Overview

Market conditions and customer demand were mixed in our key markets during the second quarter of 2012. Demand for our conductive pastes used in solar cells improved from the first quarter of 2012, but remained lower than the prior-year quarter. Lower sales of our metal pastes, metal powders and surface finishing materials reduced overall sales in our Electronic Materials business and resulted in lower segment income. We also experienced a weakening of demand from customers in Europe as a result of sovereign debt issues and deteriorating macroeconomic conditions in the region. Demand from customers in the United States was generally stronger than in Europe, but the level of customer demand varied by application market.

Net sales declined by 19% compared with the second quarter of 2011, driven by a decline in sales of Electronic Materials products. In aggregate, changes in product pricing and mix reduced our overall sales by approximately 9 percentage points. Lower sales volume reduced sales by an additional 7 percentage points, and changes in foreign currency exchange rates reduced sales by 3 percentage points. The lower sales in Electronic Materials, including reduced sales of precious metals, was the primary contributor to both the price/mix and volume declines in the quarter. Sales volume was a positive contributor and price/mix was a negative contributor to the change in sales for the total of our businesses other than Electronic Materials, compared with the second quarter of 2011.

Gross profit declined in the 2012 second quarter compared with the prior-year quarter, primarily driven by the decline in sales of high-margin metal pastes, metal powders and surface finishing materials. Raw material costs increased compared with the prior-year quarter, but these changes had little net impact on gross profit as the added costs were offset by product price increases, in aggregate, across the Company.

Selling, general and administrative ("SG&A") expenses during the 2012 second quarter increased relative to the 2011 second quarter primarily due to higher pension expense, healthcare benefit expense and costs related to an initiative to standardize and streamline our business processes and improve management information systems tools. Partially offsetting these SG&A expense increases were reductions in other SG&A expense categories including depreciation, business travel expenses and professional fees.

Restructuring and impairment charges increased during the quarter compared with the prior-year quarter as a result of restructuring initiatives in our Performance Coatings business in Europe. These new initiatives include consolidation of certain manufacturing and administrative activities within the region in order to reduce future costs.

Interest expense declined during the 2012 second quarter compared with the prior-year quarter. The decline in interest expense was primarily due to an increase in the amount of interest expense that was capitalized.

We recorded a net loss for the second quarter compared with net income in the 2011 second quarter as a result of lower net sales and the resulting decline in gross profit. Increased restructuring and impairment charges also contributed to the decline in profitability compared with the prior-year quarter.

Outlook

Our ability to forecast future financial performance is limited because of uncertainty surrounding customer demand and economic conditions in a number of key markets and regions around the world. Customer demand for our conductive solar pastes is difficult to forecast because of uncertainty in end-market demand and uncertainty in the customer adoption rate of our new products. Our visibility to future customer orders is limited. We expect demand for solar pastes and metal powders to improve during the second half of 2012, compared with the first half of the year, but the timing and strength of the improvement in customer demand is not known at this time.

Economic conditions in Europe are expected to be generally weaker in the coming quarters due to sovereign debt issues and other macroeconomic drivers. The growth in economic activity in Asia-Pacific, including China, appears to be slowing from the rate experienced earlier in 2012. Weakening economic conditions in Europe and slower growth in Asia may affect demand for our products sold to customers serving these regions, although the magnitude of these effects is difficult to estimate.

Factors that could adversely affect our future financial performance include those described under the heading "Risk Factors" in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2011.

If the timing and strength of the projected improvement in customer demand for our conductive solar pastes and other electronic materials are not achieved or the economic conditions in Europe continue to worsen, impairment of intangible assets, including goodwill, and our long-lived assets, particularly as they relate to our Electronic Materials segment, could result. At October 31, 2011, the date of our most recent goodwill impairment test, the fair value exceeded the carrying value of our Electronic Materials reporting unit by 51% on a goodwill balance of $152 million. The determination of fair value was based upon the average of the income approach and the market approach. Our estimate of fair value assumed a recovery of the demand for our electronic materials starting in the second half of 2012 and throughout 2013.

