UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2008

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

For the transition period from                      to                     

FERRO CORPORATION

(Exact name of registrant as specified in its charter)

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

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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” 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 July 31, 2008, there were 43,719,321 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 21
Item 3 Quantitative and Qualitative Disclosures about Market Risk		Page 32
Item 4 Controls and Procedures		Page 34
PART II
Item 1 Legal Proceedings		Page 35
Item 1A Risk Factors		Page 36
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds		Page 42
Item 3 Defaults Upon Senior Securities		Page 42
Item 4 Submission of Matters to a Vote of Security Holders		Page 42
Item 5 Other Information		Page 42
Item 6 Exhibits		Page 42
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 Income

		Three months ended								Six months ended
		June 30,								June 30,
		2008				2007				2008				2007
		(Dollars in thousands, except per share amounts)
Net sales		$	650,396			$	553,658			$	1,257,652			$	1,083,363
Cost of sales			527,012				446,131				1,020,949				869,056
Gross profit			123,384				107,527				236,703				214,307
Selling, general and administrative expenses			81,191				84,386				159,848				163,143
Restructuring charges			9,031				332				13,238				1,863
Other expense (income):
Interest expense			13,214				14,286				27,243				31,732
Interest earned			(142	)			(189	)			(271	)			(1,154	)
Foreign currency losses (gains), net			650				423				(891	)			934
Miscellaneous expense (income), net			2,082				883				3,932				(386	)
Income before taxes			17,358				7,406				33,604				18,175
Income tax expense			8,002				2,808				15,083				7,342
Income from continuing operations			9,356				4,598				18,521				10,833
(Gain) loss from discontinued operations, net of tax			(9	)			58				16				214
Net income			9,365				4,540				18,505				10,619
Dividends on preferred stock			223				259				450				545
Net income available to common shareholders		$	9,142			$	4,281			$	18,055			$	10,074
Per common share data
Basic earnings:
From continuing operations		$	0.21			$	0.10			$	0.42			$	0.24
From discontinued operations			0.00				0.00				0.00				0.00
		$	0.21			$	0.10			$	0.42			$	0.24
Diluted earnings:
From continuing operations		$	0.21			$	0.10			$	0.42			$	0.24
From discontinued operations			0.00				0.00				0.00				0.00
		$	0.21			$	0.10			$	0.42			$	0.24
Cash dividends declared		$	0.145			$	0.145			$	0.290			$	0.290

See accompanying notes to condensed consolidated financial statements.

Ferro Corporation and Consolidated Subsidiaries
Condensed Consolidated Balance Sheets

		June 30,				December 31,
		2008				2007
		(Dollars in thousands)
ASSETS
Current assets
Cash and cash equivalents		$	13,390			$	12,025
Accounts and trade notes receivable, net			281,858				245,369
Note receivable from Ferro Finance Corporation			28,442				29,577
Inventories			316,783				262,799
Deferred income taxes			24,454				15,764
Other receivables			47,516				33,419
Other current assets			6,332				8,239
Total current assets			718,775				607,192
Other assets
Property, plant and equipment, net			534,761				519,959
Goodwill			290,340				291,070
Amortizable intangible assets, net			8,864				9,071
Deferred income taxes			106,415				100,935
Other non-current assets			111,779				110,033
Total assets		$	1,770,934			$	1,638,260
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Loans payable and current portion of long-term debt		$	9,163			$	5,444
Accounts payable			293,539				269,591
Income taxes			27,827				—
Accrued payrolls			33,157				26,415
Accrued expenses and other current liabilities			103,482				108,882
Total current liabilities			467,168				410,332
Other liabilities
Long-term debt, less current portion			561,790				520,645
Postretirement and pension liabilities			143,404				140,988
Deferred income taxes			12,542				9,848
Other non-current liabilities			57,862				56,644
Total liabilities			1,242,766				1,138,457
Minority interests			9,988				9,896
Series A convertible preferred stock (approximates redemption value)			12,764				13,623
Shareholders’ equity
Common stock			52,323				52,323
Paid-in capital			165,968				166,391
Retained earnings			473,154				468,190
Accumulated other comprehensive income (loss)			14,495				(7,765	)
Common shares in treasury, at cost			(200,524	)			(202,855	)
Total shareholders’ equity			505,416				476,284
Total liabilities and shareholders’ equity		$	1,770,934			$	1,638,260

See accompanying notes to condensed consolidated financial statements.

Ferro Corporation and Consolidated Subsidiaries
Condensed Consolidated Statement of Shareholders’ Equity and Comprehensive Income

																						Accumulated				Total
		Common Shares																				Other				Share-
		in Treasury								Common				Paid-in				Retained				Comprehensive				holders’
		Shares				Amount				Stock				Capital				Earnings				Income (Loss)				Equity
	(In thousands)
Balances at December 31, 2007			8,753			$	(202,855	)		$	52,323			$	166,391			$	468,190			$	(7,765	)		$	476,284
Net income																			18,505								18,505
Other comprehensive income, net of tax:
Foreign currency translation adjustments																							21,247				21,247
Postretirement benefit liability adjustments																							(414	)			(414	)
Raw material commodity swap adjustments																							455				455
Interest rate swap adjustments																							606				606
Total comprehensive income																											40,399
Cash dividends:
Common																			(12,586	)							(12,586	)
Preferred																			(450	)							(450	)
Income tax benefits															21												21
Stock-based compensation transactions			(149	)			2,331								(444	)											1,887
Adjustment to initially apply FAS No. 158 as of January 1, 2008																			(505	)			366				(139	)
Balances at June 30, 2008			8,604			$	(200,524	)		$	52,323			$	165,968			$	473,154			$	14,495			$	505,416

See accompanying notes to condensed consolidated financial statements.

