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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**x****     ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For the quarterly period endedSeptember 30, 2010**

** **

**Or**

** **

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

 

**Commission filenumber 333-109686**

 

**Rockwood Specialties Group, Inc.**

(Exact name of Registrant as specified in its charter)

 

| **Delaware**                    | ** ** | **52-2277390**      |
|---------------------------------|------------|---------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer    |
| incorporation or organization)  |       | Identification No.) |

 

**7101 Muirkirk Road, Beltsville,Maryland 20705**

(Address of principal executive offices) (Zip Code)

 

**(301) 470-3366**

(Registrant’s telephone number, including area code)

 

Indicateby check mark whether the Registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  x Yes  o No

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  o Yes  o No

 

Indicateby check mark whether the Registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

Indicateby check mark whether the Registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).  o Yes  x No

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

 

TheRegistrant’s common stock, par value $0.01 per share is not publically traded.As of November 1, 2010, there were 1,910 outstanding shares of commonstock of the Registrant, all of which is held by its parent company RockwoodSpecialties International, Inc.

 

 

 

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**TABLE OF CONTENTS**

 

**FORM 10-Q**

 
|    | PART I- FINANCIAL INFORMATION                                                                                    |   |
|---------|-----------------------------------------------------------------------------------------------------------------------|--------|
| Item 1  | Financial  Statements (Unaudited)                                                                                     |   |
|    | Condensed Consolidated Statements of Operations for  the three and nine months ended September 30, 2010 and 2009 |   |
|    | Condensed Consolidated Balance Sheets as of  September 30, 2010 and December 31, 2009                       |   |
|    | Condensed Consolidated Statements of Cash Flows for  the nine months ended September 30, 2010 and 2009           |   |
|    | Condensed Consolidated Statements of Equity for the  nine months ended September 30, 2010 and 2009               |   |
|    | Notes to Condensed Consolidated Financial Statements                                                                  |   |
| Item 2  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                           |   |
| Item 3  | Quantitative  and Qualitative Disclosures about Market Risk                                                           |   |
| Item 4T | Controls and  Procedures                                                                                              |   |
|    |                                                                                                                  |   |
|    | PART II-  OTHER INFORMATION                                                                                      |   |
| Item 1  | Legal Proceedings                                                                                                     |   |
| Item 1A | Risk Factors                                                                                                          |   |
| Item 2  | Unregistered  Sales of Equity Securities and Use of Proceeds                                                          |   |
| Item 3  | Defaults  Upon Senior Securities                                                                                      |   |
| Item 4  | (Removed and  Reserved)                                                                                               |   |
| Item 5  | Other Information                                                                                                     |   |
| Item 6  | Exhibits                                                                                                              |   |
|    |                                                                                                                  |   |
|    | Signatures                                                                                                            |   |

 

2

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**PART I — FINANCIAL INFORMATION**

 

**Item 1. Financial Statements (Unaudited).**

 

**ROCKWOOD SPECIALTIES GROUP, INC.AND SUBSIDIARIES**

**CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Dollars in millions)**

**(Unaudited)**

 
| ** **                                                   | ** ** | **Three months ended** | ** **  | **Nine months ended** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|-------------|---------------------------------|------------|
| ** **                                                   | ** ** | **September 30,**           | ** **  | **September 30,**          | ** ** |
| ** **                                                   | ** ** | **2010**                         | ** **  | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net sales                                                    |       | $                                |  860.9 |                            | $          |  786.2 |   | $ |  2,569.3 |   | $ |  2,176.6 |   |
| Cost of products sold                                        |       | 584.2                            |        | 555.0                           |       | 1,744.4 |   | 1,560.1 |   |
| Gross profit                                                 |       | 276.7                            |        | 231.2                           |       | 824.9 |   | 616.5 |   |
| Selling, general and  administrative expenses                |       | 171.6                            |        | 154.8                           |       | 514.4 |   | 450.9 |   |
| Restructuring and other severance  costs                     |       | 1.5                              |        | 4.2                             |       | 4.9 |   | 16.0 |   |
| Loss (gain) on sale of assets and  other                     |       | 0.1                              |        | (0.4                            | )          | 0.2 |   | (0.3 | ) |
| Operating income                                             |       | 103.5                            |        | 72.6                            |       | 305.4 |   | 149.9 |   |
| Other expenses, net:                                         |       |                             |        |                            |       |   |   |   |   |
| Interest expense, net (a)                                    |       | (38.6                            | )           | (53.6                           | )          | (116.7 | ) | (131.4 | ) |
| Loss on early extinguishment of  debt                        |       | (1.6                             | )           | (0.9                            | )          | (1.6 | ) | (26.6 | ) |
| Foreign exchange gain, net                                   |       | 0.9                              |        | 4.5                             |       | 0.8 |   | 15.4 |   |
| Other, net                                                   |       | —                           |        | —                          |       | 0.5 |   | 0.4 |   |
| Other expenses, net                                          |       | (39.3                            | )           | (50.0                           | )          | (117.0 | ) | (142.2 | ) |
| Income from continuing operations  before taxes              |       | 64.2                             |        | 22.6                            |       | 188.4 |   | 7.7 |   |
| Income tax provision                                         |       | 20.7                             |        | 13.0                            |       | 53.4 |   | 6.9 |   |
| Income from continuing operations                            |       | 43.5                             |        | 9.6                             |       | 135.0 |   | 0.8 |   |
| (Loss) income from discontinued  operations, net of tax      |       | —                           |        | (0.1                            | )          | — |   | 3.3 |   |
| Net income                                                   |       | 43.5                             |        | 9.5                             |       | 135.0 |   | 4.1 |   |
| Net (income) loss attributable to  noncontrolling interest   |       | (3.0                             | )           | 0.6                             |       | (5.2 | ) | 6.2 |   |
| Net income attributable to  Rockwood Specialties Group, Inc. |       | $                                |  40.5  |                            | $          |  10.1 |   | $ |  129.8 |   | $ |  10.3 |   |
|                                                         |       |                             |        |                            |       |   |   |   |   |
| Amounts attributable to Rockwood  Specialties Group, Inc.:   |       |                             |        |                            |       |   |   |   |   |
| Income from continuing operations                            |       | $                                |  40.5  |                            | $          |  10.2 |   | $ |  129.8 |   | $ |  7.0 |   |
| (Loss) income from discontinued  operations                  |       | —                           |        | (0.1                            | )          | — |   | 3.3 |   |
| Net income                                                   |       | $                                |  40.5  |                            | $          |  10.1 |   | $ |  129.8 |   | $ |  10.3 |   |
|                                                         |       |                             |        |                            |       |   |   |   |   |
|                                                              |       |                             |        |                            |       |   |   |   |   |
| (a) Interest expense, net  includes:                         |       |                             |        |                            |       |   |   |   |   |
| Interest expense on debt, net                                |       | $                                |  (38.4 | )                               | $          |  (50.7 | ) | $ |  (121.1 | ) | $ |  (126.5 | ) |
| Mark-to-market gains on interest  rate swaps                 |       | 1.2                              |        | (1.3                            | )          | 8.9 |   | 1.3 |   |
| Deferred financing costs                                     |       | (1.4                             | )           | (1.6                            | )          | (4.5 | ) | (6.2 | ) |
| Total                                                        |       | $                                |  (38.6 | )                               | $          |  (53.6 | ) | $ |  (116.7 | ) | $ |  (131.4 | ) |

 

See accompanying notes to condensed consolidatedfinancial statements.

 

3

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**ROCKWOOD SPECIALTIES GROUP, INC.AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCESHEETS**

**(Dollars in millions, except pershare amounts)**

**(Unaudited)**

 
| ** **                                                                                      | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                      | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| **ASSETS**                                                                                      |       |                   |       |                  |       |
| Current assets:                                                                                 |       |                   |       |                  |       |
| Cash and cash equivalents                                                                       |       | $                      | 280.8      |                  | $          | 300.5 |   |
| Accounts receivable, net                                                                        |       | 517.5                  |       | 450.4                 |       |
| Inventories                                                                                     |       | 528.6                  |       | 517.0                 |       |
| Deferred income taxes                                                                           |       | 3.1                    |       | 12.6                  |       |
| Prepaid expenses and other current  assets                                                      |       | 66.8                   |       | 66.5                  |       |
| Total current assets                                                                            |       | 1,396.8                |       | 1,347.0               |       |
| Property, plant and equipment, net                                                              |       | 1,621.8                |       | 1,702.5               |       |
| Goodwill                                                                                        |       | 894.0                  |       | 939.2                 |       |
| Other intangible assets, net                                                                    |       | 624.5                  |       | 704.7                 |       |
| Deferred debt issuance costs, net  of accumulated amortization of $14.5 and $10.8, respectively |       | 18.9                   |       | 26.0                  |       |
| Deferred income taxes                                                                           |       | 26.2                   |       | 24.8                  |       |
| Other assets                                                                                    |       | 40.9                   |       | 37.5                  |       |
| Total assets                                                                                    |       | $                      | 4,623.1    |                  | $          | 4,781.7 |   |
| **LIABILITIES**                                                                                 |       |                   |       |                  |       |
| Current liabilities:                                                                            |       |                   |       |                  |       |
| Accounts payable                                                                                |       | $                      | 223.0      |                  | $          | 237.3 |   |
| Income taxes payable                                                                            |       | 20.6                   |       | 11.5                  |       |
| Accrued compensation                                                                            |       | 150.4                  |       | 77.7                  |       |
| Accrued expenses and other current  liabilities                                                 |       | 218.4                  |       | 179.0                 |       |
| Deferred income taxes                                                                           |       | 6.6                    |       | 2.6                   |       |
| Long-term debt, current portion                                                                 |       | 90.5                   |       | 94.2                  |       |
| Total current liabilities                                                                       |       | 709.5                  |       | 602.3                 |       |
| Long-term debt                                                                                  |       | 2,105.1                |       | 2,434.1               |       |
| Pension and related liabilities                                                                 |       | 397.7                  |       | 410.1                 |       |
| Deferred income taxes                                                                           |       | 80.3                   |       | 69.1                  |       |
| Other liabilities                                                                               |       | 126.9                  |       | 144.1                 |       |
| Total liabilities                                                                               |       | 3,419.5                |       | 3,659.7               |       |
| **EQUITY**                                                                                      |       |                   |       |                  |       |
| Rockwood Specialties Group, Inc.  stockholder’s equity:                                    |       |                   |       |                  |       |
| Common stock ($0.01 par value,  5,000 shares authorized, 1,910 shares issued and outstanding)   |       | —                 |       | —                |       |
| Paid-in capital                                                                                 |       | 1,044.0                |       | 1,044.0               |       |
| Accumulated other comprehensive  income                                                         |       | 159.3                  |       | 207.5                 |       |
| Accumulated deficit                                                                             |       | (289.7                 | )          | (419.5                | )          |
| Total Rockwood Specialties Group,  Inc. stockholder’s equity                               |       | 913.6                  |       | 832.0                 |       |
| Noncontrolling interest                                                                         |       | 290.0                  |       | 290.0                 |       |
| Total equity                                                                                    |       | 1,203.6                |       | 1,122.0               |       |
| Total liabilities and equity                                                                    |       | $                      | 4,623.1    |                  | $          | 4,781.7 |   |

 

See accompanying notes to condensed consolidatedfinancial statements.

 

4

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**ROCKWOOD SPECIALTIES GROUP, INC.AND SUBSIDIARIES**

**CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Dollars in millions)**

**(Unaudited)**

 
| ** **                                                                                              | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                              | ** ** | **2010**                                            | ** ** | **2009** | ** ** |
| **CASH FLOWS FROM  OPERATING ACTIVITIES:**                                                              |       |                                                |       |   |   |
| Net income                                                                                              |       | $                                                   | 135.0      |   | $ | 4.1 |   |
| Adjustments to reconcile net  income to net cash provided by operating activities:                      |       |                                                |       |   |   |
| Income from discontinued  operations, net of tax                                                        |       | —                                              |       | (3.3 | ) |
| Depreciation and amortization                                                                           |       | 193.4                                               |       | 208.5 |   |
| Deferred financing costs  amortization                                                                  |       | 4.5                                                 |       | 6.2 |   |
| Loss on early extinguishment of  debt                                                                   |       | 1.6                                                 |       | 26.6 |   |
| Foreign exchange gain, net                                                                              |       | (0.8                                                | )          | (15.4 | ) |
| Fair value adjustment of  derivatives                                                                   |       | (8.9                                                | )          | (1.3 | ) |
| Bad debt provision                                                                                      |       | (0.5                                                | )          | 0.7 |   |
| Stock-based compensation                                                                                |       | 9.6                                                 |       | 3.1 |   |
| Deferred income taxes                                                                                   |       | 29.8                                                |       | (11.5 | ) |
| Restructuring and other                                                                                 |       | 2.3                                                 |       | 0.1 |   |
| Changes in assets and liabilities,  net of the effect of foreign currency translation and acquisitions: |       |                                                |       |   |   |
| Accounts receivable                                                                                     |       | (77.8                                               | )          | (4.6 | ) |
| Inventories                                                                                             |       | (24.9                                               | )          | 121.4 |   |
| Prepaid expenses and other assets                                                                       |       | (3.8                                                | )          | (0.3 | ) |
| Accounts payable                                                                                        |       | (3.2                                                | )          | (32.2 | ) |
| Income taxes payable                                                                                    |       | (0.9                                                | )          | (0.8 | ) |
| Accrued expenses and other  liabilities                                                                 |       | 112.1                                               |       | (32.1 | ) |
| **Net cash provided  by operating activities**                                                          |       | 367.5                                               |       | 269.2 |   |
| **CASH FLOWS FROM  INVESTING ACTIVITIES:**                                                              |       |                                                |       |   |   |
| Acquisitions, including  transaction fees and payments for prior acquisitions, net of cash acquired     |       | (0.9                                                | )          | (6.4 | ) |
| Capital expenditures, excluding  capital leases                                                         |       | (116.2                                              | )          | (116.5 | ) |
| Contractual advance to Titanium  Dioxide Pigments noncontrolling shareholder                            |       | —                                              |       | (16.0 | ) |
| Proceeds on sale of assets                                                                              |       | 2.0                                                 |       | 7.9 |   |
| Net cash used in investing  activities of continuing operations                                         |       | (115.1                                              | )          | (131.0 | ) |
| Net cash used in investing  activities of discontinued operations                                       |       | —                                              |       | (0.5 | ) |
| **Net cash used in  investing activities**                                                              |       | (115.1                                              | )          | (131.5 | ) |
| **CASH FLOWS FROM  FINANCING ACTIVITIES:**                                                              |       |                                                |       |   |   |
| Prepayment of 2014 Notes                                                                                |       | —                                              |       | (146.8 | ) |
| Proceeds from Titanium Dioxide  Pigments revolving credit facility                                      |       |                                                |       | 14.1 |   |
| Repayment of Titanium Dioxide Pigments  revolving credit facility                                       |       | (14.3                                               | )          | — |   |
| Prepayment of senior secured debt                                                                       |       | (200.2                                              | )          | (102.3 | ) |
| Repayment of senior secured debt                                                                        |       | (30.3                                               | )          | (49.2 | ) |
| Proceeds from other borrowings                                                                          |       | 19.3                                                |       | — |   |
| Payments on other long-term debt                                                                        |       | (45.2                                               | )          | (6.2 | ) |
| Loan from Viance noncontrolling  shareholder                                                            |       | —                                              |       | 2.0 |   |
| Fees related to early  extinguishment of debt                                                           |       | —                                              |       | (12.0 | ) |
| Deferred financing costs                                                                                |       | (0.3                                                | )          | (13.8 | ) |
| **Net cash used in  financing activities**                                                              |       | (271.0                                              | )          | (314.2 | ) |
| Effect of exchange rate changes on  cash and cash equivalents                                           |       | (1.1                                                | )          | (10.1 | ) |
| Net decrease in cash and cash  equivalents                                                              |       | (19.7                                               | )          | (186.6 | ) |
| Cash and cash equivalents,  beginning of period                                                         |       | 300.5                                               |       | 468.7 |   |
| Cash and cash equivalents, end of  period                                                               |       | $                                                   | 280.8      |   | $ | 282.1 |   |
|                                                                                                    |       |                                                |       |   |   |
| Supplemental disclosures of cash  flow information:                                                     |       |                                                |       |   |   |
| Interest paid                                                                                           |       | $                                                   | 112.8      |   | $ | 118.1 |   |
| Income taxes paid, net of refunds                                                                       |       | 28.7                                                |       | 18.9 |   |
| Non-cash investing activities:                                                                          |       |                                                |       |   |   |
| Acquisition of capital equipment                                                                        |       | 12.1                                                |       | 8.1 |   |
| Fees related to early  extinguishment of debt                                                           |       | —                                              |       | 1.6 |   |

 

See accompanying notes to condensed consolidatedfinancial statements.

