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 March 31, 2007

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934   For the transition period from                      to

Commission File Number 1-584

FERRO CORPORATION

(Exact name of registrant as specified in its charter)

Ohio		34-0217820
(State of Corporation)		(IRS Employer Identification No.)

1000 Lakeside Avenue
Cleveland, OH		44114
(Address of Principal executive offices)		(Zip Code)

216-641-8580
(Telephone Number)

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

Indicate by check mark whether the registrant 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

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 April 30, 2007, there were 43,392,635 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 23
Item 3		Quantitative and Qualitative Disclosures about Market Risk		Page 31
Item 4		Controls and Procedures		Page 32
PART II
Item 1		Legal Proceedings		Page 33
Item 1A		Risk Factors		Page 33
Item 2		Unregistered Sales of Equity Securities and Use of Proceeds		Page 33
Item 3		Defaults Upon Senior Securities		Page 33
Item 4		Submission of Matters to a Vote of Security Holders		Page 33
Item 5		Other Information		Page 33
Item 6		Exhibits		Page 33
EX-18.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Ferro Corporation and Consolidated Subsidiaries

Condensed Consolidated Statements of Income

		Three months ended
		March 31,
						Adjusted
		2007				2006
		(Dollars in thousands,
		except per share amounts)
Net sales		$	529,705			$	505,153
Cost of sales			422,925				397,319
Gross profit			106,780				107,834
Selling, general and administrative expenses			78,757				79,104
Restructuring charges			1,531				—
Other expense (income):
Interest expense			17,446				13,250
Interest earned			(965	)			(744	)
Foreign currency transactions, net			511				321
Miscellaneous (income) expense, net			(1,269	)			3,400
Income before taxes			10,769				12,503
Income tax expense			4,534				4,107
Income from continuing operations			6,235				8,396
Loss on disposal of discontinued operations, net of tax			156				126
Net income			6,079				8,270
Dividends on preferred stock			286				328
Net income available to common shareholders		$	5,793			$	7,942
Per common share data
Basic earnings :
From continuing operations		$	0.14			$	0.19
From discontinued operations			0.00				0.00
		$	0.14			$	0.19
Diluted earnings:
From continuing operations		$	0.14			$	0.19
From discontinued operations			0.00				0.00
		$	0.14			$	0.19
Cash dividends declared		$	0.145			$	0.145

See accompanying notes to condensed consolidated financial statements.

Ferro Corporation and Consolidated Subsidiaries

Condensed Consolidated Balance Sheets

						Adjusted
		March 31,				December 31,
		2007				2006
		(Dollars in thousands)
ASSETS
Current assets
Cash and cash equivalents		$	17,541			$	16,985
Accounts and trade notes receivable, net			235,872				220,899
Note receivable from Ferro Finance Corporation			18,590				16,083
Inventories			290,548				269,234
Deposits for precious metals			400				70,073
Deferred income taxes			12,969				12,291
Other current assets			27,346				25,877
Total current assets			603,266				631,442
Other assets
Property, plant and equipment, net			526,786				526,802
Goodwill and other intangible assets, net			406,148				406,340
Deferred income taxes			89,934				94,490
Other non-current assets			103,554				82,528
Total assets		$	1,729,688			$	1,741,602
LIABILITIES and SHAREHOLDERS’ EQUITY
Current liabilities
Loans payable and current portion of long-term debt		$	5,956			$	10,764
Accounts payable			250,036				237,018
Income taxes			—				8,951
Accrued payrolls			37,278				33,164
Accrued expenses and other current liabilities			81,989				91,150
Total current liabilities			375,259				381,047
Other liabilities
Long-term debt, less current portion			534,819				581,654
Postretirement and pension liabilities			192,188				194,427
Deferred income taxes			17,901				11,037
Other non-current liabilities			56,008				21,599
Total liabilities			1,176,175				1,189,764
Series A convertible preferred stock			16,118				16,787
Shareholders’ equity
Common stock			52,323				52,323
Paid-in capital			157,524				158,504
Retained earnings			588,267				600,638
Accumulated other comprehensive loss			(58,366	)			(65,138	)
Common shares in treasury, at cost			(202,353	)			(211,276	)
Total shareholders’ equity			537,395				535,051
Total liabilities and shareholders’ equity		$	1,729,688			$	1,741,602

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, except per share data)
Balances at December 31, 2006 - Adjusted			9,458			$	(211,276	)		$	52,323			$	158,504			$	600,638			$	(65,138	)		$	535,051
Net income																			6,079								6,079
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment																							6,900				6,900
Postemployment benefit liability adjustments																							263				263
Raw material commodity swap adjustments																							(391	)			(391	)
Total comprehensive income																											12,851
Cash dividends:
Common																			(6,243	)							(6,243	)
Preferred																			(286	)							(286	)
Federal tax benefits																			12								12
Transactions involving benefit plans			(498	)			8,923								(980	)											7,943
Adjustment to initially apply FIN No. 48 as of January 1, 2007																			(11,933	)							(11,933	)
Balances at March 31, 2007			8,960			$	(202,353	)		$	52,323			$	157,524			$	588,267			$	(58,366	)		$	537,395

See accompanying notes to condensed consolidated financial statements.