Ferro Corporation and Consolidated Subsidiaries
Condensed Consolidated Statements of Cash Flows

		Six months ended
		June 30,
		2008				2007
		(Dollars in thousands)
Cash flows from operating activities
Net income		$	18,505			$	10,619
Depreciation and amortization			38,244				43,992
Precious metals deposits			—				70,073
Accounts and trade notes receivable, inventories, and accounts payable			(55,550	)			(26,190	)
Note receivable from Ferro Finance Corporation			1,135				(14,116	)
Other changes in current assets and liabilities, net			14,394				(7,367	)
Other adjustments, net			(10,019	)			(7,149	)
Net cash provided by continuing operations			6,709				69,862
Net cash used for discontinued operations			(16	)			(45	)
Net cash provided by operating activities			6,693				69,817
Cash flows from investing activities
Capital expenditures for property, plant and equipment			(34,572	)			(30,921	)
Proceeds from sale of assets and businesses			310				1,964
Dividends received from affiliates			336				859
Net cash used for investing activities			(33,926	)			(28,098	)
Cash flows from financing activities
Net borrowings (repayments) under short-term facilities			3,478				10,850
Proceeds from revolving credit facility			430,347				410,295
Proceeds from term loan facility			—				55,000
Principal payments on revolving credit facility			(380,074	)			(507,649	)
Principal payments on term loan facility			(7,927	)			(1,525	)
Debt issue costs paid			—				(2,086	)
Proceeds from exercise of stock options			—				8,233
Cash dividends paid			(13,036	)			(13,041	)
Other financing activities			(4,238	)			(1,325	)
Net cash provided by (used for) financing activities			28,550				(41,248	)
Effect of exchange rate changes on cash and cash equivalents			48				339
Increase in cash and cash equivalents			1,365				810
Cash and cash equivalents at beginning of period			12,025				16,985
Cash and cash equivalents at end of period		$	13,390			$	17,795
Cash paid during the period for:
Interest		$	26,493			$	28,680
Income taxes		$	5,243			$	6,774

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, 2007. 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 six months ended June 30, 2008, are not necessarily indicative of the results expected in subsequent quarters or for the full year.

2. Accounting Standards Adopted in the Six Months Ended June 30, 2008

On January 1, 2008, we adopted FASB Statement No. 157, Fair Value Measurements, (“FAS No. 157”), FASB Staff Position No. FAS 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement Under Statement 13, (“FSP No. FAS 157-1”), and FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157, (“FSP No. FAS 157-2”). FAS No. 157 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements, but does not require any new fair value measurements. FSP No. FAS 157-1 excludes FASB Statement No. 13, Accounting for Leases, (“FAS No. 13”) as well as other accounting pronouncements that address fair value measurement on lease classification or measurement under FAS No. 13 from the scope of FAS No. 157. FSP No. FAS 157-2 delays the effective date of FAS No. 157 for all nonrecurring fair value measurements of nonfinancial assets and nonfinancial liabilities until fiscal years beginning after November 15, 2008. The portions of these pronouncements that were not delayed were adopted prospectively, and their adoption reduced the disclosed fair value of our borrowings under the revolving credit and term loan facilities and reduced the carrying value of our interest rate swaps. We are currently evaluating the impact on our consolidated financial statements of adopting the deferred portions of these pronouncements on January 1, 2009.

On January 1, 2008, we adopted the measurement provisions of FASB Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R), (“FAS No. 158”). The measurement provisions require companies to measure defined benefit plan assets and obligations as of the annual balance sheet date. Previously, we used September 30 as the measurement date for U.S. pension and other postretirement benefits. We have elected to use the September 30, 2007, measurement of assets and benefit obligations to calculate the fiscal year 2008 expense. Expense for the gap period from September 30 to December 31 is recognized as of January 1, 2008, as a charge of $0.5 million, net of tax, to retained earnings and a credit of $0.4 million, net of tax, to accumulated other comprehensive income.

On January 1, 2008, we adopted FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115, (“FAS No. 159”). This statement permits us to choose, at specified election dates, to measure eligible items at fair value (the “fair value option”). For items for which the fair value option has been elected, we would report unrealized gains and losses in earnings at each subsequent reporting date and recognize up-front costs and fees in earnings as incurred. We have not elected to measure any eligible items at fair value, and we do not have any current plans to do so. Therefore, adoption of FAS No. 159 did not have an effect on our consolidated financial statements.

On January 1, 2008, we adopted Emerging Issues Task Force Issue No. 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards, (“EITF No. 06-11”). EITF No. 06-11 requires that the income tax benefit from dividends that are charged to retained earnings and paid to employees for nonvested equity shares be recognized as an increase to paid-in capital. Previously, we recognized this income tax benefit as an increase to retained earnings. Beginning in 2008, we report this income tax benefit as an increase to paid-in capital.

3. Newly Issued Accounting Pronouncements

In December 2007, the FASB issued Statement No. 141(R), Business Combinations, (“FAS No. 141(R)”) and Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51, (“FAS No. 160”). These statements change the way that companies account for business combinations and noncontrolling interests (e.g., minority interests). Both standards are to be applied prospectively for fiscal years beginning after December 15, 2008. However, FAS No. 160 requires entities to apply the presentation and disclosure requirements retrospectively to comparative financial statements. In 2009, we will retrospectively reclassify the amount of minority interests in consolidated subsidiaries to equity and separately report the amount of net income or loss attributable to minority interests.

In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133, (“FAS No. 161). This Statement requires enhanced disclosures about an entity’s derivative and hedging activities. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. We do not expect the adoption of FAS No. 161 to have a material impact on our consolidated financial statements.