 

5

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**ROCKWOOD SPECIALTIES GROUP, INC.AND SUBSIDIARIES**

**CONDENSED CONSOLIDATEDSTATEMENTS OF EQUITY**

**(Dollars in millions)**

**(Unaudited)**

 
| ** **                                                                                       | ** ** | **2010**               | ** **  | **2009**           | ** ** |
|--------------------------------------------------------------------------------------------------|------------|------------------------|-------------|--------------------|------------|
| ** **                                                                                       | ** ** | **Rockwood**           | ** **  | ** **         | ** ** | ** ** | ** ** | **Rockwood** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                       | ** ** | **Specialties**        | ** **  | ** **         | ** ** | ** ** | ** ** | **Specialties** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                       | ** ** | **Group, Inc.**   | ** **  | ** **         | ** ** | ** ** | ** ** | **Group, Inc.** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                       | ** ** | **Stockholder’s** | ** **  | **Noncontrolling** | ** ** | **Total** | ** ** | **Stockholder’s** | ** ** | **Noncontrolling** | ** ** | **Total** | ** ** |
| ** **                                                                                       | ** ** | **Equity **       | ** **  | **Interest**       | ** ** | **Equity** | ** ** | ** Equity ** | ** ** | **Interest** | ** ** | **Equity** | ** ** |
| Balance at January 1                                                                             |       | $                      |  832.0 |               | $          |  290.0 |   | $ |  1,122.0 |   | $ |  810.4 |   | $ |  315.4 |   | $ |  1,125.8 |   |
|                                                                                             |       |                   |        |               |       |   |   |   |   |   |   |   |   |
| Net income (loss)                                                                                |       | 129.8                  |        | 5.2                |       | 135.0 |   | 10.3 |   | (6.2 | ) | 4.1 |   |
| Other comprehensive (loss) income,  net of tax                                                   |       | (48.2                  | )           | 0.6                |       | (47.6 | ) | 60.3 |   | (4.4 | ) | 55.9 |   |
| Comprehensive income (loss)                                                                      |       | 81.6                   |        | 5.8                |       | 87.4 |   | 70.6 |   | (10.6 | ) | 60.0 |   |
| Change in estimate of fair value  of assets contributed to the Titanium Dioxide Pigments venture |       | —                 |        | —             |       | — |   | — |   | (16.5 | ) | (16.5 | ) |
| Foreign currency translation                                                                     |       | —                 |        | (5.8               | )          | (5.8 | ) | — |   | 4.9 |   | 4.9 |   |
| Balance at September 30                                                                          |       | $                      |  913.6 |               | $          |  290.0 |   | $ |  1,203.6 |   | $ |  881.0 |   | $ |  293.2 |   | $ |  1,174.2 |   |

 

See accompanying notes to condensed consolidatedfinancial statements.

 

6

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**ROCKWOOD SPECIALTIES GROUP, INC.AND SUBSIDIARIES**

**Notes To CondensedConsolidated Financial Statements (Unaudited)**

 

**1.  DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANTACCOUNTING POLICIES:**

 

***Business Description, Background***— Rockwood Specialties Group, Inc. and Subsidiaries is a globaldeveloper, manufacturer and marketer of high value-added specialty chemicalsand advanced materials used for industrial and commercial purposes. Unlessotherwise indicated, any references to “we,” “our,” “us,” the “Company” or “Rockwood”refer to Rockwood Specialties Group, Inc. and its consolidatedsubsidiaries. The Company is an indirect wholly-owned subsidiary of RockwoodHoldings, Inc. (“Holdings”).

 

***Basis of Presentation***— The accompanying financial statements of Rockwood are presented on aconsolidated basis. All intercompany accounts and transactions have beeneliminated in consolidation. In the opinion of management, this informationcontains all adjustments necessary for a fair presentation of the results forthe periods presented.

 

Theinterim financial statements included herein are unaudited. The results ofoperations for the interim periods are not necessarily indicative of theresults of operations for the full year. The condensed consolidatedfinancial statements are presented based upon accounting principles generallyaccepted in the United States of America (“U.S. GAAP”), except that certaininformation and footnote disclosures, normally included in financial statementsprepared in accordance with U.S. GAAP, have been condensed or omitted. Theaccompanying condensed consolidated financial statements should be read inconjunction with the consolidated financial statements and the notes theretocontained in the Company’s 2009 Form 10-K. In the opinion of management,this information contains all adjustments necessary, consisting of normal andrecurring accruals, for a fair presentation of the results for the periodspresented.

 

TheCompany’s noncontrolling interest represents the total of the noncontrollingparty’s interest in certain investments (principally the Titanium DioxidePigments venture and the Viance, LLC timber treatment joint venture) that areconsolidated but less than 100% owned.

 

Unlessotherwise noted, all balance sheet-related items which are denominated in Eurosare converted at the September 30, 2010 exchange rate of €1.00 = $1.3634.

 

EffectiveAugust 31, 2010, the Company implemented a 200-for-one reverse stock splitof its common stock. As a result of the stock split, the accompanyingconsolidated financial statements reflect a decrease in the number ofoutstanding shares of common stock and the transfer from par value toadditional paid-in-capital.  All share amounts have been restated toreflect the retroactive effect of the stock split for all periods presented.

 

***Stock-Based Compensation***— Under the 2008 Amended and Restated Stock Purchase and Option Plan ofRockwood Holdings, Inc. and Subsidiaries (the “Plan”), Holdings grantedstock options, restricted stock and other stock-based awards to the Company’semployees and directors and allowed employees and directors to purchase sharesof its common stock. However, Holdings no longer issues equity awards underthis Plan. In April 2009, Holdings adopted the 2009 Stock IncentivePlan (the “New Plan”; together with the Plan, the “Plans”), which has11,000,000 authorized shares. All equity awards granted after this date will beawarded under the New Plan.

 

Theaggregate compensation cost for stock options, restricted stock units andHoldings’ Board of Director stock grants recorded under the Plans caused incomefrom continuing operations before taxes to decrease by $3.8 million and $1.6million for the three months ended September 30, 2010 and 2009,respectively, and $9.6 million and $3.1 million for the nine months endedSeptember 30, 2010 and 2009, respectively. The total tax benefitrecognized related to stock options was $0.4 million and $0.2 million for thethree months ended September 30, 2010 and 2009, respectively, and $0.9million and $0.3 million for the nine months ended September 30, 2010 and2009, respectively.

 

InDecember 2009, Holdings approved an award of 233,657 performance-basedrestricted stock units to management and key employees which will vest onDecember 31, 2012 as long as the employee continues to be employed by theCompany on this date and upon the achievement of certain performance targetsapproved by Holdings’ compensation committee (“Compensation Committee”). Thenumber of shares of Holdings’ common stock ultimately awarded upon vesting isdetermined based on the achievement of specified performance criteria over theperiod January 1, 2010 through December 31, 2010. However, theCompany did not recognize any compensation cost in 2009 for this issuancebecause the performance targets that form the basis for vesting of theserestricted stock units were not known as of December 31, 2009. Theseperformance targets were set in January 2010, when such performancetargets were approved by the Compensation Committee, and as a result, theCompany began recording compensation cost on a ratable basis over the vestingperiod. The grant date fair value of these restricted stock units was $22.00per stock unit.

 

7

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***Recent Accounting Standards***—The following represents the impact of recently issued accounting standards:

 

InJune 2009, the FASB issued a statement that requires an enterprise toperform an analysis to determine whether it has a controlling financialinterest in a variable interest entity. It requires additional disclosuresabout involvement with variable interest entities and any significant changesin risk exposure due to that involvement. The Company adopted thisstatement on January 1, 2010. This statement did not have a materialimpact on its financial statements. See Note 3, “Variable Interest Entities,”for the disclosure requirements of this statement.

 

InJanuary 2010, the FASB issued an accounting update that amended guidanceand clarified the disclosure requirements about fair market value measurement.This requires a reporting entity to disclose separately the amounts ofsignificant transfers in and out of Level 1 and Level 2 fair value measurementsand to describe the reasons for the transfers. In addition, for measurementsutilizing significant unobservable inputs, a reporting entity should presentseparately information about purchases, sales, issuances, and settlements. TheCompany adopted this update on January 1, 2010. There was no impact uponadoption of this update on the Company’s financial statements. See Note 6, “FairValue Measurements.”

 

**2.  COMPREHENSIVE INCOME:**

 

Comprehensiveincome includes net income and the other comprehensive income components whichinclude unrealized gains and losses from foreign currency translation and fromcertain intercompany transactions that are of a long-term investment nature,pension-related adjustments that are recorded directly into a separate sectionof equity in the balance sheets and net investment and foreign exchange cashflow hedges. Foreign currency translation amounts and intercompany foreign currencyloans are not adjusted for income taxes since they relate to indefinite lengthinvestments in non-U.S. subsidiaries.

 

Comprehensiveincome is summarized as follows:

 
| ** **                                                                  | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **($ in millions)**                                               | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net income                                                                  |       | $                                                    | 43.5       |                                                | $          | 9.5 |   | $ | 135.0 |   | $ | 4.1 |   |
| Pension related adjustments, net  of tax                                    |       | (2.4                                                 | )          | —                                              |       | 1.4 |   | (0.1 | ) |
| Foreign currency translation                                                |       | 65.7                                                 |       | 49.6                                                |       | (11.9 | ) | 57.0 |   |
| Intercompany foreign currency  loans                                        |       | 81.5                                                 |       | 31.6                                                |       | (39.5 | ) | 35.0 |   |
| Net investment hedges, net of tax                                           |       | (20.7                                                | )          | (36.3                                               | )          | 0.8 |   | (35.7 | ) |
| Foreign exchange contracts, net of  tax                                     |       | 1.9                                                  |       | (0.2                                                | )          | 1.6 |   | (0.3 | ) |
| Comprehensive income                                                        |       | 169.5                                                |       | 54.2                                                |       | 87.4 |   | 60.0 |   |
| Comprehensive (income) loss  attributable to noncontrolling interest        |       | (3.6                                                 | )          | 0.8                                                 |       | (5.8 | ) | 10.6 |   |
| Comprehensive income attributable  to Rockwood Specialties Group, Inc. |       | $                                                    | 165.9      |                                                | $          | 55.0 |   | $ | 81.6 |   | $ | 70.6 |   |

 

**3.  VARIABLE INTEREST ENTITIES:**

 

**Viance LLC Joint Venture**

 

InJanuary 2007, Chemical Specialties, Inc. (“CSI”), a wholly-owned subsidiaryof the Company within the Timber Treatment Chemicals business of thePerformance Additives segment, and Rohm and Haas Company (a subsidiary of TheDow Chemical Company) completed the formation of Viance, LLC (“Viance”), ajoint venture that provides an extensive range of advanced wood treatmenttechnologies and services to the global wood treatment industry. TheCompany has concluded that Rockwood is the primary beneficiary of Viance and assuch has consolidated the joint venture and reported Rohm and Haas’ interest asnoncontrolling interest. This conclusion was made as Rockwood has theobligation to absorb losses of Viance that could potentially be significant toViance and/or the right to receive benefits from Viance that could potentiallybe significant to Viance. In addition, CSI has the power to direct theactivities of Viance that most significantly impact Viance’s performance asViance does not own manufacturing facilities. As a result, Vianceprimarily relies on CSI to provide product and distribution requirementsthrough a supply agreement.

 

AtSeptember 30, 2010 and December 31, 2009, no consolidated assets ofthe Company were pledged as collateral for any joint venture obligations andthe general creditors of the joint venture had no recourse against theCompany. The partners have provided $4.0 million of short-term financingto the venture. However, this financing is not subordinated and managementbelieves that such financing could have been readily obtained externally. Allintercompany accounts, balances and transactions have beeneliminated. Viance’s assets can only be used to settle direct obligationsof Viance.

 

8

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Thecarrying values of the assets and liabilities of the Viance joint ventureincluded in the condensed consolidated balance sheets are as follows:

 
| ** **                                      | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **ASSETS**                                      |       |                         |       |                        |       |
| Current assets:                                 |       |                         |       |                        |       |
| Cash and cash equivalents                       |       | $                            | 5.8        |                        | $          | 6.3 |   |
| Accounts receivable, net                        |       | 9.0                          |       | 6.9                         |       |
| Inventories                                     |       | 0.8                          |       | 1.1                         |       |
| Prepaid expenses and other current  assets      |       | 4.9                          |       | 4.4                         |       |
| Total current assets                            |       | 20.5                         |       | 18.7                        |       |
| Property, plant and equipment, net              |       | 1.9                          |       | 2.0                         |       |
| Other intangible assets, net                    |       | 73.2                         |       | 78.0                        |       |
| Other assets                                    |       | 1.8                          |       | 1.9                         |       |
| Total assets                                    |       | $                            | 97.4       |                        | $          | 100.6 |   |
| **LIABILITIES**                                 |       |                         |       |                        |       |
| Current liabilities:                            |       |                         |       |                        |       |
| Accounts payable                                |       | $                            | 0.8        |                        | $          | 1.5 |   |
| Income taxes payable                            |       | 0.3                          |       | 0.1                         |       |
| Accrued compensation                            |       | 0.8                          |       | 1.5                         |       |
| Accrued expenses and other current  liabilities |       | 3.0                          |       | 2.0                         |       |
| Long-term debt, current portion                 |       | 2.0                          |       | 2.0                         |       |
| Total current liabilities                       |       | 6.9                          |       | 7.1                         |       |
| Deferred income taxes                           |       | 0.1                          |       | 0.1                         |       |
| Other liabilities                               |       | 0.8                          |       | 0.8                         |       |
| Total liabilities                               |       | $                            | 7.8        |                        | $          | 8.0 |   |

 

**Titanium Dioxide Pigments Venture**

 

InSeptember 2008, the Company completed the formation of a Titanium DioxidePigments venture with Kemira Oyj (“Kemira”) that focuses on specialty titaniumdioxide pigments. The venture includes the combination of the Company’stitanium dioxide pigments and functional additives businesses, including itsproduction facility in Duisburg, Germany, and Kemira’s titanium dioxidebusiness, including Kemira’s titanium dioxide plant in Pori, Finland. TheCompany has not identified significant variable interests in this venture andaccordingly has concluded that this venture does not meet the definition of avariable interest entity (“VIE”). The Company owns 61% of the venture andconsolidates it based on the “voting interest” model given its majorityownership and ability to control decision making. Kemira only has certain “protectiverights” to limit Rockwood’s control.

 

Inconjunction with this venture, there is a power plant that is legally owned andoperated by a Finnish power cooperative (“PVO”). Kemira is a cooperativeparticipant and has an indirect interest in the power plant via ownership of aspecial share class. The venture utilizes the majority of power supplied. Thispower plant was determined to be a VIE as the equity holders of the power plantas a group (including Kemira) lack the ability to influence decision makingsince PVO effectively controls the power plant. It was determined that Rockwoodand Kemira jointly form the primary beneficiary of the power plant. The venturehas a long-term agreement expiring in August 2018 to purchase steam andelectricity (“energy”) from Kemira. Due to the terms of this agreement underwhich Kemira has the risks and benefits of the majority of the expected life ofthe power plant, the Company concluded that Kemira is the party most closelyassociated with the venture and therefore is the primary beneficiary within therelated party group. Accordingly, the Company does not consolidate the powerplant. The venture purchased $8.6 million and $9.0 million of energy fromKemira in the three months ended September 30, 2010 and 2009,respectively, and $26.9 million and $24.5 million of energy from Kemira in thenine months ended September 30, 2010 and 2009, respectively. Minimumannual payments under the energy agreement are approximately $14.7 million. Inconnection with this energy arrangement, the venture has approximately $29.2million (includes a contractual advance of $16.0 million made in 2009) ofnon-interest bearing notes receivable from Kemira that are due inAugust 2028. The carrying value of the notes receivable were $5.5 millionat September 30, 2010. Interest is imputed at an effective rate of 8.96%.Apart from routine payables to Kemira or PVO in connection with this agreement,no results or balances of the power plant are reflected in the Company’sfinancial statements.