Ferro Corporation and Consolidated Subsidiaries

Condensed Consolidated Statements of Cash Flows

		Three months ended
		March 31,
						Adjusted
		2007				2006
		(Dollars in thousands)
Cash flows from operating activities
Net income		$	6,079			$	8,270
Depreciation and amortization			21,779				17,992
Precious metals deposits			69,673				(60,000	)
Accounts and trade notes receivable, inventories, and accounts payable			(20,036	)			(36,792	)
Other changes in current assets and liabilities, net			(10,729	)			(10,600	)
Other adjustments, net			(2,977	)			2,651
Net cash used for continuing operations			63,789				(78,479	)
Net cash provided by (used for) discontinued operations			12				(208	)
Net cash used for operating activities			63,801				(78,687	)
Cash flows from investing activities
Capital expenditures for property, plant and equipment			(12,811	)			(8,247	)
Proceeds from sale of assets and businesses			1,964				835
Other investing activities			158				(246	)
Net cash used for investing activities			(10,689	)			(7,658	)
Cash flows from financing activities
Net (repayments) borrowings under short term facilities			(5,983	)			341
Proceeds from revolving credit facility			190,034				276,400
Proceeds from term loan facility			55,000				—
Principal payments on revolving credit facility			(290,601	)			(181,400	)
Debt issue costs paid			—				(4,750	)
Proceeds from exercise of stock options			6,128				2,126
Cash dividends paid			(6,529	)			(6,466	)
Other financing activities			(863	)			(1,099	)
Net cash provided by financing activities			(52,814	)			85,152
Effect of exchange rate changes on cash			258				317
(Decrease) increase in cash and cash equivalents			556				(876	)
Cash and cash equivalents at beginning of period			16,985				17,413
Cash and cash equivalents at end of period		$	17,541			$	16,537
Cash paid during the period for:
Interest		$	20,173			$	14,096
Income taxes		$	3,698			$	1,545

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, 2006. 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 months ended March 31, 2007, are not necessarily indicative of the results expected in subsequent quarters or for the full year.

2. Accounting Methods Adopted in the Three Months Ended March 31, 2007

     On January 1, 2007, we elected to change our costing method for our inventories not already costed under the lower of cost or market using the first-in, first-out (“FIFO”) method, while in prior years, these inventories were costed under the lower of cost of market using the last-in, first-out (“LIFO”) method. The percentage of inventories accounted for under the LIFO method for the carrying amount of U.S. inventories and consolidated inventories was 13.8% and 6.2%, respectively, at December 31, 2006. We believe the FIFO method is preferable as it conforms the inventory costing methods for all of our inventories to a single method and improves comparability with our industry peers. The FIFO method also better reflects current acquisition cost of those inventories on our consolidated balance sheets and enhances the matching of future cost of sales with revenues. In accordance with Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections, (“SFAS No. 154”), all prior periods presented have been adjusted to apply the new method retrospectively. The effect of the change in our inventory costing method includes the LIFO reserve and related impact on the obsolescence reserve. This change increased our inventory balance by $13.7 million and increased retained earnings, net of income tax effects, by $8.5 million as of January 1, 2006.

     On January 1, 2007, we also changed our accounting method of accruing for major planned overhauls. FASB Staff Position No. AUG AIR-1, Accounting for Planned Maintenance Activities, (“AUG AIR-1”), prohibits our prior policy of accruing for major planned overhauls in advance of when the actual costs are incurred. Under our new policy, the costs of major planned overhauls are expensed when incurred. All prior periods presented have been adjusted to apply the new method retrospectively. Adoption of this accounting pronouncement decreased our accrued expenses and other current liabilities by $2.2 million and increased retained earnings, net of income tax effects, by $1.5 million as of January 1, 2006.

     On January 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (“FIN 48”). FIN 48 clarifies what criteria must be met prior to recognition of the financial statement benefit of a position taken or expected to be taken in a tax return. This interpretation also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures. The adoption of this interpretation decreased the opening balance of retained earnings by $11.9 million as of January 1, 2007. We have elected to continue to report interest and penalties as income tax expense.

     On January 1, 2007, we also adopted FASB Statement No. 156, Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140, (“FAS No. 156”). This statement requires an entity to recognize at fair value, if practicable, a servicing asset or liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in certain situations primarily relating to off-balance sheet arrangements. Ferro provides normal collection and administration services for its U.S. trade accounts receivable sold to Ferro Finance Corporation (“FFC”). Ferro receives a fee for these services that approximates their fair value. Therefore, the adoption of FAS No. 156 did not have an effect on our consolidated financial statements.

