Results of Operations
Comparison of the three months ended March 31, 2009 and 2008

                                          Three months ended
                                              March 31,
                                         2009           2008          $ Change        % Change
                                                (Dollars in thousands,
                                              except per share amounts)
Net sales                              $ 357,809      $ 590,838      $ (233,029 )         (39.4 %)
Cost of sales                            302,563        481,573        (179,010 )         (37.2 %)

Gross profit                              55,246        109,265         (54,019 )         (49.4 %)
Gross profit percentage                     15.4 %         18.5 %
Selling, general and administrative
expenses                                  68,128         77,576          (9,448 )         (12.2 %)
Restructuring charges                      1,398          4,207          (2,809 )         (66.8 %)
Other expense (income):
Interest expense                          11,174         13,555          (2,381 )         (17.6 %)
Interest earned                             (268 )         (129 )          (139 )         107.8 %
Foreign currency losses (gains),
net                                        1,829         (1,541 )         3,370          (218.7 %)
Miscellaneous expense (income), net          533          1,440            (907 )         (63.0 %)

(Loss) income before taxes               (27,548 )       14,157         (41,705 )        (294.6 %)
Income tax (benefit) expense              (7,819 )        6,226         (14,045 )        (225.6 %)

(Loss) income from continuing
operations                               (19,729 )        7,931         (27,660 )        (348.8 %)
(Loss) income from discontinued
operations, net of tax                      (242 )        1,619          (1,861 )        (114.9 %)

Net (loss) income                      $ (19,971 )    $   9,550      $  (29,521 )        (309.1 %)


Diluted (loss) earnings per share      $   (0.46 )    $    0.21      $    (0.67 )        (319.0 %)

Net sales in the three months ended March 31, 2009, declined primarily as a result of lower sales volume that was a consequence of the recent global economic downturn. The volume decline included reduced sales of precious metals. Precious metals sales contributed approximately 8 percentage points to the overall sales decline. In addition, unfavorable changes in foreign currency exchange rates were responsible for approximately 4 percentage points of the sales decline. Sales declined in all segments and all regions.
Gross profit was lower in the 2009 first quarter as a result of the decline in sales, and the corresponding increase in manufacturing cost absorption on a per-unit basis. Partially offsetting the negative effects of lower volume were reduced manufacturing costs resulting from cost reduction initiatives including staffing reductions and plant closings. Raw material costs declined, compared with the prior-year period. The benefit from lower raw material costs was largely offset by lower product prices. During the first quarter of 2008 we incurred costs of approximately $3.3 million to clean up an accidental discharge of product into the wastewater treatment facility at our Bridgeport, New Jersey, manufacturing location.
Selling, general and administrative ("SG&A") expense declined by $9.4 million compared with the first quarter of 2008. SG&A as a percent of sales increased to 19.0% of sales from 13.1% of sales in the prior-year period as a result of the decline in sales in 2009. SG&A expense declined as a result of expense reduction efforts taken in response to slowing customer demand and lower incentive compensation expense. Partially offsetting these declines was a $4.8 million increase in pension expense resulting from a reduction in the value of pension assets in 2008 and higher health care expense of approximately $1.7 million. The 2009 first quarter SG&A expense included $1.0 million in charges, primarily from corporate development activities. SG&A expense in the 2008 first quarter included a net benefit of $0.4 million, primarily from favorable litigation developments partially offset by expenses related to corporate development activities.

Restructuring charges declined to $1.4 million in the 2009 first quarter from $4.2 million in the first quarter of 2008. The primary driver of the charges in both periods was the rationalization of our European manufacturing operations in the Performance Coatings and Color and Glass Performance Materials segments. Interest expense declined primarily as a result of lower interest rates on our borrowings. As a result of an amendment to our credit facility that was completed in March 2009, the interest rates on our term loans and borrowings under our revolving credit facility have increased.
Net foreign currency transaction losses were $1.8 million in the first three months of 2009 compared with gains of $1.5 million in the prior-year period. We manage currency risks in a wide variety of foreign currencies principally by entering into forward contracts to mitigate the impact of currency fluctuations on transactions arising from international trade. The carrying values of these contracts are adjusted to market value and the resulting gains or losses are charged to income or expense in the period.
During the first quarter of 2009, we recorded a tax benefit of $7.8 million, or 28.4% of the loss before income taxes, compared to income tax expense of $6.2 million, or 44.0% of income before taxes in the first three months of 2008. The primary reason for the decrease in the effective tax rate was a reduction to the benefit realized for current net operating losses that have been offset by a full valuation allowance.
The first quarter loss from operations was the result of lower sales and the consequent reduction in gross profit, partially offset by lower SG&A expense, lower restructuring charges and reduced interest expense.
During 2008, we sold the Fine Chemicals business that was previously part of our Other Businesses segment. As a consequence of the sale, the results from Fine Chemicals are now included in discontinued operations for all periods.