 

9

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**Other**

 

Rockwood’sSpecialty Chemicals segment has several unconsolidated ventures. Two of theseventures do not fit the criteria for classification as a VIE as they arefinancially self-sustaining, “50/50” ventures both as to control and economics.Other ventures manufacture and market products in China and an additionalventure is a service provider at a key manufacturing facility. As the partiesshare risks and benefits disproportionate to their voting interests, theCompany has concluded that these ventures are VIEs. However, the Company hasalso concluded that it should not consolidate these VIEs as it is not theprimary beneficiary. The Company does not have the power and/or ability todirect the activities most affecting venture performance due to governance structureand significant expertise provided and/or functions performed by its venturepartners. As of September 30, 2010, Rockwood’s aggregate net investment inthese ventures was $12.5 million. This investment is classified as “Otherassets” in the condensed consolidated balance sheet and represents Rockwood’sapproximate exposure to losses on these investments. Rockwood does notguarantee debt for or have other financial support obligations to theseventures.

 

**4.  SEGMENT INFORMATION:**

 

Rockwoodoperates in five reportable segments according to the nature and economiccharacteristics of its products and services as well as the manner in which theinformation is used internally by the Company’s key decision maker, who is theCompany’s Chief Executive Officer. The five segments are: (1) SpecialtyChemicals, which consists of the surface treatment and fine chemicals businesslines; (2) Performance Additives, which consists of color pigments andservices, timber treatment chemicals and clay-based additives; (3) TitaniumDioxide Pigments; (4) Advanced Ceramics; and (5) Specialty Compounds.

 

Itemsthat cannot be readily attributed to individual segments have been classifiedas “Corporate and other.” Corporate and other operating loss primarilyrepresents payroll, professional fees and other operating expenses ofcentralized functions such as treasury, tax, legal, internal audit andconsolidation accounting as well as the cost of operating the Company’s centraloffices (including some costs maintained based on legal or tax considerations).The primary components of Corporate and other loss, in addition to operatingloss, are interest expense on external debt (including the amortization ofdeferred financing costs), foreign exchange losses or gains, and mark-to-marketgains or losses on derivatives. Major components within the reconciliation ofincome from continuing operations before taxes (described more fully below)include systems/organization establishment expenses, interest expense onexternal debt, foreign exchange losses or gains, and refinancing expensesrelated to external debt. Corporate and other identifiable assets primarilyrepresent deferred financing costs that have been capitalized in connectionwith corporate external debt financing, deferred income tax assets and cashbalances maintained in accordance with centralized cash management techniques.The Corporate and other classification also includes the results of operations,assets (primarily real estate) and liabilities (including pension and environmental)of legacy businesses formerly belonging to Dynamit Nobel and the wafer reclaimbusiness. The wafer reclaim business works with semiconductor manufacturers torefurbish used test wafers and return them to the manufacturer for reuse intest and process monitor applications.

 

Summarizedfinancial information for each of the reportable segments is provided in thefollowing table:

 
| ** **                                      | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **         | ** ** | ** **       | ** ** |
|-------------------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|--------------------|------------|------------------|------------|
| ** **                                      | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | **Corporate**      | ** ** | ** **       | ** ** |
| **($ in millions)**                   | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **and other** | ** ** | **Consolidated** | ** ** |
| **Three months ended September 30,  2010** |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| Net sales                                       |       | $             | 283.6      |            | $          | 187.8        |       | $            | 192.7      |          | $          | 131.0              |       | $                | 63.9       |   | $ | 1.9 |   | $ | 860.9 |   |
| Total Adjusted EBITDA                           |       | 70.8          |       | 34.1            |       | 34.2         |       | 40.3         |       | 9.4           |       | (19.7              | )          | 169.1            |       |
| **Three months ended September 30,  2009** |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| Net sales                                       |       | $             | 261.5      |            | $          | 182.2        |       | $            | 177.5      |          | $          | 108.6              |       | $                | 54.8       |   | $ | 1.6 |   | $ | 786.2 |   |
| Total Adjusted EBITDA                           |       | 68.1          |       | 28.3            |       | 24.6         |       | 31.4         |       | 8.8           |       | (10.1              | )          | 151.1            |       |
| **Nine months ended September 30, 2010**   |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| Net sales                                       |       | $             | 860.5      |            | $          | 564.4        |       | $            | 564.1      |          | $          | 385.3              |       | $                | 189.9      |   | $ | 5.1 |   | $ | 2,569.3 |   |
| Total Adjusted EBITDA                           |       | 218.0         |       | 100.6           |       | 94.5         |       | 117.9        |       | 28.6          |       | (53.3              | )          | 506.3            |       |
| **Nine months ended September 30, 2009**   |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| Net sales                                       |       | $             | 723.0      |            | $          | 517.6        |       | $            | 480.8      |          | $          | 293.6              |       | $                | 157.5      |   | $ | 4.1 |   | $ | 2,176.6 |   |
| Total Adjusted EBITDA                           |       | 175.9         |       | 71.2            |       | 65.6         |       | 75.3         |       | 25.5          |       | (27.9              | )          | 385.6            |       |

 
| ** **                    | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **         | ** ** | ** **                | ** ** | ** **       | ** ** |
|-------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|--------------------|------------|---------------------------|------------|------------------|------------|
| ** **                    | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | **Corporate**      | ** ** | ** **                | ** ** | ** **       | ** ** |
| **($ in millions)** | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **and other** | ** ** | **Eliminations (a)** | ** ** | **Consolidated** | ** ** |
| Identifiable assets as of:    |       |          |       |            |       |         |       |         |       |          |       |               |       |                      |       |             |       |
| September 30, 2010       |       | $             | 2,098.8    |            | $          | 757.5        |       | $            | 888.7      |          | $          | 841.6              |       | $                         | 140.0      |             | $          | 290.7 |   | $ | (394.2 | ) | $ | 4,623.1 |   |
| December 31, 2009        |       | 2,088.9       |       | 762.7           |       | 945.1        |       | 866.3        |       | 124.9         |       | 323.6              |       | (329.8                    | )          | 4,781.7          |       |
|                               |            |               |            |                 |            |              |            |              |            |               |            |                    |            |                           |            |                  |            |  |  |  |  |  |  |  |  |

 

----

| (a) | Amounts  contained in the “Eliminations” column represent the individual subsidiaries’  retained interest in their cumulative net |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------|

 

10

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|   | cash  balance (deposits less withdrawals) included in the corporate centralized  cash system and within the identifiable assets of the respective segment.  These amounts are eliminated as the corporate centralized cash system is  included in the Corporate and other segment’s identifiable assets. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Geographicinformation regarding net sales based on seller’s location and long-livedassets are described in Note 3, “Segment Information,” in the Company’s 2009Form 10-K.

 

On asegment basis, the Company defines Adjusted EBITDA as operating incomeexcluding depreciation and amortization, certain non-cash gains and charges,certain other special gains and charges deemed by senior management to benon-recurring gains and charges and certain items deemed by senior managementto have little or no bearing on the day-to-day operating performance of itsbusiness segments and reporting units. The adjustments made to operating incomedirectly correlate with the adjustments to net income in calculating AdjustedEBITDA on a consolidated basis pursuant to the Company’s senior secured creditagreement, which reflects management’s interpretations thereof. The indenturegoverning the senior subordinated notes, due in 2014 (“2014 Notes”), and thefacility agreement related to the Titanium Dioxide Pigments venture excludecertain adjustments permitted under the senior credit agreement. Seniormanagement uses Adjusted EBITDA on a segment basis as the primary measure toevaluate the ongoing performance of the Company’s business segments andreporting units. Because the Company views Adjusted EBITDA on a segmentbasis as an operating performance measure, the Company uses income (loss) fromcontinuing operations before taxes as the most comparable GAAP measure.

 

11

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| ** **                                            | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **         | ** ** | ** **       | ** ** |
|-------------------------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|--------------------|------------|------------------|------------|
| ** **                                            | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | **Corporate**      | ** ** | ** **       | ** ** |
| **($ in millions)**                         | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **and other** | ** ** | **Consolidated** | ** ** |
| **Three months ended September 30,  2010**       |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| Income (loss) from continuing operations before taxes |       | $             | 37.6       |            | $          | 11.8         |       | $            | 14.0       |          | $          | 20.8               |       | $                | 4.6        |   | $ | (24.6 | ) | $ | 64.2 |   |
| Interest expense, net (a)                             |       | 15.1          |       | 7.6             |       | 4.2          |       | 6.8          |       | 2.5           |       | 2.4                |       | 38.6             |       |
| Depreciation and amortization                         |       | 18.4          |       | 14.0            |       | 16.2         |       | 12.0         |       | 1.9           |       | 1.0                |       | 63.5             |       |
| Restructuring and other severance costs               |       | 0.1           |       | 0.3             |       | —       |       | 0.7          |       | 0.3           |       | 0.1                |       | 1.5              |       |
| Systems/organization establishment expenses           |       | 0.1           |       | —          |       | —       |       | —       |       | —        |       | —             |       | 0.1              |       |
| Acquisition and disposal costs                        |       | (0.1          | )          | 0.1             |       | —       |       | —       |       | —        |       | 0.4                |       | 0.4              |       |
| Loss on early extinguishment of debt                  |       | 0.7           |       | 0.3             |       | —       |       | 0.4          |       | 0.1           |       | 0.1                |       | 1.6              |       |
| Loss on sale of assets and other                      |       | 0.1           |       | —          |       | —       |       | —       |       | —        |       | —             |       | 0.1              |       |
| Foreign exchange (gain) loss, net                     |       | (1.2          | )          | (0.1            | )          | —       |       | (0.4         | )          | —        |       | 0.8                |       | (0.9             | )          |
| Other                                                 |       | —        |       | 0.1             |       | (0.2         | )          | —       |       | —        |       | 0.1                |       | —           |       |
| Total Adjusted EBITDA                                 |       | $             | 70.8       |            | $          | 34.1         |       | $            | 34.2       |          | $          | 40.3               |       | $                | 9.4        |   | $ | (19.7 | ) | $ | 169.1 |   |
| **Three months ended September 30,  2009**       |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| Income (loss) from continuing operations before taxes |       | $             | 33.4       |            | $          | 2.0          |       | $            | (2.5       | )             | $          | 8.0                |       | $                | 2.7        |   | $ | (21.0 | ) | $ | 22.6 |   |
| Interest expense, net (a)                             |       | 18.7          |       | 8.5             |       | 6.4          |       | 9.7          |       | 2.8           |       | 7.5                |       | 53.6             |       |
| Depreciation and amortization                         |       | 18.3          |       | 15.9            |       | 19.5         |       | 13.4         |       | 3.0           |       | 1.4                |       | 71.5             |       |
| Restructuring and other severance costs               |       | 2.3           |       | 1.0             |       | 0.1          |       | 0.7          |       | 0.1           |       | —             |       | 4.2              |       |
| Systems/organization establishment expenses           |       | 0.2           |       | 0.6             |       | 1.1          |       | 0.1          |       | —        |       | 0.4                |       | 2.4              |       |
| Loss (gain) on early extinguishment of debt           |       | 1.1           |       | 0.2             |       | —       |       | 0.3          |       | 0.1           |       | (0.8               | )          | 0.9              |       |
| Gain on sale of assets and other                      |       | (0.4          | )          | —          |       | —       |       | —       |       | —        |       | —             |       | (0.4             | )          |
| Foreign exchange (gain) loss, net                     |       | (5.4          | )          | (0.1            | )          | —       |       | (0.8         | )          | —        |       | 1.8                |       | (4.5             | )          |
| Other                                                 |       | (0.1          | )          | 0.2             |       | —       |       | —       |       | 0.1           |       | 0.6                |       | 0.8              |       |
| Total Adjusted EBITDA                                 |       | $             | 68.1       |            | $          | 28.3         |       | $            | 24.6       |          | $          | 31.4               |       | $                | 8.8        |   | $ | (10.1 | ) | $ | 151.1 |   |
| **Nine months ended September 30, 2010**         |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| Income (loss) from continuing operations before taxes |       | $             | 115.8      |            | $          | 30.6         |       | $            | 32.3       |          | $          | 58.4               |       | $                | 14.7       |   | $ | (63.4 | ) | $ | 188.4 |   |
| Interest expense, net (a)                             |       | 46.4          |       | 22.9            |       | 12.1         |       | 22.2         |       | 7.5           |       | 5.6                |       | 116.7            |       |
| Depreciation and amortization                         |       | 54.9          |       | 42.9            |       | 50.0         |       | 36.5         |       | 6.0           |       | 3.1                |       | 193.4            |       |
| Restructuring and other severance costs               |       | 0.7           |       | 2.9             |       | —       |       | 0.8          |       | 0.3           |       | 0.2                |       | 4.9              |       |
| Systems/organization establishment expenses           |       | 0.8           |       | 0.3             |       | 0.3          |       | 0.1          |       | —        |       | —             |       | 1.5              |       |
| Acquisition and disposal costs                        |       | 0.4           |       | 0.1             |       | —       |       | —       |       | —        |       | 0.5                |       | 1.0              |       |
| Loss on early extinguishment of debt                  |       | 0.7           |       | 0.3             |       | —       |       | 0.4          |       | 0.1           |       | 0.1                |       | 1.6              |       |
| Loss on sale of assets and other                      |       | 0.2           |       | —          |       | —       |       | —       |       | —        |       | —             |       | 0.2              |       |
| Foreign exchange (gain) loss, net                     |       | (1.3          | )          | —          |       | —       |       | (0.5         | )          | —        |       | 1.0                |       | (0.8             | )          |
| Other                                                 |       | (0.6          | )          | 0.6             |       | (0.2         | )          | —       |       | —        |       | (0.4               | )          | (0.6             | )          |
| Total Adjusted EBITDA                                 |       | $             | 218.0      |            | $          | 100.6        |       | $            | 94.5       |          | $          | 117.9              |       | $                | 28.6       |   | $ | (53.3 | ) | $ | 506.3 |   |
| **Nine months ended September 30, 2009**         |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| Income (loss) from continuing operations before taxes |       | $             | 59.7       |            | $          | (8.6         | )          | $            | (14.2      | )             | $          | (1.5               | )          | $                | 8.7        |   | $ | (36.4 | ) | $ | 7.7 |   |
| Interest expense, net (a)                             |       | 48.6          |       | 23.0            |       | 21.0         |       | 25.9         |       | 7.4           |       | 5.5                |       | 131.4            |       |
| Depreciation and amortization                         |       | 54.9          |       | 46.4            |       | 56.2         |       | 38.1         |       | 8.3           |       | 4.6                |       | 208.5            |       |
| Restructuring and other severance costs               |       | 4.4           |       | 5.6             |       | 0.1          |       | 5.5          |       | 0.2           |       | 0.2                |       | 16.0             |       |
| Systems/organization establishment expenses           |       | 0.6           |       | 1.7             |       | 2.5          |       | 0.3          |       | —        |       | 0.4                |       | 5.5              |       |
| Loss on early extinguishment of debt                  |       | 11.6          |       | 2.4             |       | —       |       | 7.2          |       | 0.8           |       | 4.6                |       | 26.6             |       |
| Gain on sale of assets and other                      |       | (0.3          | )          | —          |       | —       |       | —       |       | —        |       | —             |       | (0.3             | )          |
| Foreign exchange gain, net                            |       | (6.0          | )          | —          |       | —       |       | (0.2         | )          | —        |       | (9.2               | )          | (15.4            | )          |
| Other                                                 |       | 2.4           |       | 0.7             |       | —       |       | —       |       | 0.1           |       | 2.4                |       | 5.6              |       |
| Total Adjusted EBITDA                                 |       | $             | 175.9      |            | $          | 71.2         |       | $            | 65.6       |          | $          | 75.3               |       | $                | 25.5       |   | $ | (27.9 | ) | $ | 385.6 |   |

 

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(a)                Includesgains of $1.2 million and losses of $1.3 million for the three months ended September 30,2010 and 2009, respectively, and gains of $8.9 million and $1.3 million for thenine months ended September 30, 2010 and 2009, respectively, representingthe movement in the mark-to-market valuation of the Company’s interest rate andcross-currency hedging instruments.