Results of Operations

Comparison of the three months ended June 30, 2012 and 2011



                                                      Three months ended
                                                           June 30,
                                                   2012                2011           $ Change        % Change
                                                   (Dollars in thousands, except per share
                                                                   amounts)
Net sales                                      $    481,505        $    593,974      $ (112,469 )         (18.9 )%
Cost of sales                                       393,660             479,627         (85,967 )         (17.9 )%

Gross profit                                         87,845             114,347         (26,502 )         (23.2 )%
Gross profit percentage                                18.2 %              19.3 %
Selling, general and administrative expenses         74,645              73,548           1,097             1.5 %
Restructuring and impairment charges                  4,728               1,545           3,183
Other expense (income):
Interest expense                                      6,848               7,352            (504 )
Interest earned                                         (51 )               (69 )            18
Foreign currency (gains) losses, net                   (221 )             1,013          (1,234 )
Miscellaneous expense (income), net                   1,841                (124 )         1,965

Income before income taxes                               55              31,082         (31,027 )
Income tax expense                                    2,573              11,461          (8,888 )

Net (loss) income                              $     (2,518 )      $     19,621      $  (22,139 )

Diluted earnings per share                     $      (0.03 )      $       0.22      $    (0.25 )

Net sales declined by 18.9% for the three months ended June 30, 2012, compared with the second quarter of 2011. The primary driver of the sales decline was reduced customer demand for our Electronic Materials products, including our metal pastes, metal powders and surface finishing materials. Lower sales of precious metals accounted for approximately 57% of the overall sales decline, driven by reduced sales volume and lower prices for silver. In aggregate, changes in product pricing and mix reduced overall net sales by approximately 9 percentage points. Lower sales volume contributed an additional 7 percentage points to the sales decline. Changes in foreign currency exchange rates reduced sales by approximately 3 percentage points.

Gross profit declined during the 2012 second quarter as a result of lower net sales and changes in product mix. Gross profit percentage declined to 18.2% of net sales from 19.3% in the prior-year quarter. In aggregate, raw material costs increased by approximately $4 million compared with the second quarter of 2012 and these increased costs were offset by increased product prices. Charges, primarily related to residual costs at closed manufacturing sites involved in earlier restructuring initiatives, reduced gross profit by $0.7 million during the second quarter. Gross profit was reduced by $1.3 million during the second quarter of 2011, also due to residual costs at closed manufacturing sites.

Selling, general and administrative ("SG&A") expenses increased by $1.1 million compared with the 2011 second quarter. Due primarily to reduced sales, SG&A expenses increased to 15.5% of net sales from 12.4% of net sales in the prior-year quarter. Increased pension expenses, healthcare benefit expenses for U.S. employees and expenses related to an initiative to streamline and standardize business processes and improve management information systems tools contributed to the higher SG&A expenses for the quarter. Partially offsetting these increases were declines in other SG&A expenses including depreciation expense, business travel costs and professional fees. SG&A expenses during the 2012 second quarter included charges of $1.0 million that were primarily related to residual expenses at sites that were closed during earlier restructuring initiatives and severance costs. SG&A expenses in the 2011 second quarter included charges of $1.4 million, primarily related to expenses at sites closed by earlier restructuring initiatives.

Restructuring and impairment charges increased to $4.7 million during the 2012 second quarter. The charges were primarily related to new restructuring initiatives in our Performance Coatings business in Europe.

Interest expense declined in the 2012 second quarter compared with the 2011 second quarter. Interest expense declined primarily as a result of an increase in the amount of interest expense that was capitalized.

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

We recorded miscellaneous expense, net, of $1.8 million during the 2012 second quarter. Included in miscellaneous expense during the 2012 second quarter was a loss of $0.8 million related to the sale of a mining operation in Argentina.