                                         Three months ended
                                              March 31,
                                         2009          2008         $ Change      % Change
                                               (Dollars in thousands)
 Segment Sales
 Performance Coatings                  $ 108,588     $ 160,792     $  (52,204 )       (32.5 %)
 Electronic Materials                     82,489       140,993        (58,504 )       (41.5 %)
 Color & Glass Performance Materials      67,416       128,840        (61,424 )       (47.7 %)
 Polymer Additives                        59,447        92,311        (32,864 )       (35.6 %)
 Specialty Plastics                       34,859        61,793        (26,934 )       (43.6 %)
 Pharmaceuticals                           5,010         6,109         (1,099 )       (18.0 %)

 Total segment sales                   $ 357,809     $ 590,838     $ (233,029 )       (39.4 %)


 Segment Operating Income (Loss)
 Performance Coatings                  $    (599 )   $   9,480     $  (10,079 )      (106.3 %)
 Electronic Materials                      2,417         8,749         (6,332 )       (72.4 %)
 Color & Glass Performance Materials      (2,455 )      15,436        (17,891 )      (115.9 %)
 Polymer Additives                         1,889         2,719           (830 )       (30.5 %)
 Specialty Plastics                        1,462         1,487            (25 )        (1.7 %)
 Pharmaceuticals                             113         1,222         (1,109 )       (90.8 %)

 Total segment operating income        $   2,827     $  39,093     $  (36,266 )       (92.8 %)

Performance Coatings Segment Results. Sales declined in Performance Coatings as a result of lower sales volumes of tile coating products and porcelain enamel products. Unfavorable changes in foreign currency exchange rates also contributed to the sales decline. Sales declined in all regions as a result of weak customer demand. Operating income declined primarily as a result of the negative effects of reduced sales volume, partially offset by reductions in selling, general and administrative expense and lower manufacturing costs.

Electronic Materials Segment Results. Sales declined in Electronic Materials as a result of lower sales volume, particularly related to dielectric materials sold in Asia. Many Asian customers who manufacture multilayer capacitors using our dielectric materials implemented extended production shutdowns during the first quarter. The sales volume decline also was the result of reduced sales of precious metals. Costs of precious metals are generally passed through to customers with minimal gross profit contribution. Operating income declined primarily as a result of the effects of lower manufacturing volumes, partially offset by reduced selling, general and administrative expense.
Color and Glass Performance Materials Segment Results. Sales in Color and Glass Performance Materials declined primarily as a result of lower sales volumes and, to a lesser extent, unfavorable changes in foreign currency exchange rates. All regions contributed to the sales decline. Operating income declined primarily as a result of lower sales volumes.
Polymer Additives Segment Results. Sales declined in Polymer Additives primarily as a result of lower sales volumes in the United States and Europe, the major markets served by this business. Operating income declined as a result of the negative effects of the lower sales volume, partially offset by lower manufacturing spending and reduced selling, general and administrative expense. In addition, during the first quarter of 2008, operating income was reduced by costs to clean up an accidental discharge of product into the wastewater treatment facility at our Bridgeport, New Jersey, manufacturing plant. Specialty Plastics Segment Results. Sales declined in Specialty Plastics as a result of lower sales volume in the United States and Europe. Operating income was down slightly, as the negative effects of lower manufacturing volumes were nearly offset by lower manufacturing spending and reduced selling, general and administrative expense.
Pharmaceuticals Segment Results. Sales declined in Pharmaceuticals primarily as a result of a less favorable product mix. Operating income declined due to increased manufacturing spending associated with the change in product mix, partially offset by reduced selling, general and administrative expense. Results related to our Fine Chemicals business, which had previously been combined with the results from our Pharmaceuticals business and reported as "Other Businesses," are now reported as discontinued operations following the sale of the Fine Chemicals business in 2008.