 

Thesummary of segment information above includes “Adjusted EBITDA,” a financialmeasure used by the Company’s chief decision maker and senior management toevaluate the operating performance of each segment.

 

*Items excluded from Adjusted EBITDA*

 

Certainitems are added to or subtracted from income (loss) from continuing operationsbefore taxes to derive Adjusted EBITDA, as defined below. These items includethe following:

 

·               *Restructuring and other severance costs*: Restructuring and other severance costs of $1.5 million and $4.2million were recorded in the three months ended September 30, 2010 and2009, respectively, and $4.9 million and $16.0 million were 

 

12

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recordedin the nine months ended September 30, 2010 and 2009, respectively, formiscellaneous restructuring activities, including headcount reductions, assetwrite-offs and facility closures (see Note 13, “Restructuring and OtherSeverance Costs,” for further details).

 

·               *Systems/organization establishment expenses*: For the nine months ended September 30, 2010, expenses of $1.5million were recorded primarily related to costs incurred in conjunction withreorganizing certain business functions within the Specialty Chemicals segmentand the integration of the Titanium Dioxide Pigments venture completed inSeptember 2008. For the three and nine months endedSeptember 30, 2009, expenses of $2.4 million and $5.5 million wererecorded related to the integration of businesses acquired, primarily relatedto the completion of the Titanium Dioxide Pigments venture and the acquisitionof the global color pigments business of Elementis plc in the PerformanceAdditives segment.

 

·               *Acquisition and disposal costs:*Costs of $0.4 million and $1.0 million were recorded in the three and ninemonths ended September 30, 2010, respectively, in connection withpotential and actual acquisitions and dispositions.

 

·                  *Loss on early extinguishment of debt*: For the three and nine months ended September 30, 2010, theCompany recorded a loss on early extinguishment of debt of $1.6 million relatedto the write-off of deferred financing costs associated with the voluntaryprepayment of $200.2 million of senior secured term loans in July 2010. Forthe three months ended September 30, 2009, the Company recorded a loss onearly extinguishment of debt of $0.9 million primarily related to lender feesto extend the maturity of its revolving credit facility. For the nine monthsended September 30, 2009, the Company recorded a loss on earlyextinguishment of debt of $26.6 million related to the write-off of deferredfinancing costs of $20.9 million and lender fees related to the earlyextinguishment of debt of $12.0 million, partially offset by a discount of $6.3million related to the repurchase of $153.2 million in aggregate principalamount of the 2014 Notes.

 

·               *Foreign exchange (gain) loss, net*: For the three and nine months ended September 30, 2010, theCompany recorded foreign exchange gains of $0.9 million and $0.8 millionprimarily related to Euro-denominated debt, cash and intercompany loans.    For the three months endedSeptember 30, 2009, the Company recorded foreign exchange gains of $4.5million primarily due to the impact of the stronger Euro as of September 30,2009 versus June 30, 2009 in connection with non-operatingEuro-denominated transactions. For the nine months ended September 30,2009, the Company recorded foreign exchange gains of $15.4 million primarilydue to the impact of the stronger pound sterling as of September 30, 2009versus December 31, 2008 in connection with non-operating Euro-denominatedtransactions.

 

·               *Other*: For the ninemonths ended September 30, 2010, the Company recorded income of $0.6million primarily related to a gain on the sale of an investment previouslyaccounted for under the equity method and the reversal of a reserve coveringlegacy obligations assumed in connection with the acquisition of the DynamitNobel businesses in 2004. For the nine months ended September 30, 2009,the Company recorded expenses of $5.6 million primarily related to an increasein reserves covering legacy obligations assumed in connection with the KKRacquisition in 2000 and the acquisition of the Dynamit Nobel businesses in2004.

 

**5.  DERIVATIVES:**

 

TheCompany is exposed to market risk from changes in interest rates and foreigncurrency exchange rates. The Company manages its exposure to these market risksthrough regular operating and financing activities and through the use ofderivatives. When used, derivatives are employed as risk management tools andnot for trading purposes.

 

**Interest Rate Risk**

 

Afterhedging, the Company had $957.3 million and $1,186.9 million of variable ratedebt outstanding as of September 30, 2010 and December 31, 2009, respectively,a portion of which is subject to a Libor or Euribor floor of 2.00%.Historically, the Company has entered into interest rate swaps to manage itsexposure to changes in interest rates related to variable rate debt. As ofSeptember 30, 2010 and December 31, 2009, these contracts covernotional amounts of €463.8 million (at interest rates ranging from 2.995% to4.416%) and €482.2 million (at interest rates ranging from 2.995% to 4.416%),respectively. These derivative contracts were originally entered into to effectivelyconvert a portion of the senior secured credit obligations and a portion of theobligations under the Titanium Dioxide Pigments term loan facility to fixedrate obligations. These contracts will mature between December 2010 andJuly 2012. The Company has not applied hedge accounting for these interestrate swaps and has recorded the mark-to-market of these derivatives as acomponent of interest expense in its condensed consolidated statements ofoperations. The Company may in the future consider adjusting the amountscovered by these derivative contracts to better suit its capital structure. TheCompany may allow all or a portion of these swaps to lapse, enter intoreplacement swaps or settle these swaps prior to expiration.

 

InJuly 2010, the Company entered into forward starting interest rate swapsto manage its exposure to changes in interest rates related to variable ratedebt. These derivative contracts replace the contracts expiring in December 2010and effectively convert all of the 

 

13

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obligationsunder the Titanium Dioxide Pigments term loan facility to fixed rateobligations and amortize over their respective lives. These contracts covernotional amounts of €220.0 million (at a fixed contract rate of 1.40%)beginning in December 2010 and maturing in June 2013. The Company hasnot applied hedge accounting for these interest rate swaps and records themark-to-market of these derivatives as a component of interest expense in itsconsolidated statements of operations.

 

During 2003,the Company entered into a cross-currency interest rate swap with a notionalamount of $20.3 million that effectively converted $20.3 million of U.S. dollarborrowings into Euro-based obligations at an effective interest rate of Euriborplus 4.00%. As of December 31, 2009, the notional amounts of thiscross-currency interest rate hedge were $19.1 million and €17.0 million. Thiscontract had a final maturity date of July 2010. In May 2010, theCompany settled this swap and paid $3.3 million to the counterparty. TheCompany had not applied hedge accounting for this cross-currency interest rateswap and had recorded the mark-to-market of this derivative as a component ofinterest expense in its condensed consolidated statements of operations.

 

**Foreign Currency Risk**

 

InDecember 2008, the Company entered into foreign currency forward contractsto manage its exposure to fluctuations in currency rates on certain forecastedsales denominated in a currency other than the functional currency of the legalentity in its Specialty Chemicals segment. These foreign currency forwardcontracts hedged the exposure to movements in foreign exchange rates forforecasted transactions for twelve months, and expired inDecember 2009. The instruments were designated as foreign exchangecash flow hedges and were effective at generating offsetting changes in thefair value or cash flows of the hedged item or transaction.

 

InFebruary 2010, the Company entered into foreign currency forward contractsto manage its exposure to fluctuations in currency rates on forecasted salesdenominated in a currency other than the functional currency of the legalentity. As of September 30, 2010, the Company had notional amountsoutstanding for these foreign currency forward contracts of $1.5 million. TheCompany has not applied hedge accounting for these foreign currency forwardcontracts.

 

InJune 2010, the Company entered into foreign currency forward contracts tomanage its exposure to fluctuations in currency rates on cash flows on certainforecasted sales denominated in a currency other than the functional currencyof a legal entity in its Titanium Dioxide segment. These foreign currencyforward contracts hedge the exposure to movements in foreign exchange rates forforecasted transactions for six months, and expire inDecember 2010. As of September 30, 2010, the Company hadnotional amounts outstanding for these foreign currency forward contracts of$24.0 million. The instruments were designated as foreign exchange cash flowhedges and were effective at generating offsetting changes in the fair value orcash flows of the hedged item or transaction.

 

Inconnection with the offering of the 2014 Notes, the Company entered into across-currency interest rate swap with a five-year term which expired inNovember 2009 and a notional amount of €155.6 million that effectivelyconverted the U.S. dollar fixed rate debt in respect of the 2014dollar-denominated notes sold into Euro fixed rate debt. The Company paid$32.9 million in connection with the settlement of this cross-currency swap inNovember 2009. The Company previously designated this contract as a hedgeof the foreign currency exposure of its net investment in its Euro-denominatedoperations. In addition, the Company has designated a portion of itsEuro-denominated debt that is recorded on its U.S. books as a net investmenthedge of its Euro-denominated investments (Euro debt of €217.1 million atSeptember 30, 2010; $296.0 million). Any foreign currency gains and lossesresulting from the designated portion of Euro-denominated debt discussed aboveis accounted for as a component of accumulated other comprehensive income foras long as the hedge remains effective. There was no ineffective portion of thenet investment hedge as of September 30, 2010.

 

14

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Thefollowing table provides the fair value and balance sheet location of theCompany’s derivative instruments as of September 30, 2010 andDecember 31, 2009:

 
| ** **                                              | ** ** | ** **                                     | ** ** | **Asset Derivatives**          | ** ** | **Liability Derivatives**      | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|
| ** **                                              | ** ** | ** **                                     | ** ** | **Fair Value as of** | ** ** | **Fair Value as of** | ** ** |
| **(in millions)**                                  | ** ** | **Balance Sheet Location**           | ** ** | **September 30, 2010**    | ** ** | **December 31, 2009**     | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
| **Derivatives designated as hedging instruments:**      | ** ** | ** **                                     |       |                                |       |                                |       |   |   |   |   |
| Foreign exchange contracts                              |       | Prepaid expenses and other current assets      |       | $                                   | 2.5        |                                | $          | — |   | $ | — |   | $ | — |   |
| Total derivatives designated as hedging instruments     |       |                                           |       | $                                   | 2.5        |                                | $          | — |   | $ | 0.1 |   | $ | — |   |
|                                                    |       |                                           |       |                                |       |                                |       |   |   |   |   |
| **Derivatives not designated as hedging instruments:**  | ** ** | ** **                                     |       |                                |       |                                |       |   |   |   |   |
| Interest rate swaps                                     |       | Accrued expenses and other current liabilities |       | $                                   | —     |                                | $          | — |   | $ | 3.8 |   | $ | 8.8 |   |
|                                                    |       | Other liabilities                              |       | —                              |       | —                              |       | 20.5 |   | 23.5 |   |
| Foreign exchange contracts                              |       | Accrued expenses and other current liabilities |       | —                              |       | —                              |       | 0.1 |   | — |   |
| Cross-currency interest rate swaps                      |       | Accrued expenses and other current liabilities |       | —                              |       | —                              |       | — |   | 5.2 |   |
| Total derivatives not designated as hedging instruments |       |                                           |       | $                                   | —     |                                | $          | — |   | $ | 24.4 |   | $ | 37.5 |   |
| **Total derivatives**                                   | ** ** | ** **                                     |       | $                                   | 2.5        |                                | $          | — |   | $ | 24.4 |   | $ | 37.5 |   |

 

Thefollowing table provides the gains and losses reported in “Other ComprehensiveIncome” (“OCI”) within Equity for the three and nine months endedSeptember 30, 2010 and 2009:

 
| ** **                                                                                | ** ** | **Amount of Gain or (Loss) Recognized in OCI on Derivatives  and Other Financial Instruments (Effective Portion)** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                | ** ** | **Three months ended September 30,**                                                                                                                                 | ** ** | **Nine months ended September 30,** | ** ** |
| **(in millions)**                                                                    | ** ** | **2010**                                                                                                                                                                                 | ** ** | **2009** | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Derivatives in  Cash Flow Hedging Relationships:**                                      |       |                                                                                                                                                                                     |       |   |   |   |   |   |   |
| Foreign exchange contracts                                                                |       | $                                                                                                                                                                                        | 2.9        |   | $ | — |   | $ | 2.5 |   | $ | (0.2 | ) |
|                                                                                      |       |                                                                                                                                                                                     |       |   |   |   |   |   |   |
| **Derivatives and  Other Financial Instruments in Net Investment Hedging Relationships:** |       |                                                                                                                                                                                     |       |   |   |   |   |   |   |
| Cross-currency interest rate swaps  - net investment hedge                                |       | $                                                                                                                                                                                        | —     |   | $ | (9.5 | ) | $ | — |   | $ | (11.6 | ) |
| Euro-denominated debt                                                                     |       | (20.7                                                                                                                                                                                    | )          | (28.2 | ) | 0.8 |   | (24.1 | ) |
|                                                                                      |       | $                                                                                                                                                                                        | (20.7      | ) | $ | (37.7 | ) | $ | 0.8 |   | $ | (35.7 | ) |

 

Inthe three and nine months ended September 30, 2010, no gains or losseswere reclassified from accumulated other comprehensive income into income.

 

Thefollowing table provides the gains and losses reported in the condensedconsolidated statements of operations for the three and nine months endedSeptember 30, 2010 and 2009:

 
| ** **                                             | ** ** | **Amount of Gain or (Loss) Recognized in Income on Derivatives** | ** ** | **Recognized in Income on**              | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                             | ** ** | **Three months ended September 30,**                                                      | ** ** | **Nine months ended September 30,** | ** ** | **Location of Gain or (Loss)** | ** ** |
| **(in millions)**                                 | ** ** | **2010**                                                                                                      | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** | **Derivatives** | ** ** |
| **Derivatives Not  Designated as Hedging Instruments** | ** ** | ** **                                                                                                    | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** |
| Foreign exchange contracts                             |       | $                                                                                                             | (0.1       | )                                                       | $          | — |   | $ | 1.0 |   | $ | — |   | Selling, general and administrative expenses |   |
|                                                   |       |                                                                                                          |       |                                                    |       |   |   |   |   |   |   |   |   |   |
| Interest rate contracts                                |       | 1.2                                                                                                           |       | (0.1                                                    | )          | 7.3 |   | 1.9 |   | Interest expense, net |   |
| Cross-currency interest rate swaps                     |       | —                                                                                                        |       | (1.2                                                    | )          | 1.6 |   | (0.6 | ) | Interest expense, net |   |
|                                                   |       | $                                                                                                             | 1.1        |                                                    | $          | (1.3 | ) | $ | 9.9 |   | $ | 1.3 |   |   |   |

 

**6.       FAIRVALUE MEASUREMENTS:**

 

TheCompany follows a fair value measurement hierarchy to measure assets andliabilities. As of September 30, 2010 and December 31, 2009, theassets and liabilities measured at fair value on a recurring basis arederivatives and marketable securities. In

 

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addition,the Company measures its pension plan assets at fair value (see Note 15, “EmployeeBenefit Plans” in the Company’s 2009 Form 10-K for further details). TheCompany’s financial assets and liabilities are measured using inputs from thethree levels of the fair value hierarchy. The three levels are as follows:

 

Level1 — Inputs are unadjusted quoted market prices in active markets for identicalassets or liabilities that the Company has the ability to access at themeasurement date.

 

Level2 — Inputs are directly or indirectly observable, which include quoted pricesfor similar assets and liabilities in active markets, quoted prices foridentical or similar assets or liabilities in markets that are not active,inputs other than quoted prices that are observable for the asset or liabilityand inputs that are derived principally from or corroborated by observablemarket data by correlation or other means.

 

Level3 — Inputs are unobservable inputs that are used to measure fair value tothe extent observable inputs are not available. The Company does not haveany financial assets or liabilities that are classified as Level 3 inputs as ofSeptember 30, 2010 and December 31, 2009.