During the 2012 second quarter, we recognized tax expense of $2.6 million. We recorded income tax expense of $11.5 million in the second quarter of 2011. The effective tax rate for the 2012 second quarter is significantly higher than the rate in the second quarter of 2011 due to pre-tax losses in jurisdictions with full valuation allowances for which no tax benefit is recognized.

We recorded a net loss of $2.5 million in the quarter, compared with net income of $19.6 million in the prior-year quarter. The change was driven by reduced gross profit resulting from lower sales and higher restructuring charges.

                                                  Three months ended
                                                       June 30,
                                                  2012          2011         $ Change        % Change
                                                        (Dollars in thousands)
Segment Sales
Electronic Materials                            $  90,741     $ 180,362     $  (89,621 )         (49.7 )%
Performance Coatings                              157,315       163,481         (6,166 )          (3.8 )%
Color and Glass Performance Materials              99,889       106,476         (6,587 )          (6.2 )%
Polymer Additives                                  83,450        91,271         (7,821 )          (8.6 )%
Specialty Plastics                                 44,151        46,510         (2,359 )          (5.1 )%
Pharmaceuticals                                     5,959         5,874             85             1.4 %

Total segment sales                             $ 481,505     $ 593,974     $ (112,469 )         (18.9 )%

Segment Income
Electronic Materials                            $      33     $  22,406     $  (22,373 )         (99.9 )%
Performance Coatings                                9,699        10,497           (798 )          (7.6 )%
Color and Glass Performance Materials              10,009        10,670           (661 )          (6.2 )%
Polymer Additives                                   1,878         4,515         (2,637 )         (58.4 )%
Specialty Plastics                                  3,806         2,827            979            34.6 %
Pharmaceuticals                                       620           945           (325 )         (34.4 )%

Total segment income                            $  26,045     $  51,860     $  (25,815 )         (49.8 )%

Electronic Materials Segment Results. Sales declined in Electronic Materials primarily as a result of reduced demand for our conductive pastes used in solar cell manufacturing and metal powders used in other electronics applications. Changes in volume reduced sales by $50 million, compared with the second quarter of 2011. Changes in product pricing and mix lowered sales by an additional $39 million. Sales of precious metals declined by $63 million due to lower sales volume of solar pastes and precious metal powders and as a result of lower precious metal prices. The costs of precious metals are passed through to our customers as an element of our product prices. Reduced sales of products produced in the United States and in Asia-Pacific accounted for most of the overall sales decline. Segment income declined due to a $23 million reduction in gross profit that was primarily the result of lower sales volume. SG&A expense declined by $0.3 million compared with the second quarter of 2011.

Performance Coatings Segment Results. Sales in Performance Coatings declined, driven by changes in exchange rates and changes in product pricing and mix. Increased sales volume offset a portion of the decline. Changes in foreign currency exchange rates reduced sales by $10 million while changes in product pricing and mix contributed an additional $8 million to the lower sales. Sales increased by $12 million due to increased sales volume. Sales declined primarily in Europe-Middle East-Africa and increased in the United States and Latin America. Segment income declined primarily as a result of a $1.3 million decline in gross profit that was partially offset by a $0.5 million decline in SG&A expense.

Color and Glass Performance Materials Segment Results. Sales declined in Color and Glass Performance Materials primarily as a result of changes in product pricing and mix as well as changes in exchange rates. These changes were partially offset by the effects of higher sales volume. Changes in product pricing and mix reduced sales by $10 million during the quarter. Changes in foreign currency exchange rates reduced sales by an additional $5 million. Higher sales volume offset approximately $9 million of the overall sales decline. Reduced sales in Europe-Middle East-Africa were the primary driver of the overall decline in sales as a result of lower demand for our pigments products. Segment income declined by $0.7 million compared with the prior-year quarter due to a $1.2 million increase in gross profit that was partially offset by a $0.5 million decline in SG&A expense.