                                 Three months ended
                                      March 31,
                                 2009          2008         $ Change       % Change
                                       (Dollars in thousands)
         Geographic Revenues
         United States         $ 170,054     $ 241,133     $  (71,079 )        (29.5 %)
         International           187,755       349,705       (161,950 )        (46.3 %)

         Total                 $ 357,809     $ 590,838     $ (233,029 )        (39.4 %)

Sales declined in all regions and in each of our business segments due to lower sales volumes resulting from the economic downturn and the consequent reduction in customer demand. Also contributing to the sales decline were reduced sales of precious metals and unfavorable changes in foreign currency exchange rates.

Summary of Cash Flows for the three months ended March 31, 2009 and 2008

                                          Three months ended
                                              March 31,
                                         2009           2008         $ Change       % Change
                                               (Dollars in thousands)
Net cash (used for) provided by
operating activities                   $ (77,539 )    $  10,938      $ (88,477 )       (808.9 %)
Net cash used for investing
activities                                (2,576 )      (15,114 )       12,538          (83.0 %)
Net cash provided by (used for)
financing activities                      85,201          3,003         82,198        2,737.2 %
Effect of exchange rate changes on
cash and cash equivalents                   (206 )          543           (749 )       (137.9 %)

Increase (decrease) in cash and
cash equivalents                       $   4,880      $    (630 )    $   5,510         (874.6 %)

Cash flows from operating activities decreased by $88.5 million in the first quarter of 2009 compared with the same period of 2008. In the first quarter of 2009, we funded $65.5 million of deposits required by financial institutions under our precious metals program. Cash flows from operating activities were also affected by the $29.5 million decrease in net income.
Within investing activities, we reduced capital expenditures to $2.6 million in the first quarter of 2009 from $14.1 million in the first quarter of 2008. Cash flows from financing activities increased by $81.3 million, of which $82.5 million related to borrowing activity. The first quarter of 2009 also included $8.1 million of debt issuance costs related to an amendment of our revolving credit and term loan facility, while the first quarter of 2008 included higher dividend payments of $5.9 million Capital Resources and Liquidity
6.50% Convertible Senior Notes
In 2008, Ferro issued $172.5 million of 6.50% Convertible Senior Notes due 2013 (the "Convertible Notes"). The proceeds from the offering, along with available cash, including borrowings under Ferro's revolving credit facility, were used to purchase all of Ferro's outstanding 9 1/8% Senior Notes due 2009. The Convertible Notes bear interest at a rate of 6.5% per year, payable semi-annually in arrears on February 15 and August 15 of each year, beginning on February 15, 2009. The Convertible Notes mature on August 15, 2013. We separately account for the liability and equity components of the Convertible Notes in a manner that will reflect our nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The effective interest rate on the liability component is 9.5%. At March 31, 2009, we were in compliance with the covenants under the Convertible Notes' indenture. Revolving Credit and Term Loan Facility
In 2006, we entered into an agreement with a group of lenders for a $700 million credit facility, consisting of a multi-currency senior revolving credit facility and a senior term loan facility, which replaced a former revolving credit facility that would have expired later that year. In 2007, we cancelled the unused portion of the term loan facility and amended the credit facility (the "2007 Amended Credit Facility") primarily to increase the size of the revolving credit facility, reduce interest rates, and increase operating flexibility. On March 11, 2009, we amended the 2007 Amended Credit Facility (the "2009 Amended Credit Facility") primarily to provide additional operating flexibility and to change pricing to more accurately reflect current market interest rates. The amendment was filed as Exhibit 10.1 to our Annual Report on Form 10-K for the year ended December 31, 2008. The primary effects of the 2009 Amended Credit Facility were to:
• Increase the interest rates and commitment fees payable thereunder pursuant to a grid structure based on our leverage ratio,