 

Inaccordance with the fair value hierarchy, the following table provides the fairvalue of the Company’s financial assets and liabilities that are required to bemeasured at fair value as of September 30, 2010 and December 31,2009:

 
| ** **                      | ** ** | **As of**                   | ** ** | **Fair Value Measurements** | ** ** |
|---------------------------------|------------|----------------------------------|------------|---------------------------------------|------------|
| **(in millions)**          | ** ** | **September 30, 2010** | ** ** | **Level 1**                      | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Assets                          | ** ** | ** **                       | ** ** | ** **                            | ** ** | ** ** | ** ** |   | ** ** |
| Marketable securities (a)       |       | $                                | 11.7       |                                  | $          | 11.7 |   | $ | — |   | $ | — |   |
| Foreign exchange contracts (b)  |       | 2.5                              |       | —                                |       | 2.5 |   | — |   |
| Total assets at fair value      |       | $                                | 14.2       |                                  | $          | 11.7 |   | $ | 2.5 |   | $ | — |   |
|                            |       |                             |       |                                  |       |   |   |   |   |
| Liabilities                     | ** ** | ** **                       | ** ** | ** **                            | ** ** | ** ** | ** ** |   | ** ** |
| Interest rate swaps (b)         |       | $                                | 24.3       |                                  | $          | — |   | $ | 24.3 |   | $ | — |   |
| Foreign exchange contracts (b)  |       | 0.1                              |       | —                                |       | 0.1 |   | — |   |
| Total liabilities at fair value |       | $                                | 24.4       |                                  | $          | — |   | $ | 24.4 |   | $ | — |   |

 
| ** **                              | ** ** | **As of**                  | ** ** | **Fair Value Measurements** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|---------------------------------------|------------|
| **(in millions)**                  | ** ** | **December 31, 2009** | ** ** | **Level 1**                      | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Assets                                  | ** ** | ** **                      | ** ** | ** **                            | ** ** | ** ** | ** ** |   | ** ** |
| Marketable securities (a)               |       | $                               | 162.0      |                                  | $          | 162.0 |   | $ | — |   | $ | — |   |
| Total assets at fair value              |       | $                               | 162.0      |                                  | $          | 162.0 |   | $ | — |   | $ | — |   |
|                                    |       |                            |       |                                  |       |   |   |   |   |
| Liabilities                             | ** ** | ** **                      | ** ** | ** **                            | ** ** | ** ** | ** ** |   | ** ** |
| Interest rate swaps (b)                 |       | $                               | 32.3       |                                  | $          | — |   | $ | 32.3 |   | $ | — |   |
| Cross-currency interest rate swaps  (b) |       | 5.2                             |       | —                                |       | 5.2 |   | — |   |
| Total liabilities at fair value         |       | $                               | 37.5       |                                  | $          | — |   | $ | 37.5 |   | $ | — |   |

 

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(a)                Theseprimarily represent money market funds with an original maturity of threemonths or less.

 

(b)               SeeNote 5, “Derivatives,” for further details of the Company’s derivativeinstruments.

 

Thefair values of marketable securities are based on unadjusted quoted marketprices from various financial information service providers and securitiesexchanges. The fair values of derivatives are based on quoted market pricesfrom various banks for similar instruments. The valuation of theseinstruments reflects the contractual terms of the derivatives, including theperiod to maturity, and uses observable market-based inputs, including forwardcurves.

 

***Counter-party risk***— The Company manages counter-party risk by entering into derivativecontracts with only major financial institutions of investment grade qualityand by limiting the amount of exposure to each financial institution. TheCompany has considered credit adjustments in its determination of the fairvalue of its derivative assets and liabilities as of September 30, 2010and December 31, 2009 based on market participant assumptions. Inaddition, based on the credit evaluation of each counter-party institution toits derivatives as of September 30, 2010 and December 31, 2009, theCompany believes the carrying values to be fully realizable.

 

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***Debt***—TheCompany estimates that its debt under the senior secured credit facility andTitanium Dioxide Pigments venture facility agreement, based on current interestrates and terms, approximates fair value. Based on quoted market prices atSeptember 30, 2010 and December 31, 2009, the Company estimated thefair value of its 2014 Notes approximated $554.6 million and $561.0 million,respectively. As of September 30, 2010 and December 31, 2009,the aggregate principal carrying amount of the 2014 Notes was $541.0 millionand $558.2 million.

 

***Cash and Cash Equivalents***—All highly liquid instruments and money market funds with an originalmaturity of three months or less are considered to be cashequivalents. The carrying amount approximates fair value because of theshort maturities of these instruments.

 

**7.****       ****INVENTORIES:**

 

Inventoriesare comprised of the following:

 
| ** **                    | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|------------------------|------------|-----------------------|------------|
| **($ in millions)** | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| Raw materials                 |       | $                      | 168.8      |                  | $          | 165.6 |   |
| Work-in-process               |       | 77.1                   |       | 73.7                  |       |
| Finished goods                |       | 275.2                  |       | 270.7                 |       |
| Packaging materials           |       | 7.5                    |       | 7.0                   |       |
| Total                         |       | $                      | 528.6      |                  | $          | 517.0 |   |

 

**8.****       ****GOODWILL:**

 

Beloware goodwill balances and activity by segment:

 
| ** **                       | ** ** | **Specialty** | ** ** | **Advanced** | ** ** | ** ** | ** ** |
|----------------------------------|------------|---------------|------------|--------------|------------|------------|------------|
| **($ in millions)**    | ** ** | **Chemicals** | ** ** | **Ceramics** | ** ** | **Total**  | ** ** |
| Balance, December 31, 2009  |       | $             | 661.7      |         | $          | 277.5      |       | $ | 939.2 |   |
| Foreign exchange                 |       | (31.2         | )          | (14.0        | )          | (45.2      | )          |
| Balance, September 30, 2010 |       | 630.5         |       | 263.5        |       | 894.0      |       |
|                                  |            |               |            |              |            |            |            |  |  |  |

 

**9.****       ****OTHER INTANGIBLE ASSETS, NET:**

 

Otherintangible assets, net consist of:

 
| ** **                               | ** ** | **As of September 30, 2010** | ** ** | **As of December 31, 2009** | ** ** |
|------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                               | ** ** | **Gross**                                        | ** ** | ** **                                      | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Carrying**                                     | ** ** | **Accumulated**                                 | ** ** | ** ** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| **($ in millions)**            | ** ** | **Amount**                                       | ** ** | **Amortization**                                | ** ** | **Net** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Patents and other intellectual  property |       | $                                                | 372.1      |                                            | $          | (149.4 | ) | $ | 222.7 |   | $ | 384.3 |   | $ | (133.0 | ) | $ | 251.3 |   |
| Trade names and trademarks               |       | 140.1                                            |       | (37.2                                           | )          | 102.9 |   | 146.3 |   | (33.7 | ) | 112.6 |   |
| Customer relationships                   |       | 377.8                                            |       | (138.0                                          | )          | 239.8 |   | 390.1 |   | (117.7 | ) | 272.4 |   |
| Supply agreements                        |       | 61.0                                             |       | (16.3                                           | )          | 44.7 |   | 62.8 |   | (12.3 | ) | 50.5 |   |
| Other                                    |       | 43.9                                             |       | (29.5                                           | )          | 14.4 |   | 48.8 |   | (30.9 | ) | 17.9 |   |
| Total                                    |       | $                                                | 994.9      |                                            | $          | (370.4 | ) | $ | 624.5 |   | $ | 1,032.3 |   | $ | (327.6 | ) | $ | 704.7 |   |

 

Amortizationof other intangible assets was $19.1 million and $20.6 million for the threemonths ended September 30, 2010 and 2009, respectively, and $57.9 millionand $60.1 million for the nine months ended September 30, 2010 and 2009,respectively.

 

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Estimatedamortization expense for each of the five succeeding fiscal years is asfollows:

 
| **($ in millions)** | ** ** | **Amortization** | ** ** |
|-------------------------------|------------|------------------|------------|
| **Year ended**           | ** ** | **Expense**      | ** ** |
| 2010                          |       | $                | 78.0       |   |
| 2011                          |       | 76.3             |       |
| 2012                          |       | 73.2             |       |
| 2013                          |       | 70.9             |       |
| 2014                          |       | 63.7             |       |
|                               |            |                  |            |  |

 

**10.  LONG-TERM DEBT:**

 

Long-termdebt and loans payable are summarized as follows:

 
| ** **                                                                                              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **($ and € in millions)**                                                           | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| Senior secured credit facilities:                                                                       |       |                   |       |                  |       |
| Tranche A-1 term loans (€3.4 and  €4.2, respectively)                                         |       | $                      | 4.6        |                  | $          | 6.0 |   |
| Tranche A-2 term loans (€29.2 and  €36.5, respectively)                                       |       | 39.8                   |       | 52.3                  |       |
| Tranche E term loans                                                                                    |       | 116.1                  |       | 139.4                 |       |
| Tranche G term loans (€59.8 and  €65.1, respectively)                                         |       | 81.5                   |       | 93.2                  |       |
| Tranche H term loans                                                                                    |       | 781.1                  |       | 937.2                 |       |
| Tranche I term loans (€178.7 and  €194.7, respectively)                                       |       | 243.6                  |       | 278.8                 |       |
| 2014 Notes (€250.1 and $200.0 as  of September 30, 2010 and December 31, 2009)           |       | 541.0                  |       | 558.2                 |       |
| Titanium Dioxide Pigments venture  term loans (€230.0 and €240.0, respectively)               |       | 313.6                  |       | 343.7                 |       |
| Titanium Dioxide Pigments venture  revolving short-term loans (€10.0 as of December 31, 2009) |       | —                 |       | 14.3                  |       |
| Capitalized lease obligations  (€29.9 and €31.9, respectively)                                |       | 40.8                   |       | 45.7                  |       |
| Other loans                                                                                             |       | 33.5                   |       | 59.5                  |       |
|                                                                                                    |       | 2,195.6                |       | 2,528.3               |       |
| Less current maturities                                                                                 |       | (90.5                  | )          | (94.2                 | )          |
|                                                                                                    |       | $                      | 2,105.1    |                  | $          | 2,434.1 |   |

 

OnJuly 29, 2010, the Company voluntarily prepaid $200.2 million of itssenior secured term loans. This included $22.5 million of tranche E term loans,€5.0 million ($6.6 million using the exchange rate in effect at the time of thetransaction) of tranche G terms loans, $151.5 million of tranche H term loans,and €15.0 million ($19.6 million using the exchange rate in effect at the timeof the transaction) of tranche I term loans. This prepayment was funded withavailable cash and cash equivalents. In connection with this prepayment, theCompany recorded a loss on early extinguishment of debt of $1.6 million relatedto the write-off of deferred financing costs.

 

**11.  INCOME TAXES:**

 

Theeffective tax rate for the nine months ended September 30, 2010 and 2009was 28.3% and 89.6%, respectively. The decrease in the effective tax rate fromthe prior year is primarily related to domestic income in 2010 that was not taxeffected since the Company had provided a valuation allowance and higherforeign earnings resulting in additional favorable foreign rate differentials.Also, in 2010 the Company favorably settled certain tax positions. In 2009, theCompany had domestic losses that were not tax benefited due to the recording ofadditional valuation allowances. In both periods, federal taxes are zero as aresult of a full valuation allowance. For the nine months ended September 30,2009, other differences between the effective tax rate and the U.S. statutoryrate of 35.0% primarily relate to a nonrecurring tax benefit regardingfunctional currency changes.

 

18

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Inthe nine months ended September 30, 2010, the Company increased itsworldwide valuation allowances by $10.9 million, primarily due to changes indeferred tax assets that were not tax benefited. The following table reflectsthe activity in the valuation allowance for worldwide net operating losses andother deferred income tax assets:

 
| ** **                                   | ** ** | **Valuation** | ** ** |
|----------------------------------------------|------------|---------------|------------|
| **($ in millions)**                | ** ** | **Allowance** | ** ** |
| Balance as of December 31,  2009        |       | $             | 133.1      |   |
| Decrease as reflected in income  tax expense |       | 10.7          |       |
| Other                                        |       | 0.2           |       |
| Balance as of September 30,  2010       |       | $             | 144.0      |   |

 

Inthe nine months ended September 30, 2010, based on the Company’s policyand review of available information, including the Company’s steady-stateanalysis, it was determined that there was not sufficient positive evidence offuture taxable income to release the U.S. federal valuation allowance that hasbeen recorded. During the nine months ended September 30, 2010, theCompany’s net U.S. federal deferred tax assets and liabilities were maintainedat a zero level, other than a noncurrent deferred tax liability relating togoodwill with an indefinite reversal period. It is the Company’s policy that thevaluation allowance is reversed in the year management determines it is morelikely than not that the deferred tax assets will be realized.

 

Unrecognizedtax benefits at September 30, 2010 were $13.2 million, all of which ifrecognized, would impact the effective tax rate. The Company had accrued $8.5million for interest and penalties as of September 30, 2010. The Companyrecognizes interest and penalties related to unrecognized tax benefits in itsincome tax provision.

 

Duringthe next twelve months, it is reasonably possible that resolution of uncertaintax benefits could result in a benefit of up to $3.0 million or a cost of up to$6.0 million. Audit outcomes and the timing of audit settlements are subject tosignificant uncertainty.

 

TheCompany is subject to taxation in the U.S., various states, and foreignjurisdictions. The Company’s tax filings in major jurisdictions are open toinvestigation by tax authorities; in the U.S. from 2005, in the U.K. from 2007,and in Germany from 2001.

 

**12.  EMPLOYEE BENEFITPLANS:**

 

The Company’s overall unfunded position in itsdefined benefit plans as of September 30, 2010 is $415.2 million and thefunded status of our plans is 38%. However, 82% of the Company’s unfundedposition is concentrated in plans mostly in Germany, where funding is neitherlegally required nor customary. When only the plans that have fundingrequirements are considered, the unfunded portion is $74.2 million, and thefunded status is 76%. The Company was incompliance with local funding requirements as of September 30, 2010. Almost all of the Company’s pensionobligations are long-term in nature. The Company’s annual cash outflows to meetfunding requirements and benefit obligations historically have notsignificantly exceeded its pension expense. Such cash outflows were less thanpension expense in 2009 and during the nine months ended September 30,2010. The measurement of our pension obligations and plan assets is dependenton a variety of assumptions used by our actuaries and is performed annually.Therefore, the funded status as of December 31, 2010 could differsignificantly.

 

Thefollowing table represents the net periodic benefit costs and relatedcomponents:

 
| ** **                         | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **($ in millions)**      | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Service cost                       |       | $                                | 1.9        |                            | $          | 2.1 |   | $ | 5.7 |   | $ | 6.3 |   |
| Interest cost                      |       | 8.2                              |       | 9.1                             |       | 24.9 |   | 26.1 |   |
| Expected return on assets          |       | (3.7                             | )          | (4.0                            | )          | (11.0 | ) | (11.4 | ) |
| Amortization of actuarial losses   |       | 0.6                              |       | 0.2                             |       | 1.7 |   | 0.6 |   |
| Amortization of prior service cost |       | 0.2                              |       | —                          |       | 0.5 |   | — |   |
| Other                              |       | —                           |       | —                          |       | 0.3 |   | — |   |
| Net periodic pension cost          |       | 7.2                              |       | 7.4                             |       | 22.1 |   | 21.6 |   |
| Settlement/curtailment             |       | —                           |       | (0.1                            | )          | — |   | (0.3 | ) |
| Total pension cost                 |       | $                                | 7.2        |                            | $          | 7.3 |   | $ | 22.1 |   | $ | 21.3 |   |

 

19

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**13.  RESTRUCTURING ANDOTHER SEVERANCE COSTS:**

 

TheCompany records restructuring liabilities that represent charges incurred inconnection with consolidations and cessations of certain of its operations,including operations from acquisitions, as well as headcount reductionprograms. These charges consist primarily of severance and facility closurecosts. Severance charges are based on various factors including the employee’slength of service, contract provisions, salary levels and local governmental legislation.At the time a related charge is recorded, the Company calculates its bestestimate based upon detailed analysis. Although significant changes are notexpected, actual costs may differ from these estimates.

 

Forthe three and nine months ended September 30, 2010, the Company expensed$1.1 million and $4.0 million of restructuring charges, primarily in theSpecialty Chemicals segment, primarily for facility closures and an assetwrite-off in connection with the elimination of a duplicate manufacturingfacility in the Performance Additives segment.

 

Forthe three and nine months ended September 30, 2009, the Company expensed$1.7 million and $4.4 million, respectively, of restructuring charges. For thenine months ended September 30, 2009, the primary components of therestructuring charge of $4.4 million included $2.0 million recorded in theSpecialty Chemicals segment primarily for headcount reduction and facilityclosure costs as part of restructuring plans in 2008 and 2007. In addition,$0.4 million of asset write-offs were recorded in the Specialty Chemicalssegment as part of restructuring plans in 2008 and 2007. The Company recorded$1.4 million in the Color Pigments and Services business within the PerformanceAdditives segment related to a restructuring plan implemented inMarch 2008 in connection with the integration of the businesses acquiredfrom Elementis plc. In addition, $0.2 million of asset write-offs were recordedin the Color Pigments and Services segment related to a 2009 restructuringplan.