In April 2008, the FASB issued Staff Position No. FAS 142-3, Determination of the Useful Life of Intangible Assets, (“FSP No. FAS 142-3”). This pronouncement 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 FASB Statement No. 142, Goodwill and Other Intangible Assets. FSP No. FAS 142-3 is to be applied prospectively and is effective for financial statements issued for fiscal years beginning after December 15, 2008, with early adoption prohibited. We are currently evaluating its effect on our financial statements.

4. Inventories

Inventories consisted of the following:

		June 30,				December 31,
		2008				2007
		(Dollars in thousands)
Raw materials		$	98,720			$	74,659
Work in process			56,163				41,640
Finished goods			161,900				146,500
Total		$	316,783			$	262,799

In the production of some of our products, we use precious metals, some of which we obtain from financial institutions under consignment agreements with terms of one year or less. The financial institutions retain ownership of the precious metals and charge us fees based on the amounts we consign. These fees were $1.3 million and $1.0 million for the three months ended June 30, 2008 and 2007, respectively, and $2.3 million and $2.0 million for the six months ended June 30, 2008 and 2007, respectively, and were charged to cost of sales. We had on hand $167.0 million at June 30, 2008, and $148.3 million at December 31, 2007, of precious metals owned by financial institutions, 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 $725.7 million at June 30, 2008, and $713.5 million at December 31, 2007.

6. Financing and Long-term Debt

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

		June 30,				December 31,
		2008				2007
		(Dollars in thousands)
Loans payable to banks		$	5,040			$	954
Current portion of long-term debt			4,123				4,490
Total		$	9,163			$	5,444

Long-term debt consisted of the following:

		June 30,				December 31,
		2008				2007
		(Dollars in thousands)
$200 million Senior Notes, 9.125%, due January 1, 2009 *		$	199,818			$	199,636
Revolving credit facility			64,130				13,857
Term loan facility			294,023				301,950
Capitalized lease obligations			7,258				8,924
Other notes			684				768
			565,913				525,135
Less current portion			(4,123	)			(4,490	)
Total		$	561,790			$	520,645

* Net of unamortized discounts.

Credit Rating

At June 30, 2008, the Company’s corporate credit rating was B1, with a positive outlook, by Moody’s Investor Services, Inc. (“Moody’s”) and B+, with a stable outlook, by Standard & Poor’s Rating Group (“S&P”).

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. In 2007, we cancelled the unused portion of the term loan facility and amended the credit facility (the “Amended Credit Facility”). At June 30, 2008, the Amended Credit Facility consisted of a $300 million revolving credit facility, which matures in 2011, and a $305 million term loan facility, which matures in 2012. As part of the agreement, we can request an increase of $50 million in the revolving credit facility. We had $227.3 million at June 30, 2008, and $277.5 million at December 31, 2007, available under the revolving credit facility, after reductions for standby letters of credit secured by this facility. In 2007, we began making periodic principal payments on the term loans. We are required to make minimum quarterly principal payments of $0.8 million from July 2008 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. In April 2008, we made a term loan principal payment of $7.2 million, consisting of the $0.8 million minimum quarterly payment and a $6.4 million additional principal payment.

The interest rates under the Amended Credit Facility are equal to the sum of (A) either (1) LIBOR or (2) the higher of the Federal Funds Rate plus 0.5% or the Prime Rate 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. The average interest rate for revolving credit borrowings was 4.5% at June 30, 2008, and 6.5% at December 31, 2007, and the effective interest rate for term loan borrowings after adjusting for the interest rate swaps was 6.1% at June 30, 2008, and 7.2% at December 31, 2007.

Senior Notes

The senior notes are due January 1, 2009. We continue to classify the senior notes as noncurrent liabilities, because we have both the intention to refinance them in a way that would extend their maturity beyond one year and the ability to do so through availability under our revolving credit facility. The senior notes are redeemable at our option at any time for the present value of the principal amount then outstanding plus the unpaid interest through maturity. The senior notes are redeemable at the option of the holders only upon a change in control of the Company combined with a rating by either Moody’s or S&P below investment grade as defined in the indenture. Currently, the ratings by Moody’s and S&P of the senior notes are below investment grade.

In June 2008, we commenced a cash tender offer to purchase any and all of the senior notes. We intend to finance the purchase of the senior notes due 2009 and related fees and expenses primarily through a proposed public offering of $200 million of senior notes due 2016. The exact terms and timing of the offering will depend upon market conditions and other factors.

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 are reported as interest expense and were $3.7 million and $3.3 million for the six months ended June 30, 2008 and 2007, respectively.

In our largest program, we sell substantially all of Ferro’s U.S. trade accounts receivable to Ferro Finance Corporation (“FFC”), a wholly-owned unconsolidated qualified special purpose entity (“QSPE”). FFC finances its acquisition of trade receivable assets by issuing beneficial interests in (securitizing) the receivables to multi-seller receivables securitization companies (the “Conduits”). In June 2008, we amended the program to reduce the maximum proceeds and the conduits’ commitment levels from $100.0 million to $75 million. Ferro had received net proceeds of $75.0 million at June 30, 2008, and $54.6 million at December 31, 2007, for outstanding receivables. FFC and the Conduits have no recourse to Ferro’s other assets for failure of debtors to pay when due, as the assets transferred are legally isolated in accordance with the U.S. bankruptcy laws. Ferro, on behalf of FFC and the Conduits, provides normal collection and administration services for the trade accounts receivable sold.