     We have presented the effects of the changes in accounting principles for inventory costs and for major planned overhauls for 2007 and 2006 below. We combined certain financial statement line items if they were not affected by the changes in accounting principles.

Condensed Consolidated Statements of Income

		Three months ended March 31, 2007
		Computed				Change to				Reported
		under LIFO				FIFO				under FIFO
		(Dollars in thousands, except per share amounts)
Net sales		$	529,705			$	—			$	529,705
Cost of sales			423,024				(99	)			422,925
Gross profit			106,681				99				106,780
Selling, general and administrative expenses			78,757				—				78,757
Restructuring charges			1,531				—				1,531
Other expense			15,723				—				15,723
Income before taxes			10,670				99				10,769
Income tax expense			4,495				39				4,534
Income from continuing operations			6,175				60				6,235
Loss on disposal of discontinued operations, net of tax			156				—				156
Net income			6,019				60				6,079
Dividends on preferred stock			286				—				286
Net income available to common shareholders		$	5,733			$	60			$	5,793
Per common share data
Basic earnings:
From continuing operations		$	0.14			$	0.00			$	0.14
From discontinued operations			0.00				0.00				0.00
		$	0.14			$	0.00			$	0.14
Diluted earnings:
From continuing operations		$	0.14			$	0.00			$	0.14
From discontinued operations			0.00				0.00				0.00
		$	0.14			$	0.00			$	0.14

		Three months ended March 31, 2006
		Originally				Change to				Adoption of
		Reported				FIFO				AUG AIR-1				Adjusted
		(Dollars in thousands, except per share amounts)
Net sales		$	505,153			$	—			$	—			$	505,153
Cost of sales			397,246				178				(105	)			397,319
Gross profit			107,907				(178	)			105				107,834
Selling, general and administrative expenses			79,104				—				—				79,104
Other expense			16,227				—				—				16,227
Income before taxes			12,576				(178	)			105				12,503
Income tax expense			4,138				(66	)			35				4,107
Income from continuing operations			8,438				(112	)			70				8,396
Loss on disposal of discontinued operations, net of tax			126				—				—				126
Net income			8,312				(112	)			70				8,270
Dividends on preferred stock			328				—				—				328
Net income available to common shareholders		$	7,984			$	(112	)		$	70			$	7,942
Per common share data
Basic earnings:
From continuing operations		$	0.19			$	0.00			$	0.00			$	0.19
From discontinued operations			0.00				0.00				0.00				0.00
		$	0.19			$	0.00			$	0.00			$	0.19
Diluted earnings:
From continuing operations		$	0.19			$	0.00			$	0.00			$	0.19
From discontinued operations			0.00				0.00				0.00				0.00
		$	0.19			$	0.00			$	0.00			$	0.19

Condensed Consolidated Balance Sheets

		March 31, 2007
		Computed				Change to				Reported
		under LIFO				FIFO				under FIFO
		(Dollars in thousands)
ASSETS
Current assets
Inventories		$	275,728			$	14,820			$	290,548
Deferred income taxes			18,623				(5,654	)			12,969
Other current assets			299,749				—				299,749
Total current assets			594,100				9,166				603,266
Other assets			1,126,422				—				1,126,422
Total assets		$	1,720,522			$	9,166			$	1,729,688
LIABILITIES and SHAREHOLDERS’ EQUITY
Current liabilities		$	375,259			$	—			$	375,259
Other liabilities			800,916				—				800,916
Total liabilities			1,176,175				—				1,176,175
Series A convertible preferred stock			16,118				—				16,118
Shareholders’ equity
Retained earnings			579,101				9,166				588,267
Other shareholders’ equity			(50,872	)			—				(50,872	)
Total shareholders’ equity			528,229				9,166				537,395
Total liabilities and shareholders’ equity		$	1,720,522			$	9,166			$	1,729,688

		December 31, 2006
		Originally				Change to				Adoption of
		Reported				FIFO				AUG AIR-1				Adjusted
		(Dollars in thousands)
ASSETS
Current assets
Inventories		$	254,513			$	14,721			$	—			$	269,234
Deferred income taxes			18,175				(5,615	)			(269	)			12,291
Other current assets			349,917				—				—				349,917
Total current assets			622,605				9,106				(269	)			631,442
Other assets
Deferred income taxes			94,662				—				(172	)			94,490
Other non-current assets			1,015,670				—				—				1,015,670
Total assets		$	1,732,937			$	9,106			$	(441	)		$	1,741,602
LIABILITIES and SHAREHOLDERS’ EQUITY
Current liabilities
Income taxes		$	8,732			$	—			$	219			$	8,951
Accrued expenses and other current liabilities			93,206				—				(2,056	)			91,150
Other current liabilities			280,946				—				—				280,946
Total current liabilities			382,884				—				(1,837	)			381,047
Other liabilities			808,717				—				—				808,717
Total liabilities			1,191,601				—				(1,837	)			1,189,764
Series A convertible preferred stock			16,787				—				—				16,787
Shareholders’ equity
Retained earnings			590,136				9,106				1,396				600,638
Other shareholders’ equity			(65,587	)			—				—				(65,587	)
Total shareholders’ equity			524,549				9,106				1,396				535,051
Total liabilities and shareholders’ equity		$	1,732,937			$	9,106			$	(441	)		$	1,741,602