 

“Restructuringand other severance costs” in the condensed consolidated statements ofoperations also included other severance-related costs of $0.4 million and $2.5million for the three months ended September 30, 2010 and 2009,respectively, and $0.9 million and $11.6 million for the nine months endedSeptember 30, 2010 and 2009, respectively, related to headcount reductionsundertaken throughout the Company.

 

Allrestructuring actions still in progress as of September 30, 2010 areexpected to be substantially complete by the end of the year. However, payoutsof certain liabilities resulting from these actions will take place overseveral years. In particular, as of September 30, 2010, restructuringliabilities of $4.5 million includes $1.8 million in the Corporate and othersegment related to an unexpired lease in connection with the 2006 restructuringof the Wafer Reclaim business. Management believes that the majority of theremaining $2.7 million obligation will be utilized in 2010. Selectedinformation for outstanding liabilities from recent restructuring actions is asfollows:

 
| ** **                                  | ** ** | **Severance/** | ** ** | **Facility** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|----------------|------------|--------------|------------|------------|------------|
| **($ in millions)**               | ** ** | **Relocation** | ** ** | **Closure**  | ** ** | **Total**  | ** ** |
| Liability balance,  December 31, 2009  |       | $              | 4.2        |         | $          | 3.3        |       | $ | 7.5 |   |
| Restructuring charge in 2010 (a)            |       | 0.5            |       | 0.6          |       | 1.1        |       |
| Utilized                                    |       | (2.4           | )          | (1.5         | )          | (3.9       | )          |
| Foreign exchange and other                  |       | (0.2           | )          | —       |       | (0.2       | )          |
| Liability balance,  September 30, 2010 |       | $              | 2.1        |         | $          | 2.4        |       | $ | 4.5 |   |

 

----

(a)                Excludesasset write-off described above.

 

Restructuring reserves by segment are as follows:

 
| ** **                    | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|------------------------|------------|-----------------------|------------|
| **($ in millions)** | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| Specialty  Chemicals          |       | $                      | 1.8        |                  | $          | 3.7 |   |
| Performance  Additives        |       | 0.1                    |       | 0.7                   |       |
| Advanced  Ceramics            |       | 0.6                    |       | 1.0                   |       |
| Corporate  and other          |       | 2.0                    |       | 2.1                   |       |
|                          |       | $                      | 4.5        |                  | $          | 7.5 |   |

 

**14.  COMMITMENTS ANDCONTINGENCIES:**

 

***Legal Proceedings***—The Company is involved in various legal proceedings, includingcommercial, intellectual property, product 

 

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liability,regulatory and environmental matters of a nature considered normal to itsbusiness. It is the Company’s policy to accrue for amounts related to thesematters if it is probable that a liability has been incurred and an amount canbe reasonably estimated. It is the Company’s policy to disclose such matterswhen there is at least a reasonable possibility that a material loss may havebeen incurred.

 

**Advertising Matter**

 

OnMarch 3, 2009, Osmose, Inc. (“OI”) filed an action against Viance,the joint venture in the Timber Treatment Chemicals business, RockwoodHoldings, Inc., and certain individuals, in the U.S. District Court,Northern District of Georgia, claiming that recent advertisements by Viancecomparing its ACQ product and OI’s MCQ product were false and misleading inviolation of the Lanham Act, constituted unfair competition, violated theGeorgia Deceptive Trade Practices Act, were defamatory and that Viancetortiously interfered with OI’s business relationships. OI is seeking damages,including their attorney’s fees and costs and punitive damages. OI also soughta temporary restraining order (“TRO”) and a preliminary injunction prohibitingViance from continuing to make certain claims in advertisements related totheir MCQ product. On March 20, 2009, the district court grantedOsmose’s motion for a TRO. Viance raised certain counterclaims related toOI’s advertisements and both parties’ claims were heard. InSeptember 2009, the district court issued a preliminary injunctionprohibiting Viance from making certain claims related to MCQ in itsadvertisements and denied Viance’s request for a preliminary injunction relatedto certain claims in Osmose’s advertisements, which Viance subsequentlyappealed. The U.S. Court of Appeals, Eleventh Circuit heard oral arguments onMay 20, 2010 and rendered its decision on July 30, 2010 remanding inpart, affirming in part, and vacating in part the preliminary injunction. Thetrial court entered an order revising the preliminary injunction and an orderlifting the stay and commencing discovery. The Company will continue tovigorously defend this matter. While the Company believes the defendantshave meritorious defenses against OI’s claims and does not believe thatresolution of this matter will have a material adverse effect on its businessor financial condition, the Company cannot predict the ultimate outcome of thislitigation, and the resolution of this matter may have a material adverseeffect on its results of operations or cash flows in any quarterly or annualreporting period.

 

**EC Heat Stabilizers Investigation**

 

TheEuropean Commission (“EC”) has investigated possible infringement of certainantitrust regulations in the market for heat stabilizers from 1986 until atleast 2000 by certain industry participants, which included a business sold bya subsidiary in the Specialty Chemicals segment in 2000. On March 23,2009, the EC confirmed that it commenced a proceeding against certainparticipants in the heat stabilizers market, including the business formerlyowned by this subsidiary and the Company’s subsidiary. Neither the Company norany of its subsidiaries are active in the market for heat stabilizers; however,the business sold in 2000 was active in this market. On November 11,2009, the EC issued its decision imposing fines on several companies includinga fine jointly and severally against the Company’s subsidiary and two otherparties in the amount of €1.9 million, and against the Company’s subsidiary andone other party in the amount of €1.4 million. By decision of February 8,2010, the EC amended its decision of November 11, 2009 to apply thecap pursuant to the applicable European Council Regulation limiting the amountfor which the Company’s subsidiary and the two other parties are jointly andseverally liable to €1.1 million. The Company’s subsidiary and one of the twoother parties have each paid one third of the €1.1 million fine. The thirdparty, however, has appealed the decision and did not remit any payment.Therefore, the Company’s maximum remaining exposure in connection with thismatter is €0.4 million, which is the outstanding amount of the fine. TheCompany does not believe that resolution of this matter will have a materialadverse effect on its business, results of operations or financial condition.

 

**Lanxess Matter**

 

OnJanuary 18, 2010, Lanxess Deutschland GmbH filed suit in the DistrictCourt of Satakunta, Finland against Sachtleben Pigments Oy (“Sachtleben”), asubsidiary of the Company’s Titanium Dioxide Pigments venture, claiming breachof contract in connection with Sachtleben’s termination of a supply agreementwith plaintiff. The plaintiff is seeking up to €7.0 million in damagesplus accrued interest and legal fees. Sachtleben’s answer and plea ofjurisdiction were filed on March 19, 2010. The Court held a hearing on October 28,2010 related to the proper jurisdiction for this matter and the Company isawaiting the Court’s ruling. The Company believes Sachtleben has meritoriousdefenses against the plaintiff’s claims, and although Sachtleben does notbelieve that resolution of this matter will have a material adverse effect onits business or financial condition, the Company cannot predict the ultimateoutcome of this litigation, and the resolution of this matter may have amaterial adverse effect on its results of operations or cash flows in anyquarterly or annual reporting period.

 

**Former Glass Sealants Business**

 

Asubsidiary in the Specialty Chemicals segment that formerly manufacturedsealants for insulating glass and resins for laminated glass prior to and afterthe sale of this business has been named as a defendant in several lawsuitsrelating to alleged negligent manufacturing of those products. Pursuant to thesale and purchase agreement with respect to the divested “glass” business, thissubsidiary may be required to pay indemnity claims related to these lawsuits.Although the Company expects its subsidiary to have coverage under its productliability insurance policies should damages ultimately be awarded or agreed to,in such an event, its

 

21

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insurancemay not cover such claims and, if not, its subsidiary may not have sufficientcash flow to pay these claims. Although the Company does not believe thatresolution of these matters will have a material adverse effect on its businessor financial condition, the Company cannot predict the ultimate outcome ofthese claims, and the resolution of one or more of these claims may have amaterial adverse effect on its results of operations or cash flows in anyquarterly or annual reporting period.

 

**InspectorGeneral Subpoena**

 

In February 2010, a subsidiaryof the Company received a subpoena from the Inspector General of the Departmentof Defense (“DOD”) seeking information relatedto a product in the Timber Treatment Chemicals business in the PerformanceAdditives segment. Thissubsidiary has and will continue to comply with the request of the DOD toprovide the relevant information. The Company cannot predict thelikelihood of further legal action in connection with this matter or theresolution of this matter.

 

**PensionReceivable Matter**

 

Rockwood’s pension liability includes defined benefitobligations to employees of a previously divested company which cannot legallybe transferred to the current owners under local law. The current owner ofthe business has agreed to indemnify the Company for these obligations,however, such company has filed for bankruptcy. Accordingly, the Company haspartially reserved against our related receivable due from the current owner.The Company believes its maximum remaining exposure is $5.4 million, whichrepresents the remaining receivable due from the current owner. The Companycannot predict the ultimate outcome of this matter. The Company does notbelieve that resolution of this matter will have a material adverse effect onits business or financial condition, however, resolution of this matter mayhave a material adverse effect on its results of operations or cash flows inany quarterly or annual reporting period.

 

**Other Matters**

 

Althoughthe Company expects to continue to pay legal fees in connection with the abovematters and other legal actions such as chromated copper arsenate and otherproduct liability matters, based on currently available facts, the Company doesnot believe that any other individual action will have a material adverseeffect on the financial condition, results of operations or liquidity of theCompany.

 

Reservesin connection with product liability matters do not individually exceed $1.1million and in the aggregate $3.1 million as of September 30, 2010. TheCompany’s reserve estimates are based on available facts, including damageclaims and input from its internal and external legal counsel, past experience,and, in some instances where defense costs are being paid by its insurer, knowninsurance recoveries. The Company is unable to estimate the amount or range ofany potential incremental charges should facts and circumstances change and mayin the future revise its estimates based on new information becoming available.Further, the Company cannot predict the outcome of any litigation or thepotential for future litigation.

 

***Indemnity Matters***— The Company may be indemnified by third parties in connection withcertain matters related to acquired businesses. Although the Company hasno reason to believe that the financial condition of those parties who may haveindemnification obligations to the Company is other than sound, in the eventthe Company seeks indemnity under any of these agreements or through othermeans, there can be no assurance that any party who may have obligations toindemnify the Company will adhere to their obligations and the Company may haveto resort to legal action to enforce its rights under the indemnities. In caseswhere the Company’s indemnification claims to such third parties areuncontested, the Company expects to realize recoveries within the short term.

 

Inaddition, the Company may be subject to indemnity claims relating to propertiesor businesses it divested. The Company has agreed to indemnify the buyer of itsformer Electronics business, Groupe Novasep segment and pool and spa chemicalsbusiness. For example, the Company is required to indemnify the buyer of itsElectronics business for certain known and unknown environmental actions whichmay arise in the future that relate to the period prior to the closing.

 

Inthe opinion of management, and based upon information currently available, theultimate resolution of any indemnification obligations owed to the Company orby the Company is not expected to have a material adverse effect on the Company’sfinancial condition, results of operations or cash flows, but may have amaterial adverse effect on the Company’s results of operations or cash flow inany quarterly or annual reporting period.

 

***Safety, Health and Environmental Matters***

 

**General**

 

TheCompany is subject to extensive environmental, health and safety laws in theUnited States, the European Union (“EU”) and 

 

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elsewhereat the international, national, state, and local levels. Many of these lawsimpose requirements relating to clean up of contamination, and impose liabilityin the event of damage to human beings, natural resources or property, andprovide for substantial fines, injunctions and potential criminal sanctions forviolations. Other laws require post-closure reclamation of landfills andsurface mining sites for damage resulting from normal operation of thesefacilities. The products, including the raw materials handled, are also subjectto rigorous industrial hygiene regulations and investigation. The nature of theCompany’s operations exposes it to risks of liability for breaches of theselaws and regulations as a result of the production, storage, transportation andsale of materials that can cause contamination or personal injury when releasedinto the environment. Environmental laws are subject to change and have tendedto become stricter over time. Such changes in environmental laws, or theenactment of new environmental laws, could result in materially increasedcapital, operating and compliance costs.

 

**Safety, Health and Environmental Management Systems**

 

TheCompany is committed to achieving and maintaining compliance with allapplicable safety, health and environmental (“SHE”) legal requirements. TheCompany’s subsidiaries have developed policies and management systems that areintended to identify the SHE legal requirements applicable to their operations,enhance compliance with such requirements, ensure the safety of the Company’semployees, contractors, community neighbors and customers and minimize theproduction and emission of wastes and other pollutants. Although SHE legalrequirements are constantly changing, these SHE management systems are designedto assist the Company in meeting its compliance goals and minimizing overallrisk.

 

**SHE Capital Expenditures**

 

TheCompany will incur future costs for capital improvements and general complianceunder SHE laws. For the year ended December 31, 2009, the capitalexpenditures for SHE matters totaled $17.9 million, excluding costs to maintainand repair pollution control equipment. For 2010, the Company estimates capitalexpenditures for compliance with SHE laws to be at similar levels; however,because capital expenditures for these matters are subject to changes inexisting and new SHE laws, the Company cannot provide assurance that its recentexpenditures will be indicative of future amounts required to comply with theselaws.

 

**Regulatory Developments**

 

Greenhousegases have increasingly become the subject of international, national, stateand local attention. On September 22, 2009, the EnvironmentalProtection Agency (“EPA”) passed its final greenhouse gas monitoring andreporting rule that requires certain facilities in the U.S. to measuretheir greenhouse gases beginning January 1, 2010 and begin reporting thesemeasurements on March 31, 2011. Currently, the Company believes thatthis rule will affect four of its facilities. The Company does notbelieve, based upon currently available information, that this rule willhave a material impact on its results of operations. However, furtherlegislation of greenhouse gases and carbon dioxide has been proposed in theU.S., U.K. and other jurisdictions. Any such laws may directly andindirectly have a material adverse impact on our results of operations, such asthrough higher costs for energy and certain raw materials and additionalcapital expenditures to comply with such laws.

 

OnJune 1, 2007, the Registration, Evaluation and Authorization of Chemicals(“REACH”) legislation became effective in the EU. REACH requires manufacturersand importers of certain chemicals to register those chemicals, perform healthand environmental risk analyses of those chemicals, and in certain instances,obtain authorizations for the use of the chemicals. Covered substances werepre-registered by November 30, 2008. REACH is expected to be implementedin three phases over an eleven year period based on known product hazardsand/or volume of product in commerce. Under REACH, where warranted by a riskassessment, specified uses of some hazardous substances may be restricted. As aspecialty chemicals company, it is possible that the Company is the onlymanufacturer of one or more substances to be regulated under REACH and thuscould potentially bear the full cost of compliance with REACH for some or allof the Company’s products. The Company estimates it has approximately 350products that are subject to REACH. The Company is taking steps to comply withREACH, which included the pre-registration of its products. The Company doesnot believe these costs will have a material impact on its results ofoperations, financial position or liquidity. In addition, it is possible thatREACH may affect raw material supply, customer demand for certain products andthe Company’s decision to continue to manufacture and sell certain products.

 

TheCompany is also subject to the Homeland Security Agency’s regulations, whichaddress chemical plant safety, the Kyoto Protocol, which relates to theemission of greenhouse gases and the European Union Integrated PollutionPrevention and Control Directive, which relates to environmental permittingprograms for individual facilities. In addition, legislation was recentlyintroduced in Congress seeking to reform the Toxic Control Substances Act,which among other things, would require manufacturers to develop and submitadditional safety data for each chemical it produces, similar to REACH. TheCompany does not believe, based upon currently available information, thatthese regulations will have a material adverse impact on its results ofoperations, financial position or liquidity.

 

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**Environmental Liabilities**

 

Environmentallaws have a significant effect on the nature and scope of any clean-up ofcontamination at current and former operating facilities, the costs oftransportation and storage of chemicals and finished products and the costs ofthe storage and disposal of wastes. In addition, “Superfund” statutes in theUnited States as well as statutes in other jurisdictions impose strict, jointand several liability for clean-up costs on the entities that generated wasteand/or arranged for its disposal at contaminated third party sites, as well asthe past and present owners and operators of contaminated sites. Allresponsible parties may be required to bear some or all clean-up costsregardless of fault, legality of the original disposal or ownership of thedisposal site.