Activity from this program for the six months ended June 30 is detailed below:

		2008				2007
		(Dollars in thousands)
Trade accounts receivable sold to FFC		$	549,362			$	497,358
Cash proceeds from FFC			550,369				482,838
Trade accounts receivable collected and remitted to FFC and the conduits			529,991				482,138

In addition, we maintain several international programs to sell trade accounts receivable, primarily without recourse. The commitments supporting these programs can be withdrawn at any time and totaled $87.2 million at June 30, 2008, and $80.8 million at December 31, 2007. Ferro had received net proceeds under the international programs of $41.2 million at June 30, 2008, and $42.1 million at December 31, 2007, for outstanding receivables. Ferro provides normal collection and administration services for the trade accounts receivable sold to certain financial institutions.

Activity from these programs for the six months ended June 30 is detailed below:

		2008				2007
		(Dollars in thousands)
Trade accounts receivable sold to financial institutions		$	134,069			$	86,985
Cash proceeds from financial institutions			128,921				86,113
Trade accounts receivable collected and remitted to financial institutions for programs where we provide collection and administrative services			42,431				42,844

7. Financial Instruments

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.

Senior Notes. The carrying amount of the senior notes was $199.8 million at June 30, 2008, and $199.6 million at December 31, 2007. The fair value of the senior notes was $203.5 million at June 30, 2008, and $205.0 million at December 31, 2007. The fair value of Ferro’s senior notes is based on a third party’s estimated bid price.

Revolving credit facility. The carrying amount of the revolving credit facility was $64.1 million at June 30, 2008, and $13.9 million at December 31, 2007. The fair value of the revolving credit facility was $60.0 million at June 30, 2008, and $13.9 million at December 31, 2007. The fair value of the revolving credit facility is based on the present value of expected future cash flows and assumptions about current interest rates. Beginning in 2008 in connection with the adoption of FAS No. 157, the fair value also reflects assumptions about the creditworthiness of the Company that market participants would use in pricing the debt.

Term loan facility. The carrying amount of the term loan facility was $294.0 million at June 30, 2008, and $302.0 million at December 31, 2007. The fair value of the term loan facility was $275.5 million at June 30, 2008, and $302.0 million at December 31, 2007. The fair value of the term loan facility is based on the present value of expected future cash flows and assumptions about current interest rates. Beginning in 2008 in connection with the adoption of FAS No. 157, the fair value also reflects assumptions about the creditworthiness of the Company that market participants would use in pricing the debt.

The following financial instruments are measured and recorded at fair value on a recurring basis. 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:

						Fair Value Measurements
		June 30,				at June 30, 2008												December 31,
		2008				Level 1				Level 2				Level 3				2007
		(Dollars in thousands)
Assets
Foreign currency forward contracts		$	50			$	—			$	50			$	—			$	16
Precious metals forward contracts			7				—				7				—				755
Total fair value		$	57			$	—			$	57			$	—			$	771
Liabilities
Interest rate swaps		$	(7,168	)		$	—			$	(7,168	)		$	—			$	(8,109	)
Foreign currency forward contracts			(618	)			—				(618	)			—				(284	)
Raw material commodity swaps			(1,025	)			—				(1,025	)			—				(1,499	)
Precious metals forward contracts			(10	)			—				(10	)			—				—
Total fair value		$	(8,821	)		$	—			$	(8,821	)		$	—			$	(9,892	)

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. We mark these agreements to fair value and recognize the resulting gains or losses as other comprehensive income or loss. In 2007, the fair value of the interest rate swaps was based on settlement prices provided by the counterparties. Beginning in 2008 in connection with the adoption of FAS No. 157, the fair value of the 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.

Foreign currency forward contracts. We manage foreign currency risks principally by entering into forward contracts to mitigate the impact of currency fluctuations on transactions. We mark these contracts to fair value based on market prices for comparable contracts and recognize the resulting gains or losses in net foreign currency gains or losses.

Raw material commodity swaps. We hedge a portion of our exposure to changes in the pricing of certain raw material commodities principally using swap arrangements that allow us to fix the price of the commodities for future purchases. We mark these contracts to fair value based on market prices for comparable contracts and recognize the resulting gains or losses as other comprehensive income or loss. After the contracts mature and the materials are sold, the gains and losses are recognized as part of cost of sales.

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. Some of these agreements, with purchase commitments totaling $18.0 million at June 30, 2008, are designated as normal purchase contracts and are not marked to fair value. We mark the remaining precious metal contracts to fair value based on market prices for comparable contracts and recognize the resulting gains or losses as miscellaneous income or expense.

8. Income Taxes

Income tax expense for the six months ended June 30, 2008 was $15.1 million or 44.9% of pre-tax income compared with $7.3 million or 40.4% in the prior-year six months ended June 30, 2007. The reasons for the increase in the effective tax rate were a change in the mix of income by country, loss of a tax holiday and a decrease in the U.S. tax cost on foreign dividends. The effective tax rate was also impacted by an unfavorable tax decision in Brazil, an increase in the foreign valuation allowance and favorable adjustments to prior year accruals that in aggregate totaled $2.2 million.

During the first six months of 2008, we allocated income tax expense (benefit) directly to shareholders’ equity for the following items: $0.3 million for raw material commodity swap adjustments, $0.3 million for interest rate swap adjustments, and $0.2 million for the adjustments to initially apply FAS No. 158. During the first six months of 2007, we allocated income tax expense (benefit) directly to shareholders’ equity for the following items: $0.2 million for postretirement benefit liability adjustments, $(1.0) million for raw material commodity swap adjustments, and $(0.5) for interest rate swap adjustments.

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, including Spain, France, Germany, Netherlands, Italy, Japan, China, Portugal, and the United Kingdom. With few exceptions, we are not subject to federal, state, local or non-U.S. income tax examinations for years before 2000.

