing rationalization projects and corporate development expenses.

Restructuring and impairment charges declined to $1.5 million in the three months ended June 30, 2011 compared with $21.2 million in the second quarter of 2010. The significant decline reflects the reduction in restructuring activities as we complete the final actions related to our multi-year manufacturing rationalization initiatives.

Interest expense declined by $6.4 million in the second quarter of 2011 compared with the prior-year period. Reduced borrowing levels and a decline in amortization of debt issuance costs were the drivers of the decline in interest expense. Interest expense in the second quarter of 2010 included a $1.5 million noncash write-off of fees related to a $50 million paydown of our term loan debt.

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

Miscellaneous income for the 2011 second quarter was $0.1 million compared with $3.6 million in the second quarter of 2010. As part of our miscellaneous income and expense in the 2010 second quarter, we recorded a net pre-tax gain of $7.8 million as a result of a business combination related to decoration materials for ceramic and glass products. Also included in the 2010 second quarter miscellaneous income and expense was a charge of $3.5 million for an increased reserve for environmental remediation costs at a non-operating facility in Brazil.

During the 2011 second quarter, we recognized income tax expense of $11.5 million, or 36.9% of pre-tax income. We recorded income tax expense of $13.9 million, or 64.7% of pre-tax income, in the second quarter of 2010. The decrease in the effective tax rate was primarily the result of a decrease in losses in jurisdictions with full valuation allowances, which resulted in an unrecognized tax benefit of $5.5 million in the prior-year period as compared with $1.9 million in the 2011 second quarter. In addition, in the prior-year quarter the effective tax rate was increased by $1.8 million of tax charges that resulted from recording valuation allowances on certain deferred tax assets.

Net income increased to $19.6 million in the 2011 second quarter from $7.6 million in the second quarter of 2010. The improvement was due to reduced restructuring and impairment charges and lower interest expense, partially offset by reduced gross profit and higher SG&A expenses.

		Three months ended
		June 30,
		2011				2010				$ Change				% Change
		(Dollars in thousands)
Segment Sales
Electronic Materials		$	180,362			$	174,528			$	5,834				3.3	%
Performance Coatings			163,481				142,137				21,344				15.0	%
Color and Glass Performance Materials			106,476				97,697				8,779				9.0	%
Polymer Additives			91,271				79,664				11,607				14.6	%
Specialty Plastics			46,510				43,359				3,151				7.3	%
Pharmaceuticals			5,874				6,100				(226	)			(3.7	)%
Total segment sales		$	593,974			$	543,485			$	50,489				9.3	%
Segment Operating Income (Loss)
Electronic Materials		$	23,914			$	37,397			$	(13,483	)			(36.1	)%
Performance Coatings			11,329				14,422				(3,093	)			(21.4	)%
Color and Glass Performance Materials			11,201				9,982				1,219				12.2	%
Polymer Additives			4,331				2,836				1,495				52.7	%
Specialty Plastics			2,810				3,503				(693	)			(19.8	)%
Pharmaceuticals			759				(271	)			1,030			NM
Total segment operating income		$	54,344			$	67,869			$	(13,525	)			(19.9	)%

Electronic Materials Segment Results. Sales increased in Electronic Materials due to increased sales of precious metals resulting from higher prices of silver that are passed through to customers as a portion of our product prices. Sales volume of conductive pastes for solar cell applications declined compared with the prior period due to lower demand associated with excess customer inventories of solar power modules, particularly in Europe. Changes in product pricing and mix increased sales by $29 million during the quarter and changes in foreign currency exchange rates contributed an additional $5 million to sales growth. Reductions in volume reduced sales growth during the quarter by approximately $28 million. Sales increased due to products sourced in the Asia-Pacific region and declined in the United States and Europe. Operating income declined primarily due to a $13 million decrease in gross profit. The decline in gross profit was due to lower volume of products sold, particularly pastes for solar cell applications.

Performance Coatings Segment Results. Sales increased in Performance Coatings primarily due to higher product prices and changes in foreign currency exchange rates. The higher product prices in the quarter reflected higher raw material costs compared with the prior-year period. Changes in product prices and mix contributed $14 million to the overall sales increase during the period. Changes in foreign currency exchange rates added an additional $10 million to sales growth. Lower sales volume offset sales growth by $3 million. Sales increases were driven by growth in Europe-Middle East-Africa and Latin America. Operating profit declined primarily as a result of increased SG&A expenses. SG&A expenses increased by $3 million compared to the prior-year quarter.