 

Thefollowing table provides a list of the Company’s present and former facilitieswith environmental contamination or reclamation obligations for which theCompany has reserved for at September 30, 2010:

 
| **Country**     | ** ** | **Location**                    | ** ** | **(a)** | ** ** | **(b)** | ** ** | **(c)** | ** ** | **(d)** | ** ** | **(e)** |
|-----------------|------------|---------------------------------|------------|---------|------------|---------|------------|---------|------------|---------|------------|---------|
| Brazil          |       | Diadema                         |       |    |       |    |       | X       |       |    |       |    |
| Chile           |       | Salar de Atacama                |       |    |       |    |       |    |       | X       |       |    |
| China           |       | Shenzhen                        |       |    |       |    |       | X       |       |    |       |    |
| Finland         |       | Kipsikorpi                      |       |    |       |    |       |    |       | X       |       |    |
|            |       | Pori                            |       |    |       |    |       |    |       | X       |       |    |
| France          |       | Clichy                          |       |    |       |    |       | X       |       |    |       |    |
|            |       | Sens                            |       | X       |       |    |       |    |       |    |       |    |
| Germany         |       | Duisburg                        |       | X       |       |    |       |    |       | X       |       |    |
|            |       | Hainhausen                      |       | X       |       |    |       |    |       |    |       |    |
|            |       | Schwarzheide                    |       |    |       |    |       |    |       | X       |       |    |
|            |       | Marktredwitz                    |       |    |       | X       |       |    |       |    |       |    |
|            |       | Plochingen                      |       |    |       | X       |       |    |       |    |       |    |
|            |       | Stadeln                         |       | X       |       | X       |       |    |       |    |       |    |
|            |       | Troisdorf                       |       | X       |       | X       |       | X       |       |    |       |    |
| Italy           |       | Turin                           |       |    |       |    |       | X       |       |    |       |    |
| The Netherlands |       | Oss                             |       | X       |       |    |       |    |       |    |       |    |
| United Kingdom  |       | Barrow-in Furness               |       | X       |       |    |       |    |       |    |       |    |
|            |       | Birtley                         |       |    |       |    |       | X       |       |    |       |    |
|            |       | Kidsgrove                       |       |    |       |    |       | X       |       |    |       |    |
| United States   |       | Beltsville, MD                  |       | X       |       |    |       | X       |       |    |       |    |
|            |       | East St. Louis, IL         |       |    |       |    |       | X       |       |    |       |    |
|            |       | Easton, PA                      |       |    |       |    |       | X       |       |    |       |    |
|            |       | Gonzales, TX                    |       |    |       |    |       |    |       | X       |       |    |
|            |       | Harrisburg, NC                  |       | X       |       |    |       | X       |       |    |       |    |
|            |       | La Mirada, CA                   |       | X       |       |    |       |    |       |    |       |    |
|            |       | Laurens, SC                     |       |    |       | X       |       |    |       |    |       |    |
|            |       | Middletown, NY (formerly owned) |       | X       |       |    |       | X       |       |    |       | X       |
|            |       | New Johnsonville, TN            |       |    |       | X       |       | X       |       |    |       |    |
|            |       | Silver Peak, NV                 |       | X       |       |    |       |    |       | X       |       |    |
|            |       | Sunbright, VA (facility closed) |       | X       |       |    |       |    |       |    |       | X       |
|            |       | Valdosta, GA                    |       | X       |       |    |       |    |       |    |       |    |

 

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(a)                The Company iscurrently operating groundwater monitoring and/or remediation systems at theselocations.

 

(b)               The Company iscurrently operating groundwater monitoring and/or remediation systems at theselocations for which prior owners or insurers have assumed responsibility.

 

(c)             The Company is currentlyconducting investigations into additional possible soil and/or groundwatercontamination at these locations.

 

(d)               The Company has landrestoration obligations relating to landfill activities or surface mining atthese locations.

 

(e)                The Company isresponsible for liabilities related to environmental matters at these closedfacilities.

 

TheCompany is also responsible for environmental matters at some of its formeroff-site disposal locations owned by third parties. 

 

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Thesesites are considered Superfund sites as defined by the EPA or state regulatoryauthority. The Company is a potentially responsible party or*de minimis* participant at the followingSuperfund locations: Casmalia, CA; Laurel, MD; Niagara Falls, NY; South Gate,CA; and Whittier, CA and has reserves for these matters totaling $0.1 millionat September 30, 2010. In addition, the German authorities have orderedthe Company to investigate and, depending on the results, potentially remediatea portion of a former site in Liebenau, Germany. The Company is currently inthe process of gathering additional information regarding the site and cannotpredict the potential scope of any such remediation.

 

Althoughthe Company cannot provide assurances in this regard, the Company does notbelieve that these issues will have a material adverse effect on its businessor financial condition, but may have a material adverse effect on the resultsof operations or cash flows in any given quarterly or annual reporting period.Nonetheless, the discovery of contamination arising from present or historical industrialoperations at some of the Company’s or its predecessor’s former and presentproperties and/or at sites where the Company and its predecessor disposedwastes could expose the Company to cleanup obligations and other damages in thefuture.

 

***Environmental Reserves***

 

TheCompany has established financial reserves relating to anticipatedenvironmental cleanup obligations, site reclamation and remediation and closurecosts, which are reviewed at least quarterly based on currently availableinformation. Liabilities are recorded when potential liabilities are eitherknown or believed to be probable and can be reasonably estimated. In the eventthat the Company establishes a financial reserve in connection with siteremediation costs, the Company records a reserve for the estimated cost of theremediation, even though the costs of the remediation will likely be spread outover many years. The Company does not include unasserted claims in itsreserves.

 

TheCompany’s liability estimates are based upon available facts, existingtechnology, indemnities from third parties, past experience and, in someinstances, insurance recoveries where the remediation costs are being paid byits insurers, and are generated by several means, including State-mandatedschedules, environmental consultants and internal experts, depending on thecircumstances. On a consolidated basis, the Company has accrued $50.5 millionand $55.1 million for known environmental liabilities as of September 30,2010 and December 31, 2009, respectively. As of September 30,2010 and December 31, 2009, $48.7 million and $53.6 million, respectively,were classified as other non-current liabilities in the consolidated balancesheets. Included in the $50.5 million as of September 30, 2010 is$26.5 million that is discounted using discount rates ranging from 5.0% to8.0%, with the undiscounted amount of these reserves equaling $39.1 million.Included in the $55.1 million as of December 31, 2009 is $22.8 millionthat is discounted using discount rates ranging from 5.0% to 7.5%, with theundiscounted amount of these reserves equaling $33.5 million. In certain cases,the Company’s remediation liabilities are payable over periods of up to 30years. At a number of the sites described above, the extent of contaminationhas not yet been fully investigated or the final scope of remediation is notyet determinable and could potentially affect the range. The Company estimatesthat the potential range for such environmental matters as ofSeptember 30, 2010 is from $50.5 million to $75.3 million. For the ninemonths ended September 30, 2010, the Company recorded charges of $2.3million to increase its environmental liabilities and made payments of $4.5million for clean-up and remediation costs, which reduced its environmentalliabilities. For the nine months ended September 30, 2010, the recurringcost of managing hazardous substances for ongoing operations is $34.1 million.

 

TheCompany believes these accruals are adequate based on currently availableinformation. The Company may incur losses in excess of the amounts accrued;however, based on currently available information, it does not believe theadditional amount of potential losses would have a material effect on itsresults of operations or financial condition, but may have a material effect onthe results of operations or cash flows in any given quarterly or annualreporting period. The Company does not believe that any known individualenvironmental matter would have a material effect on its results of operationsor financial condition. The Company is unable to estimate the amount or rangeof any potential incremental charges should facts and circumstances change andmay in the future revise its estimates based on new information becomingavailable.

 

TheCompany is obligated to undertake soil remediation at two facilities in Europein the event manufacturing operations are discontinued there at some futuredate. In addition, in the event that manufacturing operations are discontinuedat any of the Company’s other facilities with known contamination, regulatoryauthorities may impose more stringent requirements on the Company includingsoil remediation. The Company does not contemplate any such action occurring inthe foreseeable future, as these facilities’ remaining lives are indefinite.Given the indeterminate useful life of these facilities and the correspondingindeterminate settlement date of any soil remediation obligations, the Companydoes not have sufficient information to estimate a range of potential settlementdates for its obligations. Consequently, the Company cannot employ a presentvalue technique to estimate fair value and, accordingly, has not accrued forany environmental-related costs to remediate soil at these facilities.

 

**15.**            **CONSOLIDATING FINANCIAL INFORMATION:**

 

TheCompany issued the 2014 Notes in November 2004. The followingconsolidating financial statements present the results of operations, financialcondition and cash flows in separate columns of the parent company (RockwoodSpecialties Group, Inc.), which 

 

25

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isthe issuer of the 2014 Notes, guarantor subsidiaries, elimination adjustmentsand consolidated totals.

 

**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGSTATEMENT OF OPERATIONS**

**THREE MONTHS ENDEDSEPTEMBER 30, 2010**

**(Dollars inmillions)**

 
| ** **                                                               | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                               | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| Net sales                                                                |       | $           | —     |             | $          | 187.0             |       | $                | 673.9      |   | $ | 860.9 |   |
| Cost of products sold                                                    |       | —      |       | 132.5            |       | 451.7             |       | 584.2            |       |
| Gross profit                                                             |       | —      |       | 54.5             |       | 222.2             |       | 276.7            |       |
| Selling, general and  administrative expenses                            |       | —      |       | 44.9             |       | 126.7             |       | 171.6            |       |
| Restructuring and other severance  costs                                 |       | —      |       | 0.3              |       | 1.2               |       | 1.5              |       |
| Loss on sale of assets and other                                         |       | —      |       | —           |       | 0.1               |       | 0.1              |       |
| Operating income                                                         |       | —      |       | 9.3              |       | 94.2              |       | 103.5            |       |
| Other income (expenses), net:                                            |       |        |       |             |       |              |       |             |       |
| Intergroup interest, net                                                 |       | 35.6        |       | (13.7            | )          | (21.9             | )          | —           |       |
| Interest expense, net                                                    |       | (31.6       | )          | (0.6             | )          | (6.4              | )          | (38.6            | )          |
| Loss on early extinguishment of  debt                                    |       | (0.1        | )          | (0.7             | )          | (0.8              | )          | (1.6             | )          |
| Intergroup other, net                                                    |       | —      |       | 3.4              |       | (3.4              | )          | —           |       |
| Foreign exchange (loss) gain, net                                        |       | (3.3        | )          | (0.4             | )          | 4.6               |       | 0.9              |       |
| Other, net                                                               |       | —      |       | —           |       | —            |       | —           |       |
| Other income (expenses), net                                             |       | 0.6         |       | (12.0            | )          | (27.9             | )          | (39.3            | )          |
| Income (loss) from continuing  operations before taxes                   |       | 0.6         |       | (2.7             | )          | 66.3              |       | 64.2             |       |
| Income tax provision                                                     |       | 0.1         |       | 1.6              |       | 19.0              |       | 20.7             |       |
| Net income (loss)                                                        |       | 0.5         |       | (4.3             | )          | 47.3              |       | 43.5             |       |
| Net income attributable to the  noncontrolling interest                  |       | —      |       | —           |       | (3.0              | )          | (3.0             | )          |
| Net income (loss) attributable to  Rockwood Specialties Group, Inc. |       | $           | 0.5        |             | $          | (4.3              | )          | $                | 44.3       |   | $ | 40.5 |   |

 

26

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGSTATEMENT OF OPERATIONS**

**THREE MONTHS ENDEDSEPTEMBER 30, 2009**

**(Dollars inmillions)**

 
| ** **                                                               | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                               | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| Net sales                                                                |       | $           | —     |             | $          | 168.1             |       | $                | 618.1      |   | $ | 786.2 |   |
| Cost of products sold                                                    |       | —      |       | 126.5            |       | 428.5             |       | 555.0            |       |
| Gross profit                                                             |       | —      |       | 41.6             |       | 189.6             |       | 231.2            |       |
| Selling, general and  administrative expenses                            |       | —      |       | 32.6             |       | 122.2             |       | 154.8            |       |
| Restructuring and other severance  costs                                 |       | —      |       | 0.7              |       | 3.5               |       | 4.2              |       |
| Gain on sale of assets                                                   |       | —      |       | (0.4             | )          | —            |       | (0.4             | )          |
| Operating income                                                         |       | —      |       | 8.7              |       | 63.9              |       | 72.6             |       |
| Other expenses, net:                                                     |       |        |       |             |       |              |       |             |       |
| Intergroup interest, net                                                 |       | 33.9        |       | (15.7            | )          | (18.2             | )          | —           |       |
| Interest expense, net                                                    |       | (43.2       | )          | (0.4             | )          | (10.0             | )          | (53.6            | )          |
| Intergroup other, net                                                    |       | —      |       | 2.1              |       | (2.1              | )          | —           |       |
| Gain (loss) on early  extinguishment of debt, net                        |       | 0.7         |       | (0.7             | )          | (0.9              | )          | (0.9             | )          |
| Foreign exchange gain, net                                               |       | —      |       | —           |       | 4.5               |       | 4.5              |       |
| Other, net                                                               |       | (0.1        | )          | 0.1              |       | —            |       | —           |       |
| Other expenses, net                                                      |       | (8.7        | )          | (14.6            | )          | (26.7             | )          | (50.0            | )          |
| (Loss) income from continuing  operations before taxes                   |       | (8.7        | )          | (5.9             | )          | 37.2              |       | 22.6             |       |
| Income tax provision (benefit)                                           |       | 7.7         |       | (3.3             | )          | 8.6               |       | 13.0             |       |
| (Loss) income from continuing  operations                                |       | (16.4       | )          | (2.6             | )          | 28.6              |       | 9.6              |       |
| (Loss) income from discontinued  operations, net of tax                  |       | (0.2        | )          | 0.1              |       | —            |       | (0.1             | )          |
| Net (loss) income                                                        |       | (16.6       | )          | (2.5             | )          | 28.6              |       | 9.5              |       |
| Net loss attributable to the  noncontrolling interest                    |       | —      |       | —           |       | 0.6               |       | 0.6              |       |
| Net (loss) income attributable to  Rockwood Specialties Group, Inc. |       | $           | (16.6      | )                | $          | (2.5              | )          | $                | 29.2       |   | $ | 10.1 |   |

 

27

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGSTATEMENT OF OPERATIONS**

**NINE MONTHS ENDEDSEPTEMBER 30, 2010**

**(Dollars inmillions)**

 
| ** **                                                               | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                               | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| Net sales                                                                |       | $           | —     |             | $          | 553.5             |       | $                | 2,015.8    |   | $ | 2,569.3 |   |
| Cost of products sold                                                    |       | —      |       | 392.7            |       | 1,351.7           |       | 1,744.4          |       |
| Gross profit                                                             |       | —      |       | 160.8            |       | 664.1             |       | 824.9            |       |
| Selling, general and  administrative expenses                            |       | 0.1         |       | 132.9            |       | 381.4             |       | 514.4            |       |
| Restructuring and other severance  costs                                 |       | —      |       | 0.4              |       | 4.5               |       | 4.9              |       |
| Loss on sale of assets and other                                         |       | —      |       | —           |       | 0.2               |       | 0.2              |       |
| Operating income                                                         |       | (0.1        | )          | 27.5             |       | 278.0             |       | 305.4            |       |
| Other income (expenses), net:                                            |       |        |       |             |       |              |       |             |       |
| Intergroup interest, net                                                 |       | 112.8       |       | (41.6            | )          | (71.2             | )          | —           |       |
| Interest expense, net                                                    |       | (97.5       | )          | (1.8             | )          | (17.4             | )          | (116.7           | )          |
| Loss on early extinguishment of  debt                                    |       | (0.1        | )          | (0.7             | )          | (0.8              | )          | (1.6             | )          |
| Intergroup other, net                                                    |       | —      |       | 10.7             |       | (10.7             | )          | —           |       |
| Foreign exchange gain (loss), net                                        |       | 1.2         |       | (0.6             | )          | 0.2               |       | 0.8              |       |
| Other, net                                                               |       | —      |       | —           |       | 0.5               |       | 0.5              |       |
| Other income (expenses), net                                             |       | 16.4        |       | (34.0            | )          | (99.4             | )          | (117.0           | )          |
| Income (loss) from continuing  operations before taxes                   |       | 16.3        |       | (6.5             | )          | 178.6             |       | 188.4            |       |
| Income tax provision                                                     |       | 0.5         |       | 4.6              |       | 48.3              |       | 53.4             |       |
| Net income (loss)                                                        |       | 15.8        |       | (11.1            | )          | 130.3             |       | 135.0            |       |
| Net income attributable to the  noncontrolling interest                  |       | —      |       | —           |       | (5.2              | )          | (5.2             | )          |
| Net income (loss) attributable to  Rockwood Specialties Group, Inc. |       | $           | 15.8       |             | $          | (11.1             | )          | $                | 125.1      |   | $ | 129.8 |   |