Condensed Consolidated Statements of Cash Flows

		Three months ended March 31, 2007
		Computed				Change to				Reported
		under LIFO				FIFO				under FIFO
		(Dollars in thousands)
Cash flows from operating activities
Net income		$	6,019			$	60			$	6,079
Depreciation and amortization			21,779				—				21,779
Precious metals deposits			69,673				—				69,673
Accounts and trade notes receivable, inventories, and accounts payable			(27,097	)			(99	)			(27,196	)
Other changes in current assets and liabilities, net			(3,569	)			—				(3,569	)
Other adjustments, net			(3,016	)			39				(2,977	)
Net cash used for continuing operations			63,789				—				63,789
Net cash used for discontinued operations			12				—				12
Net cash used for operating activities			63,801				—				63,801
Cash flows from investing activities			(10,689	)			—				(10,689	)
Cash flows from financing activities			(52,814	)			—				(52,814	)
Effect of exchange rate changes on cash			258				—				258
(Decrease) increase in cash and cash equivalents			556				—				556
Cash and cash equivalents at beginning of period			16,985				—				16,985
Cash and cash equivalents at end of period		$	17,541			$	—			$	17,541

		Three months ended March 31, 2006
		Originally				Change to				Adoption of
		Reported				FIFO				AUG AIR-1				Adjusted
		(Dollars in thousands)
Cash flows from operating activities
Net income		$	8,312			$	(112	)		$	70			$	8,270
Depreciation and amortization			17,992				—				—				17,992
Precious metals deposits			(60,000	)			—				—				(60,000	)
Accounts and trade notes receivable, inventories, and accounts payable			(36,970	)			178				—				(36,792	)
Other changes in current assets and liabilities,net			(10,505	)			—				(95	)			(10,600	)
Other adjustments, net			2,692				(66	)			25				2,651
Net cash used for continuing operations			(78,479	)			—				—				(78,479	)
Net cash used for discontinued operations			(208	)			—				—				(208	)
Net cash used for operating activities			(78,687	)			—				—				(78,687	)
Cash flows from investing activities			(7,658	)			—				—				(7,658	)
Cash flows from financing activities			85,152				—				—				85,152
Effect of exchange rate changes on cash			317				—				—				317
(Decrease) increase in cash and cash equivalents			(876	)			—				—				(876	)
Cash and cash equivalents at beginning of period			17,413				—				—				17,413
Cash and cash equivalents at end of period		$	16,537			$	—			$	—			$	16,537

3. Reclassifications

     Interest earned in the three months ended March 31, 2006, of $0.7 million was reclassified from miscellaneous (income) expense, net, in the condensed consolidated statements of income.

4. Inventories

     As noted in Note 2, effective January 1, 2007, we elected to change our costing method for selected inventories. We applied this change in accounting principle by adjusting all prior periods presented retrospectively. Inventories consisted of the following:

						Adjusted
		March 31,				December 31,
		2007				2006
		(Dollars in thousands)
Raw materials		$	81,663			$	74,160
Work in process			47,836				44,658
Finished goods			161,049				150,416
Total		$	290,548			$	269,234

     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 $1.0 million and $0.5 million for the three months ended March 31, 2007 and 2006, respectively, and were charged to cost of sales. In November 2005, the financial institutions renewed their requirement for cash deposits from us to provide additional collateral beyond the value of the underlying precious metals. These requirements were substantially reduced in the first quarter of 2007. Outstanding collateral deposits were $0.4 million at March 31, 2007, and $70.1 million at December 31, 2006. We had on hand $125.6 million at March 31, 2007, and $120.9 million at December 31, 2006, of precious metals owned by financial institutions, measured at fair value.

5. Property, Plant and Equipment

     Property, plant and equipment is reported net of accumulated depreciation of $711.7 million at March 31, 2007, and $691.4 million at December 31, 2006.

6. Financing and Long-term Debt

     Long-term debt consisted of the following:

		March 31,				December 31,
		2007				2006
		(Dollars in thousands)
$200,000 Senior Notes, 9.125%, due 2009 *		$	199,363			$	199,273
Revolving credit facility			27,386				127,953
Term loan facility			305,000				250,000
Capital lease obligations			6,610				6,744
Other notes			850				1,008
			539,209				584,978
Less current portion			(4,390	)			(3,324	)
Total		$	534,819			$	581,654

Credit Rating

     The Company’s senior credit rating was B+ by Standard & Poor’s Rating Group (“S&P”) at March 31, 2007. The Company is not currently rated by any other debt-rating agency.