9. Contingent Liabilities

In February 2003, we were requested to produce documents in connection with an investigation by the United States Department of Justice into possible antitrust violations in the heat stabilizer industry. In April 2006, we were notified by the Department of Justice that the Government had closed its investigation and that the Company was relieved of any obligation to retain documents that were responsive to the Government’s earlier document request. Before closing its investigation, the Department of Justice took no action against the Company or any of its current or former employees. The Company was previously named as a defendant in several lawsuits alleging civil damages and requesting injunctive relief relating to the conduct the Government was investigating and has recently been named in four more indirect purchaser lawsuits related to an existing lawsuit in the Eastern District of Pennsylvania. We entered into a verbal agreement in June 2007 and a definitive written settlement agreement in July 2007 with the direct purchasers in one of these class action civil lawsuits related to alleged antitrust violations in the heat stabilizer industry. The settlement agreement was approved by the United States District Court for the Eastern District of Pennsylvania in December 2007. Although the Company decided to bring this matter to a close through settlement, the Company did not admit to any of the alleged violations and continues to deny any wrongdoing. The Company is vigorously defending the remaining six indirect purchaser civil actions alleging antitrust violations in the heat stabilizer industry, which are in their preliminary stages; therefore, we cannot determine the outcomes of these lawsuits at this time. In December 2006, we filed a lawsuit against the former owner of our heat stabilizer business seeking indemnification for the defense of these lawsuits and any resulting payments by the Company. These payments include approximately $6.3 million to the class of direct purchasers and a plaintiff that opted out of the class of direct purchasers and entered into a separate settlement agreement with the Company. In April 2008, the United States District Court for the Northern District of Ohio dismissed our lawsuit, and we have appealed the court’s decision to the Sixth Circuit Court of Appeals.

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 $18.1 million at June 30, 2008, and $17.7 million at December 31, 2007. These agreements primarily relate to Ferro’s insurance programs, potential environmental remediation liabilities, 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.

10. Retirement Benefits

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

		U.S. Pension Plans								Non-U.S. Pension Plans								Other Benefit Plans
		2008				2007				2008				2007				2008				2007
		(Dollars in thousands)
Components of net periodic cost:
Service cost		$	50			$	315			$	1,557			$	1,633			$	16			$	152
Interest cost			5,177				5,029				3,040				2,318				731				859
Expected return on plan assets			(5,663	)			(5,129	)			(2,203	)			(1,837	)			—				—
Amortization of prior service cost			25				39				25				28				(411	)			(293	)
Net amortization and deferral			624				1,473				55				145				—				—
Curtailment and settlement effects			—				—				—				—				—				—
Net periodic benefit cost		$	213			$	1,727			$	2,474			$	2,287			$	336			$	718

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

		U.S. Pension Plans								Non-U.S. Pension Plans								Other Benefit Plans
		2008				2007				2008				2007				2008				2007
		(Dollars in thousands)
Components of net periodic cost:
Service cost		$	100			$	631			$	3,058			$	3,225			$	32			$	304
Interest cost			10,354				10,057				5,979				4,578				1,462				1,718
Expected return on plan assets			(11,326	)			(10,252	)			(4,336	)			(3,628	)			—				—
Amortization of prior service cost			50				79				49				55				(822	)			(586	)
Net amortization and deferral			1,248				2,949				112				286				—				—
Curtailment and settlement effects			—				250				—				—				—				—
Net periodic benefit cost		$	426			$	3,714			$	4,862			$	4,516			$	672			$	1,436

The change in net periodic cost is due primarily to restructuring activities related to closing the Company’s Niagara Falls, New York, and Rotterdam, Netherlands, manufacturing facilities, the freezing of pension benefits at several U.S. plants, and the limiting of eligibility for retiree medical and life insurance coverage for nonunion employees. In the first quarter of 2007, we recorded curtailment losses of $0.3 million for pension benefits related to the Niagara Falls, New York, closing.

11. Stock-Based Compensation

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

		2008				2007
		(Dollars in thousands)
Stock options		$	1,087			$	1,573
Performance shares			(178	)			615
Deferred stock units			267				308
Restricted shares			172				—
Total		$	1,348			$	2,496

The following table contains information regarding the stock-based compensation as of and for the six month period ended June 30, 2008:

						Weighted-				Aggregate Grant				Remaining
		Number of				Average Fair				Date Fair Value				Service or
		Shares or Units				Value per Share				of Shares or				Performance
		Granted				or Unit				Units Granted				Period
										(Dollars in				(In years)
										thousands)
Stock options			488,100			$	4.18			$	2,040				3.7
Performance shares			77,825				17.26				1,343				2.7
Deferred stock units			34,200				16.69				571				0.7
Restricted shares			92,400				17.22				1,591				2.7

The stock-based compensation transaction in shareholders’ equity consisted of the following for the six months ended June 30, 2008:

		Common Shares
		in Treasury								Paid-in
		Shares				Amount				Capital
		(In thousands)
Stock options			—			$	324			$	1,404
Performance shares, net			36				25				(804	)
Deferred stock units			(32,900	)			140				—
Directors’ deferred compensation			—				(397	)			397
Preferred stock conversions			(24,070	)			435				—
Restricted shares			(92,400	)			1,804				(1,441	)
Total			(149,334	)		$	2,331			$	(444	)

Restricted Share Awards

Under the 2006 Long-Term Incentive Plan, the Company may award restricted shares of Ferro common stock. The restricted shares vest in three years from the date of the award and are forfeited if the recipient’s employment terminates, except in the case of death or disability. During the vesting period, the recipient is not entitled to exercise rights pertaining to the restricted shares, including the right to vote such shares, and dividends on the restricted shares are deferred without interest. Following the vesting period, the recipient may not dispose of the shares for two years, without Ferro’s prior written consent. The first restricted shares were awarded in 2008.