Color and Glass Performance Materials Segment Results. Sales increased in Color and Glass Performance Materials as a result of product prices, mix and exchange rate changes, partially offset by reduced sales volume. Sales of certain metal oxide products were curtailed as a result of the closing of a manufacturing plant in Portugal and sales volume also was reduced as a result of divesting certain precious metal preparation product lines during 2010. Changes in product price and mix accounted for approximately $3 million of the sales increase for the quarter, and changes in foreign currency exchange rates contributed an additional $8 million to the overall sales growth. Reduced sales volume offset approximately $2 million of the sales growth. The sales growth was primarily driven by increased sales in Europe-Middle East-Africa. Operating profit increased as a result of a $3 million increase in gross profit, partially offset by a $2 million increase in SG&A expenses. The gross profit increase was driven by the benefits from manufacturing rationalization activities in prior periods.

Polymer Additives Segment Results. Sales increased in Polymer Additives primarily as a result of higher product prices. Changes in product prices and mix increased sales by $10 million during the quarter. Changes in foreign currency exchange rates added an additional $3 million to sales growth. Lower sales volume reduced sales by $1 million. Sales increases were primarily in the United States and Europe-Middle East-Africa, the primary markets for our polymer additives products. Operating income increased as a result of a $1 million increase in gross profit that was driven by improved product pricing, while SG&A expenses were nearly unchanged with the prior-year period.

Specialty Plastics Segment Results. Sales increased in Specialty Plastics primarily due to changes in product pricing and mix, partially offset by reduced sales volume. Changes in product price and mix accounted for $5 million of the overall sales increase, while changes in foreign currency exchange rates contributed an additional $2 million to sales growth. Lower sales volume reduced sales growth by $4 million. Sales growth was primarily in Europe-Middle East-Africa. Operating profit declined due to a $0.4 million decrease in gross profit and a $0.3 million increase in SG&A expenses. The reduction in gross profit was driven primarily by reductions in sales volume and our inability to raise product prices quickly enough to fully reflect rising raw material costs.

Pharmaceuticals Segment Results. Sales were nearly flat in Pharmaceuticals as we recorded a decline of $0.2 million compared with the prior-year quarter. Operating income increased due to a $1 million increase in gross profit that was the result of improved manufacturing effectiveness and product mix changes.

		Three months ended
		June 30,
		2011				2010				$ Change				% Change
		(Dollars in thousands)
Geographic Revenues
United States		$	277,294			$	277,003			$	291				0.1	%
International			316,680				266,482				50,198				18.8	%
Total		$	593,974			$	543,485			$	50,489				9.3	%

Sales of our products increased during the 2011 second quarter reflecting increased product pricing and changes in foreign currency exchange rates. Sales were nearly flat in the United States and grew in all international regions. In the 2011 second quarter, sales originating in the United States were 47% of total sales, compared with 51% in the prior-year period. Growth in international sales, compared with the second quarter of 2010, was driven by higher sales in Europe-Middle East-Africa and Asia-Pacific. Sales recorded in each region include products exported to customers that are located in other regions.

Comparison of the six months ended June 30, 2011 and 2010

		Six months ended
		June 30,
		2011				2010				$ Change				% Change
		(Dollars in thousands, except per share amounts)
Net sales		$	1,166,983			$	1,036,350			$	130,633				12.6	%
Cost of sales			932,310				807,086				125,224				15.5	%
Gross profit			234,673				229,264				5,409				2.4	%
Gross profit percentage			20.1	%			22.1	%
Selling, general and administrative expenses			150,366				140,800				9,566				6.8	%
Restructuring and impairment charges			3,175				34,537				(31,362	)
Other expense (income):
Interest expense			14,178				26,677				(12,499	)
Interest earned			(143	)			(464	)			321
Foreign currency losses, net			2,323				3,246				(923	)
Miscellaneous expense (income), net			394				(4,822	)			5,216
Income before income taxes			64,380				29,290				35,090
Income tax expense			21,568				22,508				(940	)
Net income		$	42,812			$	6,782			$	36,030
Diluted earnings per share		$	0.48			$	0.08			$	0.40