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

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

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

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

• Require additional financial reporting by the Company to the lenders,

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

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

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

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

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

The 2009 Amended Credit Facility currently includes a $300.0 million revolving credit facility, which matures in 2011. At March 31, 2009, we had borrowed $205.4 million of the revolver and had $87.7 million available, after reductions for standby letters of credit secured by this facility. At December 31, 2008, we had borrowed $111.8 million of the revolver and had $180.0 million available. The increase in borrowings under our revolver was driven by reductions in accounts payable and, as discussed below, our decision to cash collateralize certain precious metals consignment agreements.
At March 31, 2009, the 2009 Amended Credit Facility also included a term loan facility with an outstanding principal balance of $291.7 million, which matures in 2012. We make periodic principal payments on the term loans. We are required to make minimum quarterly principal payments of $0.8 million from April 2009 to July 2011. During the last year of the loan's life, we are required to repay the remaining balance of the term loans in four quarterly installments. Currently, those last four payments will be $71.0 million each. In addition to the minimum quarterly payments, each April we may be required to make an additional principal payment. The amount of this additional payment is dependent on the Company's leverage and certain cash flow metrics. Any additional payment that is required reduces, on a dollar-for-dollar basis, the amount due in the last four quarterly payments. We were not required to make an additional principal payment in April 2009.
We are subject to a number of restrictive covenants under our credit facilities, which could affect our flexibility to fund ongoing operations and strategic initiatives, and, if we are unable to maintain compliance with such covenants, could lead to significant challenges in meeting our liquidity requirements. This risk factor is described in more detail in "Risk Factors" under Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008. Continued weak economic conditions could impact our financial performance, making it more challenging to comply with the financial covenants. At March 31, 2009, we were in compliance with the covenants of the 2009 Amended Credit Facility.

Domestic Receivable Sales Program
We have an asset securitization program for substantially all of Ferro's U.S. trade accounts receivable. This program accelerates cash collections at favorable financing costs and helps us manage the Company's liquidity requirements. We legally sell these trade accounts receivable to Ferro Finance Corporation ("FFC"), which finances its acquisition of trade receivable assets by issuing beneficial interests in (securitizing) the receivables to multi-seller receivables securitization companies (the "conduits"). 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. FFC is a wholly-owned subsidiary, which until December 2008 was a qualified special purpose entity ("QSPE") and, therefore, was not consolidated. In December 2008, we amended the program so that FFC is no longer a QSPE; FFC is included in our consolidated financial statements; and this program is no longer accounted for as an off balance sheet arrangement. In 2008, we amended the facility to reduce the program's size from $100 million to $75 million. After reductions for non-qualifying receivables, we had $50.0 million at March 31, 2009, available under this program. At March 31, 2009, FFC had not issued any beneficial interests in its trade accounts receivable, therefore no debt was outstanding under the asset securitization program. The Company intends to replace the asset securitization program prior to its scheduled expiration in June 2009 and has entered into negotiations with other financing sources to do so, however there can be no assurance that the Company will be successful in establishing a replacement program. Off Balance Sheet Arrangements
International Receivable Sales Programs. We maintain several international programs to sell trade accounts receivable, primarily without recourse. At March 31, 2009, the commitments supporting these programs, which can be withdrawn at any time, totaled $78.9 million, the amount of outstanding receivables sold under these programs was $14.9 million, and Ferro had received net proceeds under these programs of $8.7 million for outstanding receivables. Consignment and Customer Arrangements for Precious Metals. In the production of some of our products, we use precious metals, primarily silver for Electronic Materials products and gold for Color and Glass Performance Materials products. We obtain most precious metals from financial institutions under consignment agreements (generally referred to as our precious metals program). 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 for the three months ended March 31, 2009. At March 31, 2009, we had on hand $112.8 million of precious metals, measured at fair value, owned by participants in our precious metals program. We also process precious metals owned by our customers.
The consignment agreements involve short-term commitments that typically mature within 30 to 180 days of each transaction and are typically renewed on an ongoing basis. As a result, the Company relies on the continued willingness of financial institutions to participate in these arrangements to maintain this source of liquidity. During February and March 2009, several participants in our precious metals program required Ferro to deliver cash collateral to secure Ferro's obligations arising under the consignment agreements. At March 31, 2009, . . .