12. Restructuring and Cost Reduction Programs

During 2008, 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.

In July 2006, we announced that we were restructuring our European operations, including a portion of our Performance Coatings and Color and Glass Performance Materials segments. This program affected operations in Spain, Italy, Portugal, France, and Germany. We expect these actions to significantly reduce the cost structure of our manufacturing operations. As a result of these activities, since July 2006, we reduced our workforce by approximately 117 employees and are evaluating further workforce reductions. Revised total anticipated charges through 2009 amount to $10.9 million. Charges incurred through 2007 amounted to $9.0 million. Restructuring charges for the six months ended June 30, 2008, include $1.0 million for employee severance costs and $0.1 million of accrual reversals.

In May 2007, we initiated discussions with representatives of workers at our Rotterdam, Netherlands, Porcelain Enamel manufacturing site regarding possible restructuring actions. In September 2007, we reached an agreement with the Rotterdam Works Council. As a result, the Company will discontinue porcelain enamel frit manufacturing at its Rotterdam facility in 2008 and will consolidate production at other European facilities. This consolidation will result in the reduction of 84 employees. Restructuring charges are expected to total $25.8 million with completion anticipated by the end of the third quarter 2008. During 2007, we recorded $11.8 million in restructuring charges and an additional $0.5 million for inventory write downs included in cost of sales. During the first half of 2008, we recorded $3.1 million for employee severance costs, $3.0 million for future minimum lease obligations, and $0.4 million in other costs.

In November 2007, March 2008 and April 2008, we initiated additional restructuring plans for our Performance Coatings, Color and Glass Performance Materials, Polymer Additives, and Specialty Plastics segments. These restructuring plans will result in the reduction of approximately 120 employees. Total estimated employee termination charges through 2008 are $6.2 million. During 2007, we recorded total charges of $1.4 million. In the first half of 2008, we recorded $4.0 million of additional restructuring charges.

In February 2008, we announced the closing of a Plastics facility in Aldridge, United Kingdom. This closure will result in the reduction of 10 employees at the anticipated cost of $1.1 million. During the first half of 2008, we recorded $0.2 million in severance costs and $0.2 million in lease termination costs.

In June 2008, we announced the partial closing of a Performance Coatings facility in Americana, Brazil. This closure will result in the reduction of 67 employees at the anticipated cost of $1.5 million. During the first half of 2008, we recorded $1.0 million in severance costs and $0.4 million of asset impairment costs.

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

		Employee
		Termination				Other				Asset
		Benefits				Costs				Impairment				Total
		(Dollars in thousands)
Balance, December 31, 2007		$	8,381			$	1,560			$	—			$	9,941
Restructuring charges			9,110				3,689				439				13,238
Cash payments			(9,563	)			(523	)			—				(10,086	)
Currency translation adjustment			492				211				—				703
Non-cash items			(83	)			—				(439	)			(522	)
Balance, June 30, 2008		$	8,337			$	4,937			$	—			$	13,274

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

13. Discontinued Operations

Discontinued operations relate to the Powder Coatings, Petroleum Additives and Specialty Ceramics businesses that we sold in 2002 and 2003. There were no sales or cash flows from investing or financing activities from discontinued operations in the six months ended June 30, 2008 or 2007. The loss (income) from discontinued operations includes ongoing legal costs and reserve adjustments directly related to discontinued operations. Discontinued operations resulted in the following pre-tax losses (income) and related income tax benefits (expense):

		Three months ended June 30,								Six months ended June 30,
		2008				2007				2008				2007
		(Dollars in thousands)
Pre-tax (income) losses		$	(15	)		$	95			$	26			$	351
Tax (expense) benefits			(6	)			37				10				137
Net of tax (income) losses		$	(9	)		$	58			$	16			$	214

We have continuing environmental remediation obligations that are related to these divestitures, and we had accrued $3.3 million at June 30, 2008, and $3.3 million at December 31, 2007, for these matters.

14. Earnings per Share

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

		Three months ended								Six months ended
		June 30,								June 30,
		2008				2007				2008				2007
		(In thousands, except per share amounts)
Basic earnings per share computation:
Net income available to common shareholders		$	9,142			$	4,281			$	18,055			$	10,074
(Subtract) add: (Gain) loss from discontinued operations			(9	)			58				16				214
		$	9,133			$	4,339			$	18,071			$	10,288
Weighted-average common shares outstanding			43,251				42,906				43,206				42,807
Basic earnings per share from continuing operations		$	0.21			$	0.10			$	0.42			$	0.24
Diluted earnings per share computation:
Net income available to common shareholders		$	9,142			$	4,281			$	18,055			$	10,074
(Subtract) add: (Gain) loss from discontinued operations			(9	)			58				16				214
Plus: Convertible preferred stock			—				—				—				—
		$	9,133			$	4,339			$	18,071			$	10,288
Weighted-average common shares outstanding			43,251				42,906				43,206				42,807
Assumed conversion of convertible preferred stock			—				—				—				—
Assumed satisfaction of performance share conditions			65				47				70				51
Assumed satisfaction of deferred stock unit conditions			11				14				7				10
Assumed exercise of stock options			—				—				—				—
Weighted-average diluted shares outstanding			43,327				42,967				43,283				42,868
Diluted earnings per share from continuing operations		$	0.21			$	0.10			$	0.42			$	0.24

15. Comprehensive Income

The components of comprehensive income were as follows:

		Three months ended								Six months ended
		June 30,								June 30,
		2008				2007				2008				2007
		(Dollars in thousands)
Net income		$	9,365			$	4,540			$	18,505			$	10,619
Other comprehensive income, net of tax:
Foreign currency translation adjustments			(282	)			5,842				21,247				12,742
Postretirement benefit liability adjustments			(39	)			(266	)			(414	)			(3	)
Raw material commodity swap adjustments			(393	)			(1,121	)			455				(1,512	)
Interest rate swap adjustments			3,209				(751	)			606				(751	)
Comprehensive income		$	11,860			$	8,244			$	40,399			$	21,095

16. Reporting for Segments

The Company has six reportable segments: Performance Coatings, Electronic Materials, Color and Glass Performance Materials, Polymer Additives, Specialty Plastics and Other Businesses. We have combined our Tile Coating Systems and Porcelain Enamel business units into one reportable segment, Performance Coatings, based on their similar economic and operating characteristics. We have also combined two of our segments, Pharmaceuticals and Fine Chemicals, into one reportable segment, Other Businesses, because they do not meet the quantitative thresholds for separate disclosure.

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, 2007. We measure segment income for internal reporting purposes as income from continuing operations before unallocated corporate expenses, restructuring charges, other expense (income) items, such as interest expense, and income tax expense. Unallocated corporate expenses primarily consist of corporate employment costs and professional services.

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

		Three months ended								Six months ended
		June 30,								June 30,
		2008				2007				2008				2007
		(Dollars in thousands)
Performance Coatings		$	178,504			$	158,501			$	339,296			$	297,316
Electronic Materials			156,202				108,823				297,195				221,767
Color and Glass Performance Materials			130,230				109,920				259,070				215,620
Polymer Additives			98,715				85,160				191,026				167,673
Specialty Plastics			63,609				69,797				125,402				136,758
Other Businesses			23,136				21,457				45,663				44,229
Total net sales		$	650,396			$	553,658			$	1,257,652			$	1,083,363

Below are each segment’s income and reconciliations to income before taxes from continuing operations:

		Three months ended								Six months ended
		June 30,								June 30,
		2008				2007				2008				2007
						(Dollars in thousands)
Performance Coatings		$	12,785			$	10,815			$	22,265			$	21,498
Electronic Materials			17,683				4,929				26,432				11,012
Color and Glass Performance Materials			15,547				12,668				30,983				27,735
Polymer Additives			4,599				4,053				7,318				7,159
Specialty Plastics			3,237				4,236				4,724				7,375
Other Businesses			915				3,698				4,760				7,389
Total segment income			54,766				40,399				96,482				82,168
Unallocated corporate expenses			12,573				17,258				19,627				31,004
Restructuring charges			9,031				332				13,238				1,863
Other expense, net			15,804				15,403				30,013				31,126
Income before taxes from continuing operations		$	17,358			$	7,406			$	33,604			$	18,175

We sell our products throughout the world, and we attribute sales to countries based on the country where we generate the customer invoice. We have detailed net sales by geographic region in the table below:

		Three months ended								Six months ended
		June 30,								June 30,
		2008				2007				2008				2007
		(Dollars in thousands)
United States		$	277,902			$	239,612			$	530,176			$	478,018
International			372,494				314,046				727,476				605,345
Total net sales		$	650,396			$	553,658			$	1,257,652			$	1,083,363

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

Overview

Net income for the three months ended June 30, 2008, increased to $9.4 million from $4.5 million in the second quarter of 2007. Income increased primarily as a result of higher sales that led to increased gross profit; lower selling, general and administrative expense; and lower interest expense. Partially offsetting these improvements was an increase in restructuring charges during the quarter.

Net sales increased by 17.5% as a result of higher sales in our Electronic Materials, Color and Glass Performance Materials, Performance Coatings, Polymer Additives, and Other Businesses segments. Sales in the Specialty Plastics segment declined compared with the second quarter of 2007. The primary drivers for the increased sales were product price changes, including the pass-through of higher precious metal costs, changes in foreign currency exchange rates and increased sales volumes.

Raw material costs continued to be highly volatile in the quarter, with petrochemical-based raw materials, natural oils and fat-based inputs rising the most quickly. Raw material costs increased, in aggregate, across the business although costs of some individual raw materials have moderated during the past several quarters. Gross profit increased during the quarter as a result of higher sales. Gross profit percentage declined compared with the second quarter of 2007 primarily as a result of increased precious metal costs, which we generally pass through to customers with minimal gross profit contribution.

Selling, general and administrative (“SG&A”) expenses declined in the 2008 second quarter. SG&A expenses as a percent of sales declined to 12.5% from 15.2% in the second quarter of 2007. The beneficial effects of prior restructuring and other expense reduction efforts reduced SG&A expenses in the 2008 second quarter, while unfavorable changes in foreign currency exchange rates increased SG&A expenses as measured in U.S. dollars. In addition, SG&A expenses were higher in the second quarter of 2007 partly as a result of litigation settlement costs.

Interest expense declined in the second quarter compared with the prior-year period primarily as a result of lower interest rates on our floating-rate borrowings, partially offset by higher average borrowings.

Outlook

Economic conditions continue to be mixed, with an outlook for slower general economic growth in most markets. Markets in the United States that are related to residential housing, automobiles and automobile parts, and appliances are expected to continue a pattern of weak customer demand that has existed for the past year. This market weakness is expected to negatively affect the volume of products sold in our Specialty Plastics, Polymer Additives, Color and Glass Performance Materials, and Performance Coatings segments. Markets outside the United States are generally stronger, although rates of growth are expected to be lower than levels experienced in 2007. Customer demand for our products in continental Europe has been affected by slower economic growth. Demand from customers in regions we supply from Europe, such as North Africa, the Middle East and Central Europe, continues to be relatively strong. Demand growth in Asia continues to be strong for a number of our products, particularly our conductive metal pastes used in solar cell manufacturing. The demand for these pastes is expected to continue an upward trend, although rapid expansion of capacity among solar cell manufacturers could lead to some increased demand volatility due to short-term supply and demand imbalances in the future.