Revolving Credit and Term Loan Facilities

     In 2006, we entered into an agreement from a group of lenders for a $700 million credit facility (the “New Credit Facility”). The New Credit Facility consists of a five-year, $250 million multi-currency senior revolving credit facility and a six-year, $450 million senior term loan facility.

     We had $213.9 million at March 31, 2007, and $109.3 million at December 31, 2006, available under the revolving credit facility, after reductions for standby letters of credit secured by this facility. In addition, we can request an increase of $50 million in the revolving credit facility.

     In January 2007, we borrowed an additional $55 million of our term loan facility and used the proceeds to reduce borrowings under our revolving credit facility. We also cancelled the remaining unused term loan commitment of $145 million, which was reserved to finance the potential accelerated payment of the senior notes, since the default under the senior notes was no longer continuing. As a result of canceling the remaining commitment, we wrote off to interest expense $2.0 million of deferred fees related to the term loan facility in the first quarter of 2007. At March 31, 2007, we had borrowed $305.0 million in term loans. The Company is required to make quarterly principal payments of $0.8 million from April 2007 to July 2011 and $72.8 million from October 2011 to April 2012 and a final payment of $72.8 million in June 2012.

     Interest rates for borrowings under the New Credit Facility are equal to the sum of (A) at our option, 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 Ferro’s debt rating, or for the term loan facility, a fixed margin. At March 31, 2007, the average interest rate was 8.3% for revolving credit borrowings and 8.1% for term loan borrowings. At December 31, 2006, the average interest rate was 8.1% for revolving credit borrowings and 8.1% for term loan borrowings.

Senior Notes and Debentures

     The senior notes are redeemable at our option at any time for the principal amount then outstanding plus the present value of 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 rating by S&P of the senior notes is below investment grade.

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. 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 (“conduits”) for proceeds of up to $100.0 million. FFC had received net proceeds of $71.7 million at March 31, 2007, and $60.6 million at December 31, 2006, 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 with respect to the trade accounts receivable sold.

     Activity from this program for the three months ended March 31 is detailed below:

		2007				2006
		(Dollars in thousands)
Trade accounts receivable sold to FFC		$	250,007			$	259,563
Cash proceeds from FFC			246,716				245,269
Trade accounts receivable collected and remitted to FFC and the conduits			235,616				245,069

7. Financial Instruments

     The carrying amounts of borrowings under the New Credit Facility approximate their fair values, due to their variable market interest rates. The carrying amount of the senior notes was $199.4 million at March 31, 2007, and $199.3 million at December 31, 2006. The fair value of the senior notes was $205.5 million at March 31, 2007, and $205.5 million at December 31, 2006. The fair value of Ferro’s senior notes is based on a third party’s estimated bid price.

     We manage foreign currency risks principally by entering into forward contracts to mitigate the impact of currency fluctuations on transactions. 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 purchase. When we enter into fixed price sales contracts for products with precious metal content, we also enter into a forward purchase arrangement with a precious metals supplier to completely cover the value of the fixed price sales contract. We also purchase portions of our natural gas requirements under fixed price contracts to reduce the volatility of cost changes.

     The notional amount, carrying amount and fair value of these derivative instruments were as follows:

		March 31,				December 31,
		2007				2006
		(Dollars in thousands)
Foreign currency forward contracts:
Notional amount		$	117,290			$	121,430
Carrying amount and fair value		$	(500	)		$	(640	)
Raw material commodity swaps:
Notional amount (in metric tons of base metals)			1,847				2,004
Carrying amount and fair value		$	768			$	1,939
Precious metals forward contracts:
Notional amount (in troy ounces)			241,194				183,264
Carrying amount and fair value		$	305			$	192
Marked-to-market natural gas forward purchase contracts:
Notional amount (in MBTUs)			—				120,000
Carrying amount and fair value		$	—			$	(442	)

8. Income Taxes

     Income tax expense for the three months ended March 31, 2007, was $4.5 million or 42.1% of pre-tax income compared with $4.1 million or 32.8% of pre-tax income in the prior year quarter ended March 2006. The primary reason for the increase in rate is an increase in the anticipated level of current year earnings to be repatriated from outside the United States.

     On January 1, 2007, we adopted FIN 48. For further information regarding the adoption of FIN 48, refer to Note 2.

     As of January 1, 2007, we had unrecognized tax benefits of $47.4 million, which, if recognized, would have a favorable impact of $23.5 million on income tax expense. We have recorded accrued interest and penalties related to unrecognized tax benefits totaling $3.7 million at January 1, 2007. During the first quarter of 2007, there were no significant changes in the amount of unrecognized tax benefits. We do not anticipate any significant increase or decrease in the amount of unrecognized tax benefits within the next twelve months.