Polymer Additives Segment Results. Sales declined in Polymer Additives driven by reduced volume. Reduced volume lowered sales by $8 million and changes in foreign currency exchange rates reduced sales by an additional $2 million. Changes in product prices and mix increased sales by $2 million. Sales declined in Europe-Middle East-Africa and in the United States compared with the prior-year quarter. The decline in Europe-Middle East-Africa reflected reduced market demand resulting from a weak macroeconomic environment in the region and reduced demand for certain plasticizer products due to changing environmental regulations. Segment income declined primarily due to reduced gross profit that resulted from lower sales and costs associated with planned maintenance shutdowns at two manufacturing locations.

Specialty Plastics Segment Results. Sales declined in Specialty Plastics primarily as a result of reduced sales volume and changes in exchange rates, partially offset by improved product pricing and mix. Reduced sales volume lowered sales by $3.8 million and changes in foreign currency exchange rates contributed an additional $1.5 million to the sales decline. Changes in product pricing and mix increased sales by $3 million. Reduced sales in Europe-Middle East-Africa were the primary driver of the sales decline, reflecting the weakening macroeconomic environment in the region. Segment income increased, primarily driven by higher gross profit that resulted from changes in product pricing.

Pharmaceuticals Segment Results. Sales increased slightly in Pharmaceuticals due to changes in product pricing and mix. Segment income declined primarily due to reduced gross profit.

                                Three months ended
                                     June 30,
                                2012          2011         $ Change        % Change
                                      (Dollars in thousands)
        Geographic Revenues
        United States         $ 214,732     $ 277,294     $  (62,562 )         (22.6 )%
        International           266,773       316,680        (49,907 )         (15.8 )%

        Total                 $ 481,505     $ 593,974     $ (112,469 )         (18.9 )%

Net sales declined in both the United States and international regions compared with the prior-year quarter. In the 2012 second quarter, sales originating in the United States were 45% of total sales, compared with 47% of sales in the second quarter of 2011. The decline in U.S. sales was largely due to the reduced sales of our Electronic Materials products. Sales originating in the Asia-Pacific region declined, also primarily as a result of lower Electronic Materials sales. Sales in Europe-Middle East-Africa declined as a result of reduced customer demand resulting from a weakened macroeconomic environment in the region.

Comparison of the six months ended June 30, 2012 and 2011

                                                       Six months ended
                                                           June 30,
                                                   2012                2011           $ Change        % Change
                                                   (Dollars in thousands, except per share
                                                                   amounts)
Net sales                                      $    947,895        $  1,166,983      $ (219,088 )         (18.8 )%
Cost of sales                                       771,727             932,310        (160,583 )         (17.2 )%

Gross profit                                        176,168             234,673         (58,505 )         (24.9 )%
Gross profit percentage                                18.6 %              20.1 %
Selling, general and administrative expenses        152,330             150,366           1,964             1.3 %
Restructuring and impairment charges                  5,039               3,175           1,864
Other expense (income):
Interest expense                                     13,588              14,178            (590 )
Interest earned                                        (135 )              (143 )             8
Foreign currency (gains) losses, net                    (77 )             2,323          (2,400 )
Miscellaneous expense, net                            2,235                 394           1,841

Income before income taxes                            3,188              64,380         (61,192 )
Income tax expense                                    4,292              21,568         (17,276 )

Net (loss) income                              $     (1,104 )      $     42,812      $  (43,916 )

Diluted earnings per share                     $      (0.02 )      $       0.48      $    (0.50 )

Net sales declined by 18.8% for the six months ended June 30, 2012, compared with the first six months of 2011. The primary reason for the decline was reduced customer demand for our Electronic Materials products, including our metal pastes and powders. Lower sales of precious metals accounted for approximately 69% of the overall sales decline, driven by reduced sales volume and lower prices for silver. Net sales, in total, for all segments other than Electronic Materials were largely unchanged from the first six months of 2011. In aggregate, changes in product pricing and mix reduced overall net sales by approximately 9 percentage points. Lower sales volume accounted for an additional 8 percentage points of the sales decline. Changes in foreign currency exchange rates reduced sales by approximately 2 percentage point during the first six months of 2012.