We expect to continue to record charges associated with our current and future restructuring programs, particularly related to our rationalization of the manufacturing assets in our European operations.

Factors that could adversely affect our future financial performance are described under the heading “Risk Factors” of Item 1A of Part II of this Quarterly Report on Form 10-Q for the quarter ended June 30, 2008.

Results of Operations

Comparison of the three months ended June 30, 2008 and 2007

		Three months ended
		June 30,
		2008				2007				$ Change				% Change
		(Dollars in thousands,
		except per share amounts)
Net sales		$	650,396			$	553,658			$	96,738				17.5	%
Cost of sales			527,012				446,131				80,881				18.1	%
Gross profit			123,384				107,527				15,857				14.7	%
Gross profit percentage			19.0	%			19.4	%
Selling, general and administrative expenses			81,191				84,386				(3,195	)			(3.8	%)
Restructuring charges			9,031				332				8,699				2,620.2	%
Other expense (income):
Interest expense			13,214				14,286				(1,072	)			(7.5	%)
Interest earned			(142	)			(189	)			47				(24.9	%)
Foreign currency losses, net			650				423				227				53.7	%
Miscellaneous expense, net			2,082				883				1,199				135.8	%
Income before taxes			17,358				7,406				9,952				134.4	%
Income tax expense			8,002				2,808				5,194				185.0	%
Income from continuing operations			9,356				4,598				4,758				103.5	%
(Gain) loss on disposal of discontinued operations, net of tax			(9	)			58				(67	)			(115.5	%)
Net income		$	9,365			$	4,540			$	4,825				106.3	%
Diluted earnings per share		$	0.21			$	0.10			$	0.11				110.0	%

Sales for the quarter ended June 30, 2008, increased by 17.5%, driven by increased product pricing and favorable product mix, favorable changes in foreign currency exchange rates and improved sales volume. Sales volume increased the most strongly in the Electronic Materials and Performance Coatings segments. Sales volume declined in Specialty Plastics and Polymer Additives. Sales increased in Europe, the United States, Asia and Latin America compared with the second quarter of 2007.

Gross profit was higher in the 2008 second quarter as a result of increased product pricing, higher sales volume and manufacturing cost reduction programs, partially offset by higher raw material costs. Gross profit was reduced by $1.4 million in the quarter as a result of asset write-offs and costs related to manufacturing rationalization activities. Charges for manufacturing rationalization activities reduced gross profit by $1.9 million in the second quarter of 2007. Gross profit percentage was negatively impacted by higher raw material costs, including precious metal costs. Precious metal costs are generally passed through to customers with minimal gross profit contribution.

Selling, general and administrative (“SG&A”) expenses declined to 12.5% of net sales in the 2008 second quarter compared with 15.2% of net sales in the prior-year period. The 2008 second-quarter SG&A expense included charges of $2.4 million primarily related to corporate development activities, asset write-offs, and employee severance expenses. The 2007 second-quarter SG&A expenses included an increased reserve for litigation settlements and other charges totaling $7.8 million. The 2008 second quarter expenses benefited from prior-period restructuring initiatives and other expense reduction activities, and were increased by changes in foreign currency exchange rates.

Restructuring charges of $9.0 million were recorded in the 2008 second quarter, up from $0.3 million in the second quarter of 2007. The 2008 second quarter charges were primarily related to our manufacturing rationalization activities in Europe and Latin America related to our Performance Coatings and Color and Glass Performance Materials segments.

Interest expense declined in the 2008 second quarter primarily as a result of lower average interest rates on our variable-rate borrowings, partially offset by higher borrowing levels.

Miscellaneous expense increased in the second quarter of 2008 primarily as a result of an increased provision for an environmental contingency in Latin America related to a previously closed manufacturing property.

Income tax expense for the three months ended June 30, 2008 was $8.0 million or 46.1% of pre-tax income compared with $2.8 million or 37.9% of pre-tax income in the second quarter of 2007. The primary reasons for the increase in the effective tax rate were a change in the mix of income by country, loss of a tax holiday and a decrease in the U.S. tax cost on foreign dividends. The effective tax rate was also impacted by an unfavorable tax decision in Brazil and favorable adjustments to prior-year accruals that increased tax expense in the 2008 second quarter by $1.6 million, in aggregate.

There were no new businesses included in discontinued operations in the second quarter of 2008.

		Three months ended
		June 30,
		2008				2007				$ Change				% Change
		(Dollars in thousands)
Segment Sales
Performance Coatings		$	178,504			$	158,501			$	20,003				12.6	%
Electronic Materials			156,202				108,823				47,379				43.5	%
Color & Glass Performance Materials			130,230				109,920				20,310				18.5	%
Polymer Additives			98,715				85,160				13,555				15.9	%
Specialty Plastics			63,609				69,797				(6,188	)			(8.9	%)
Other Businesses			23,136				21,457				1,679				7.8	%
Total segment sales		$	650,396			$	553,658			$	96,738				17.5	%
Segment Operating Income
Performance Coatings		$	12,785			$	10,815			$	1,970				18.2	%
Electronic Materials			17,683				4,929				12,754				258.8	%
Color & Glass Performance Materials			15,547				12,668				2,879				22.7	%
Polymer Additives			4,599				4,053				546				13.5	%
Specialty Plastics			3,237				4,236				(999	)			(23.6	%)
Other Businesses			915				3,698				(2,783	)			(75.3	%)
Total segment operating income		$	54,766			$	40,399			$	14,367				35.6	%