     The Company conducts business globally, and, as a result, the U.S. parent company or one of its subsidiaries files 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, 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 1999.

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. We are vigorously defending the Company in those actions and believe we would have a claim for indemnification by the former owner of our heat stabilizer business if the Company were found liable. Because these actions are in their preliminary stages, we cannot determine the outcomes of these lawsuits at this time.

     In a July 2004 press release, we announced that our Polymer Additives business performance in the second quarter of 2004 fell short of expectations and that our Audit Committee would investigate possible inappropriate accounting entries in the Polymer Additives business. We were later sued in a series of putative securities class action lawsuits related to this July 2004 announcement. Those lawsuits were consolidated into a single case, and the consolidated case is currently pending in the United States District Court for the Northern District of Ohio against the Company, our deceased former Chief Executive Officer, our former Chief Financial Officer, and a former Operating Vice President of the Company. This claim is based on alleged violations of Federal securities laws. We consider these allegations to be unfounded and are defending this action vigorously. We have notified Ferro’s directors and officers liability insurer of the claim. Because this action is in its preliminary stage, we cannot determine the outcome of this litigation at this time.

     Also following this July 2004 press release, four derivative lawsuits were filed and subsequently consolidated in the United States District Court for the Northern District of Ohio. These lawsuits alleged breach of fiduciary duties and mismanagement-related claims. In March 2006, the Court dismissed the consolidated derivative action without prejudice. In April 2006, the plaintiffs filed a motion seeking relief from the judgment that dismissed the derivative lawsuit and seeking to amend their complaint further following discovery. The plaintiffs’ motion was denied. Later in April 2006, plaintiffs filed a Notice of Appeal to the Sixth Circuit Court of Appeals. The Directors and named executives consider the allegations contained in the derivative actions to be unfounded, have vigorously defended this action and will defend against the new filing. We have notified Ferro’s directors and officers liability insurer of the claim. Because this appeal is in the preliminary stage, we cannot determine the outcome of this litigation at this time.

     Finally, in June 2005, a putative class action lawsuit was filed against the Company and certain former and current employees alleging breach of fiduciary duty with respect to ERISA plans in connection with the matters announced in the July 2004 press release. In October 2006, the parties reached a settlement in principle that would result in the dismissal of the lawsuit with prejudice in exchange for a settlement amount of $4.0 million, which would be paid by the Company’s liability insurer subject to our satisfaction of the remaining retention amount under the insurance policy. The Company and the individual defendants have expressly denied any and all liability. The United States District Court granted preliminary approval of the settlement in November 2006. Several conditions must be met before the settlement becomes final. We do not expect the ultimate outcome of the lawsuit to have a material effect on the financial position, results of operations or cash flows of the Company.

     In October 2004, the Belgian Ministry of Economic Affairs’ Commercial Policy Division (the “Ministry”) served on our Belgian subsidiary a mandate requiring the production of certain documents related to an alleged cartel among producers of butyl benzyl phthalate (“BBP”) from 1983 to 2002. Subsequently, German and Hungarian authorities initiated their own national investigations related to the same allegations. Our Belgian subsidiary acquired its BBP business from Solutia Europe S.A./N.V. (“SOLBR”) in August 2000. Ferro promptly notified SOLBR of the Ministry’s actions and requested SOLBR to indemnify and defend Ferro and its Belgian subsidiary with respect to these investigations. In response to our notice, SOLBR exercised its right under the 2000 acquisition agreement to take over the defense and settlement of these matters. In December 2005, the Hungarian authorities imposed a de minimus fine on our Belgian subsidiary, and we expect the German and Belgian authorities also to assess fines for the alleged conduct. We cannot predict the amount of fines that will ultimately be assessed and cannot predict the degree to which SOLBR will indemnify Ferro’s Belgian subsidiary for such fines.

     In late February 2007, we discovered that some of the values shown on certificates of analysis provided to customers by a plant in our Specialty Plastics segment were inaccurate. We are working with the customers of the Specialty Plastics business to provide those customers with products that meet their performance requirements and are accurately described on

the corresponding certificates of analysis. While it is possible some customers may not accept products with new specifications or otherwise assert claims relating to this issue, we cannot predict at this time the financial effects of any resulting lost business or claims.