Gross profit declined as a result of reduced sales and a change in product mix due to the decline in Electronic Materials sales. Gross profit percentage declined to 18.6% of net sales from 20.1% of net sales in the first six months of 2011. In aggregate, raw material costs increased by approximately $14 million compared with the first two quarters of 2011 and these costs were offset by increased product prices. Charges primarily related to residual costs at closed manufacturing sites involved in earlier restructuring initiatives reduced gross profit by $1.4 million during the first six months of 2012. Gross profit was reduced by charges of $2.9 million in the first six months of 2011. These charges were also primarily due to residual costs at closed manufacturing sites involved in prior-period restructuring initiatives.

Selling, general and administrative ("SG&A") expenses increased by $2 million compared with the first six months of 2011. Due primarily to reduced sales, SG&A expenses increased to 16.1% of net sales compared with 12.9% of net sales in the prior-year period. Increased pension expenses, healthcare benefit expenses for U.S. employees and expenses related to an initiative to streamline and standardize business processes and improve management information systems tools contributed to higher SG&A expenses during the first six months of 2012. Partially offsetting these increases were declines in other SG&A expenses including depreciation expense, business travel costs and professional fees. SG&A expenses in the first six months of 2012 included charges of $2.7 million that were primarily related to residual expenses at sites that were closed during earlier restructuring initiatives and severance costs. SG&A expenses in the first six months of 2011 included charges of $2.5 million, primarily related to expenses at closed sites impacted by previous restructuring initiatives.

Restructuring and impairment charges increased to $5.0 million during the first six months of 2012. The charges were primarily related to a restructuring initiative in our Performance Coatings business in Europe.

Interest expense declined in the first six months of 2012 compared with the prior-year period. The lower expense primarily was a result of increased capitalized interest and lower average borrowings.

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

We recorded miscellaneous expense, net, of $2.2 million during the first six months of 2012. Included in miscellaneous expense was a loss of $0.8 million related to the sale of a mining operation in Argentina.

During the first six months of 2012, income tax expense was $4.3 million, or 135% of pre-tax income. In the first six months of 2011, we recorded tax expense of $21.6 million, or 33.5% of pre-tax income. The increase in the effective tax rate was primarily due to an increase in pre-tax losses in jurisdictions with full valuation allowances for which no tax benefit is recognized.

We recorded a net loss of $1.1 million in the first six months of 2012 compared with net income of $42.8 million in the prior-year period, primarily driven by lower sales and the resulting decline in gross profit.

                                                 Six months ended
                                                     June 30,
                                              2012             2011           $ Change         % Change
                                                      (Dollars in thousands)
Segment Sales
Electronic Materials                        $ 162,437       $   382,709      $ (220,272 )          (57.6 )%
Performance Coatings                          309,829           300,181           9,648              3.2 %
Color and Glass Performance Materials         201,324           206,281          (4,957 )           (2.4 )%
Polymer Additives                             171,174           177,133          (5,959 )           (3.4 )%
Specialty Plastics                             91,207            89,139           2,068              2.3 %
Pharmaceuticals                                11,924            11,540             384              3.3 %

Total segment sales                         $ 947,895       $ 1,166,983      $ (219,088 )          (18.8 )%

Segment Income (Loss)
Electronic Materials                        $  (4,657 )     $    53,154      $  (57,811 )             NM
Performance Coatings                           17,758            16,844             914              5.4 %
Color and Glass Performance Materials          18,466            19,768          (1,302 )           (6.6 )%
Polymer Additives                               8,505            11,095          (2,590 )          (23.3 )%
Specialty Plastics                              8,454             4,699           3,755             79.9 %
Pharmaceuticals                                 1,807             2,271            (464 )          (20.4 )%

Total segment income                        $  50,333       $   107,831      $  (57,498 )          (53.3 )%

NM - Not meaningful

Electronic Materials Segment Results. Sales declined in Electronic Materials primarily as a result of reduced demand for our conductive pastes used in solar cells and metal powders used in other electronics applications. Changes in . . .