     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 $17.0 million at March 31, 2007, and $20.8 million at December 31, 2006. These agreements primarily relate to Ferro’s insurance programs, natural gas contracts, 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 March 31 is as follows:

		U.S. Pension Plans								Non-U.S. Pension Plans								Other Benefit Plans
		2007				2006				2007				2006				2007				2006
										(Dollars in thousands)
Components of net periodic cost:
Service cost		$	316			$	2,693			$	1,592			$	1,681			$	152			$	217
Interest cost			5,028				5,305				2,260				1,791				859				843
Expected return on plan assets			(5,123	)			(4,910	)			(1,791	)			(1,406	)			—				—
Amortization of prior service cost			40				18				27				37				(293	)			(91	)
Net amortization and deferral			1,476				1,973				141				220				—				—
Curtailment and settlement effects			250				—				—				—				—				—
Net periodic benefit cost		$	1,987			$	5,079			$	2,229			$	2,323			$	718			$	969

     The change in net periodic cost is due primarily to the following factors:

	•		A curtailment recognized in the second quarter of 2006 of retirement benefit accumulations for our largest defined benefit plan, which covers certain salaried and hourly employees in the United States. The affected employees now receive benefits in the Company’s defined contribution plan that previously covered only U.S. salaried employees hired after 2003. These changes do not affect current retirees or former employees.
	•		Settlements recognized in the second and third quarters of 2006 of certain obligations in our U.S. unfunded nonqualified defined benefit retirement plan, related primarily to a lump sum payment to the beneficiary of our deceased former Chief Executive Officer.
	•		Restructuring activities that will result in closing the Company’s Niagara Falls, New York, manufacturing facility by the end of 2007. In the first quarter of 2007, we recorded a net curtailment loss of $0.3 million for pension benefits related to this closing. We will also record a net curtailment gain of approximately $1.9 million for other benefits for the closing, but the timing and eventual amount depend on when employees are terminated.
	•		A curtailment recognized in the second quarter of 2006 of eligibility for retiree medical and life insurance coverage for nonunion employees. Only employees age 55 or older with 10 or more years of service as of December 31, 2006, will be eligible for postretirement medical and life insurance benefits. Moreover, these benefits will be available only to those employees who retire by December 31, 2007, after having advised the Company of their retirement plans by March 31, 2007.

11. Stock-Based Compensation

     On January 1, 2006, we adopted SFAS No. 123 (revised 2004), Share-Based Payment, (“FAS 123R”) and therefore measure and recognize compensation expense for all share-based payment awards made to employees and directors based on estimated fair values.

Deferred Stock Units

     Under the 2006 Long-Term Incentive Plan (the “Plan”) we granted our directors 36,700 deferred stock units during the three months ended March 31, 2007. Each deferred stock unit represents a forfeitable share of Ferro common stock. At the end of the deferral period, the deferred stock units will be converted into nonforfeitable shares of Ferro common stock based upon the recipients’ continued service with the Company. The recipients of the deferred stock units are not entitled to receive dividends during the deferral period. The deferred stock units granted in 2007 contain a deferral period of one year.

     Because the deferred stock units may only be paid in shares of Ferro common stock, we will treat them as equity awards under the requirements of FAS 123R. We determined the fair value of the deferred stock units based upon the closing stock price on the date of the grant adjusted downward for the present value of the dividends that will not be paid to recipients of the deferred stock units. We will recognize the related compensation expense evenly over the deferral period.

Compensation Expense Information

     The following table contains the total stock-based compensation expense recorded in selling, general and administrative expense for the three months ended March 31:

		2007				2006
		(Dollars in thousands)
Stock options		$	812			$	743
Performance shares			509				168
Deferred stock units			111				—
Total		$	1,432			$	911

Grant Information

     The following table contains information regarding the stock-based compensation as of and for the three month period ended March 31, 2007:

Aggregate

Weighted-

Grant Date

Remaining

Number of

Average Fair

Fair Value of

Service or

Shares or

Value per

Shares or

Performance

Units Granted

Share or Unit

Units Granted

Period

(Dollars in

(In years)

thousands)

Stock options

505,000

$

6.24

$

3,151

3.8

Performance shares

151,600

21.88

3,316

2.8

Deferred stock units

36,700

21.50

789

0.9

12. Restructuring and Cost Reduction Programs

     During 2006, we developed and initiated 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. A portion of our Italian manufacturing operations and administrative functions will be consolidated with Spain, where additional production capacity is being constructed. Additionally, we are consolidating our decorative colors production, primarily from Frankfurt, Germany, to Colditz, Germany. As a result of these activities, we plan to reduce our workforce by approximately 150 employees. We expect these actions to significantly reduce the cost structure of our manufacturing operations. During the quarter ended March 31, 2007, we recorded charges of $1.3 million for our operations in Spain, Portugal and France, primarily relating to registration taxes paid and expected employee termination benefits for additional headcount reductions affecting 10 employees. This charge was offset by a $1.1 million reversal of previously accrued charges related to the ongoing German plan. In March 2007, we reached an agreement with the Betriebsrat der Ferro GmbH (German Works Council) regarding employee termination benefits for employees included in the decorative colors consolidation plan. The agreement provides that a higher number of employees than previously anticipated will participate in a social early retirement plan. As a result, the timing of the related expense recognition will occur ratably over future periods, and the estimated amounts previously accrued were reversed during the first quarter. In total, 37 employees were terminated relating to the European consolidation during the first quarter of 2007.

     In November 2006, we announced that we were restructuring the Electronic Materials segment due to excess capacity we had for the production of dielectric and industrial ceramic products. We will cease production at our Niagara Falls, New York, manufacturing facility by the end of 2007 and transfer some of its production to facilities in Penn Yan, New York, and Uden, Netherlands. The closure will impact approximately 150 employees. During the quarter ended March 31, 2007, we recorded $0.4 million of restructuring charges associated with termination benefits.

     In February 2007, we approved an additional restructuring plan for our Specialty Plastics and Polymer Additives segments. As a result, we recorded $0.7 million of restructuring charges in the quarter ended March 31, 2007, primarily associated with termination benefits affecting 18 employees.

     Restructuring charges for the quarter ended March 31, 2007, also include $0.2 million in accrual adjustments for other cost reduction and restructuring programs prior to 2006.

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

		Employee
		Termination				Other				Asset
		Benefits				Costs				Writedowns				Total
						(Dollars in thousands)
Balance, December 31, 2006		$	6,730			$	39			$	15,795			$	22,564
Gross charges			1,079				452				—				1,531
Cash payments			(2,630	)			(452	)			—				(3,082	)
Balance, March 31, 2007		$	5,179			$	39			$	15,795			$	21,013

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

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, income before taxes or related tax expense, or cash flows from investing or financing activities from discontinued operations in the three months ended March 31, 2007 or 2006. The loss on disposal of discontinued operations includes ongoing legal costs and reserve adjustments directly related to discontinued operations. The disposal of discontinued operations resulted in the following pre-tax loss and related income tax benefit for the three months ended March 31:

		2007				2006
		(Dollars in thousands)
Pre-tax loss		$	256			$	201
Tax benefit			100				75
Net of tax loss		$	156			$	126

     We have continuing environmental remediation obligations that are related to these divestitures, and we had accrued $3.3 million at March 31, 2007, and $3.1 million at December 31, 2006, for these matters.

14. Earnings per Share

     Details of the calculation of basic and diluted earnings per share for the three months ended March 31 are shown below:

		2007				2006
		(In thousands,
		except per share amounts)
Basic earnings per share computation:
Net income available to common shareholders		$	5,793			$	7,942
Add back: Loss from discontinued operations			156				126
		$	5,949			$	8,068
Weighted-average common shares outstanding			42,708				42,337
Basic earnings per share from continuing operations		$	0.14			$	0.19
Diluted earnings per share computation:
Net income available to common shareholders		$	5,793			$	7,942
Add back: Loss from discontinued operations			156				126
Plus: Convertible preferred stock			—				—
		$	5,949			$	8,068
Weighted-average common shares outstanding			42,708				42,337
Assumed conversion of convertible preferred stock			—				—
Assumed satisfaction of performance share conditions			55				10
Assumed satisfaction of deferred stock unit conditions			5				—
Assumed exercise of stock options			—				—
Weighted-average diluted shares outstanding			42,768				42,347
Diluted earnings per share from continuing operations		$	0.14			$	0.19

     The convertible preferred shares and the stock options were anti-dilutive for the three months ended March 31, 2007 and 2006, and thus not included in the diluted shares outstanding.

15. 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, 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, 2006. We measure segment income for internal reporting purposes as net operating profit before interest and taxes. Segment income excludes unallocated corporate expenses and charges associated with restructuring and cost reduction programs.

     Net sales to external customers by segment for the three months ended March 31 are presented in the table below. Sales between segments were not material:

		2007				2006
		(Dollars in thousands)
Performance Coatings		$	138,815			$	126,109
Electronic Materials			112,944				107,366
Color and Glass Performance Materials			105,700				94,612
Polymer Additives			82,513				82,723
Specialty Plastics			66,961				71,724
Other businesses			22,772				22,619
Total net sales		$	529,705			$	505,153

     Below are each segment’s income and reconciliations to income before taxes from continuing operations for the three months ended March 31:

		2007				2006
		(Dollars in thousands)
Performance Coatings		$	10,683			$	9,091
Electronic Materials			6,083				8,281
Color and Glass Performance Materials			15,067				12,771
Polymer Additives			3,106				4,544
Specialty Plastics			3,139				5,791
Other businesses			3,691				1,597
Total segment income			41,769				42,075
Unallocated expenses			(15,277	)			(13,345	)
Interest expense			(17,446	)			(13,250	)
Interest earned			965				744
Foreign currency			(511	)			(321	)
Miscellaneous — net			1,269				(3,400	)
Income before taxes from continuing operations		$	10,769			$	12,503

     We sell our products throughout the world, and we attribute sales to countries based on the country where we generate the customer invoice. No single country other than the U.S. represents greater than 10% of our net sales. We have detailed net sales by geographic region for the three months ended March 31 in the table below:

		2007				2006
		(Dollars in thousands)
United States		$	238,406			$	248,671
International			291,299				256,482
Total net sales		$	529,705			$	505,153