 

28

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGSTATEMENT OF OPERATIONS**

**NINE MONTHS ENDEDSEPTEMBER 30, 2009**

**(Dollars inmillions)**

 
| ** **                                                               | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                               | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| Net sales                                                                |       | $           | —     |             | $          | 480.1             |       | $                | 1,696.5    |   | $ | 2,176.6 |   |
| Cost of products sold                                                    |       | —      |       | 365.5            |       | 1,194.6           |       | 1,560.1          |       |
| Gross profit                                                             |       | —      |       | 114.6            |       | 501.9             |       | 616.5            |       |
| Selling, general and  administrative expenses                            |       | 0.1         |       | 99.9             |       | 350.9             |       | 450.9            |       |
| Restructuring and other severance  costs                                 |       | —      |       | 3.8              |       | 12.2              |       | 16.0             |       |
| Gain on sale of assets                                                   |       | —      |       | (0.3             | )          | —            |       | (0.3             | )          |
| Operating income                                                         |       | (0.1        | )          | 11.2             |       | 138.8             |       | 149.9            |       |
| Other income (expenses), net:                                            |       |        |       |             |       |              |       |             |       |
| Intergroup interest, net                                                 |       | 87.6        |       | (40.4            | )          | (47.2             | )          | —           |       |
| Interest expense, net                                                    |       | (99.0       | )          | (1.3             | )          | (31.1             | )          | (131.4           | )          |
| Intergroup other, net                                                    |       | 155.3       |       | (147.4           | )          | (7.9              | )          | —           |       |
| Gain (loss) on early  extinguishment of debt                             |       | 5.2         |       | (6.9             | )          | (24.9             | )          | (26.6            | )          |
| Foreign exchange (loss) gain, net                                        |       | (3.3        | )          | (0.1             | )          | 18.8              |       | 15.4             |       |
| Other, net                                                               |       | (0.5        | )          | 0.5              |       | 0.4               |       | 0.4              |       |
| Other income (expenses), net                                             |       | 145.3       |       | (195.6           | )          | (91.9             | )          | (142.2           | )          |
| Income (loss) from continuing  operations before taxes                   |       | 145.2       |       | (184.4           | )          | 46.9              |       | 7.7              |       |
| Income tax provision (benefit)                                           |       | 6.9         |       | 1.3              |       | (1.3              | )          | 6.9              |       |
| Income (loss) from continuing  operations                                |       | 138.3       |       | (185.7           | )          | 48.2              |       | 0.8              |       |
| Income from discontinued  operations, net of tax                         |       | 1.0         |       | 0.2              |       | 2.1               |       | 3.3              |       |
| Net income (loss)                                                        |       | 139.3       |       | (185.5           | )          | 50.3              |       | 4.1              |       |
| Net loss attributable to the  noncontrolling interest                    |       | —      |       | —           |       | 6.2               |       | 6.2              |       |
| Net income (loss) attributable to  Rockwood Specialties Group, Inc. |       | $           | 139.3      |             | $          | (185.5            | )          | $                | 56.5       |   | $ | 10.3 |   |

 

29

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGBALANCE SHEET**

**SEPTEMBER 30, 2010**

**(Dollars inmillions)**

 
| ** **                                                             | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                                             | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                                             |       |        |       |             |       |              |       |             |       |             |       |
| Current assets:                                                        |       |        |       |             |       |              |       |             |       |             |       |
| Cash and cash equivalents                                              |       | $           | 6.5        |             | $          | 173.2             |       | $                | 101.1      |             | $          | — |   | $ | 280.8 |   |
| Accounts receivable, net                                               |       | —      |       | 98.7             |       | 418.8             |       | —           |       | 517.5            |       |
| Inventories                                                            |       | —      |       | 115.1            |       | 413.5             |       | —           |       | 528.6            |       |
| Deferred income taxes                                                  |       | —      |       | —           |       | 3.1               |       | —           |       | 3.1              |       |
| Prepaid expenses and other current  assets                             |       | 4.2         |       | 10.0             |       | 52.6              |       | —           |       | 66.8             |       |
| Total current assets                                                   |       | 10.7        |       | 397.0            |       | 989.1             |       | —           |       | 1,396.8          |       |
| Property, plant and equipment, net                                     |       | —      |       | 260.1            |       | 1,361.7           |       | —           |       | 1,621.8          |       |
| Investment in subsidiary                                               |       | 1,045.8     |       | 91.0             |       | —            |       | (1,136.8         | )          | —           |       |
| Goodwill                                                               |       | —      |       | 17.1             |       | 876.9             |       | —           |       | 894.0            |       |
| Intergroup receivable                                                  |       | 2,286.0     |       | 45.3             |       | 3,898.2           |       | (6,229.5         | )          | —           |       |
| Other intangible assets, net                                           |       | —      |       | 83.8             |       | 540.7             |       | —           |       | 624.5            |       |
| Deferred debt issuance costs, net                                      |       | 1.0         |       | 4.3              |       | 13.6              |       | —           |       | 18.9             |       |
| Deferred income taxes                                                  |       | 8.6         |       | (7.2             | )          | 24.8              |       | —           |       | 26.2             |       |
| Other assets                                                           |       | —      |       | 1.0              |       | 39.9              |       | —           |       | 40.9             |       |
| Total assets                                                           |       | $           | 3,352.1    |             | $          | 892.4             |       | $                | 7,744.9    |             | $          | (7,366.3 | ) | $ | 4,623.1 |   |
| **LIABILITIES**                                                        |       |        |       |             |       |              |       |             |       |             |       |
| Current liabilities:                                                   |       |        |       |             |       |              |       |             |       |             |       |
| Accounts payable                                                       |       | $           | —     |             | $          | 45.9              |       | $                | 177.1      |             | $          | — |   | $ | 223.0 |   |
| Income taxes payable                                                   |       | —      |       | 0.4              |       | 20.2              |       | —           |       | 20.6             |       |
| Accrued compensation                                                   |       | —      |       | 43.8             |       | 106.6             |       | —           |       | 150.4            |       |
| Accrued expenses and other current  liabilities                        |       | 30.0        |       | 64.1             |       | 124.3             |       | —           |       | 218.4            |       |
| Deferred income taxes                                                  |       | 10.3        |       | (7.9             | )          | 4.2               |       | —           |       | 6.6              |       |
| Long-term debt, current portion                                        |       | 4.6         |       | —           |       | 85.9              |       | —           |       | 90.5             |       |
| Total current liabilities                                              |       | 44.9        |       | 146.3            |       | 518.3             |       | —           |       | 709.5            |       |
| Long-term debt                                                         |       | 1,763.3     |       | —           |       | 341.8             |       | —           |       | 2,105.1          |       |
| Pension and related liabilities                                        |       | —      |       | 12.2             |       | 385.5             |       | —           |       | 397.7            |       |
| Intergroup payable                                                     |       | 79.4        |       | 1,185.7          |       | 4,964.4           |       | (6,229.5         | )          | —           |       |
| Deferred income taxes                                                  |       | —      |       | —           |       | 80.3              |       | —           |       | 80.3             |       |
| Other liabilities                                                      |       | 31.2        |       | 23.5             |       | 72.2              |       | —           |       | 126.9            |       |
| Total liabilities                                                      |       | 1,918.8     |       | 1,367.7          |       | 6,362.5           |       | (6,229.5         | )          | 3,419.5          |       |
| **EQUITY**                                                             |       |        |       |             |       |              |       |             |       |             |       |
| Rockwood Specialties  Group, Inc. stockholder’s equity:      |       |        |       |             |       |              |       |             |       |             |       |
| Common stock                                                           |       | —      |       | 190.6            |       | 164.7             |       | (355.3           | )          | —           |       |
| Paid-in capital                                                        |       | 1,044.0     |       | 186.9            |       | 594.6             |       | (781.5           | )          | 1,044.0          |       |
| Accumulated other comprehensive  income                                |       | 44.9        |       | 12.0             |       | 102.4             |       | —           |       | 159.3            |       |
| Retained earnings (deficit)                                            |       | 344.4       |       | (864.8           | )          | 230.7             |       | —           |       | (289.7           | )          |
| Total Rockwood Specialties  Group, Inc. stockholder’s equity |       | 1,433.3     |       | (475.3           | )          | 1,092.4           |       | (1,136.8         | )          | 913.6            |       |
| Noncontrolling interest                                                |       | —      |       | —           |       | 290.0             |       | —           |       | 290.0            |       |
| Total equity                                                           |       | 1,433.3     |       | (475.3           | )          | 1,382.4           |       | (1,136.8         | )          | 1,203.6          |       |
| Total liabilities and equity                                           |       | $           | 3,352.1    |             | $          | 892.4             |       | $                | 7,744.9    |             | $          | (7,366.3 | ) | $ | 4,623.1 |   |

 

30

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGBALANCE SHEET**

**DECEMBER 31,2009**

**(Dollars inmillions)**

 
| ** **                                                             | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                                             | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                                             |       |        |       |             |       |              |       |             |       |             |       |
| Current assets:                                                        |       |        |       |             |       |              |       |             |       |             |       |
| Cash and cash equivalents                                              |       | $           | 19.8       |             | $          | 40.3              |       | $                | 240.4      |             | $          | — |   | $ | 300.5 |   |
| Accounts receivable, net                                               |       | —      |       | 76.3             |       | 374.1             |       | —           |       | 450.4            |       |
| Inventories                                                            |       | —      |       | 107.1            |       | 409.9             |       | —           |       | 517.0            |       |
| Deferred income taxes                                                  |       | (4.0        | )          | 8.9              |       | 7.7               |       | —           |       | 12.6             |       |
| Prepaid expenses and other current  assets                             |       | —      |       | 18.8             |       | 47.7              |       | —           |       | 66.5             |       |
| Total current assets                                                   |       | 15.8        |       | 251.4            |       | 1,079.8           |       | —           |       | 1,347.0          |       |
| Property, plant and equipment, net                                     |       | —      |       | 273.9            |       | 1,428.6           |       | —           |       | 1,702.5          |       |
| Investment in subsidiary                                               |       | 1,045.8     |       | 91.0             |       | —            |       | (1,136.8         | )          | —           |       |
| Goodwill                                                               |       | —      |       | 17.1             |       | 922.1             |       | —           |       | 939.2            |       |
| Intergroup receivable                                                  |       | 2,541.8     |       | 160.3            |       | 4,651.7           |       | (7,353.8         | )          | —           |       |
| Other intangible assets, net                                           |       | —      |       | 95.6             |       | 609.1             |       | —           |       | 704.7            |       |
| Deferred debt issuance costs, net                                      |       | 1.3         |       | 6.0              |       | 18.7              |       | —           |       | 26.0             |       |
| Deferred income taxes                                                  |       | 6.8         |       | (6.1             | )          | 24.1              |       | —           |       | 24.8             |       |
| Other assets                                                           |       | —      |       | 1.4              |       | 36.1              |       | —           |       | 37.5             |       |
| Total assets                                                           |       | $           | 3,611.5    |             | $          | 890.6             |       | $                | 8,770.2    |             | $          | (8,490.6 | ) | $ | 4,781.7 |   |
| **LIABILITIES**                                                        |       |        |       |             |       |              |       |             |       |             |       |
| Current liabilities:                                                   |       |        |       |             |       |              |       |             |       |             |       |
| Accounts payable                                                       |       | $           | —     |             | $          | 39.8              |       | $                | 197.5      |             | $          | — |   | $ | 237.3 |   |
| Income taxes payable                                                   |       | —      |       | (0.6             | )          | 12.1              |       | —           |       | 11.5             |       |
| Accrued compensation                                                   |       | —      |       | 24.4             |       | 53.3              |       | —           |       | 77.7             |       |
| Accrued expenses and other current  liabilities                        |       | 23.2        |       | 33.2             |       | 122.6             |       | —           |       | 179.0            |       |
| Deferred income taxes                                                  |       | —      |       | —           |       | 2.6               |       | —           |       | 2.6              |       |
| Long-term debt, current portion                                        |       | 15.8        |       | —           |       | 78.4              |       | —           |       | 94.2             |       |
| Total current liabilities                                              |       | 39.0        |       | 96.8             |       | 466.5             |       | —           |       | 602.3            |       |
| Long-term debt                                                         |       | 1,997.0     |       | —           |       | 437.1             |       | —           |       | 2,434.1          |       |
| Pension and related liabilities                                        |       | —      |       | 12.6             |       | 397.5             |       | —           |       | 410.1            |       |
| Intergroup payable                                                     |       | 83.7        |       | 1,222.3          |       | 6,047.8           |       | (7,353.8         | )          | —           |       |
| Deferred income taxes                                                  |       | —      |       | —           |       | 69.1              |       | —           |       | 69.1             |       |
| Other liabilities                                                      |       | 35.1        |       | 25.4             |       | 83.6              |       | —           |       | 144.1            |       |
| Total liabilities                                                      |       | 2,154.8     |       | 1,357.1          |       | 7,501.6           |       | (7,353.8         | )          | 3,659.7          |       |
| **EQUITY**                                                             |       |        |       |             |       |              |       |             |       |             |       |
| Rockwood Specialties  Group, Inc. stockholder’s equity:      |       |        |       |             |       |              |       |             |       |             |       |
| Common stock                                                           |       | —      |       | 190.6            |       | 164.7             |       | (355.3           | )          | —           |       |
| Paid-in capital                                                        |       | 1,044.0     |       | 184.6            |       | 596.9             |       | (781.5           | )          | 1,044.0          |       |
| Accumulated other comprehensive  income                                |       | 84.1        |       | 12.0             |       | 111.4             |       | —           |       | 207.5            |       |
| Retained earnings (deficit)                                            |       | 328.6       |       | (853.7           | )          | 105.6             |       | —           |       | (419.5           | )          |
| Total Rockwood Specialties  Group, Inc. stockholder’s equity |       | 1,456.7     |       | (466.5           | )          | 978.6             |       | (1,136.8         | )          | 832.0            |       |
| Noncontrolling interest                                                |       | —      |       | —           |       | 290.0             |       | —           |       | 290.0            |       |
| Total equity                                                           |       | 1,456.7     |       | (466.5           | )          | 1,268.6           |       | (1,136.8         | )          | 1,122.0          |       |
| Total liabilities and equity                                           |       | $           | 3,611.5    |             | $          | 890.6             |       | $                | 8,770.2    |             | $          | (8,490.6 | ) | $ | 4,781.7 |   |

 

31

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGSTATEMENT OF CASH FLOWS**

**NINE MONTHS ENDEDSEPTEMBER 30, 2010**

**(Dollars inmillions)**

 
| ** **                                                                                              | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                              | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS FROM  OPERATING ACTIVITIES:**                                                              |       |        |       |             |       |              |       |             |       |
| Net income (loss)                                                                                       |       | $           | 15.8       |             | $          | (11.1             | )          | $                | 130.3      |   | $ | 135.0 |   |
| Adjustments to reconcile net  income (loss) to net cash (used in) provided by operating activities:     |       |        |       |             |       |              |       |             |       |
| Depreciation and amortization                                                                           |       | —      |       | 38.3             |       | 155.1             |       | 193.4            |       |
| Deferred financing costs  amortization                                                                  |       | 0.2         |       | 1.0              |       | 3.3               |       | 4.5              |       |
| Loss on early extinguishment of  debt                                                                   |       | 0.1         |       | 0.7              |       | 0.8               |       | 1.6              |       |
| Foreign exchange (gain) loss                                                                            |       | (1.2        | )          | 0.6              |       | (0.2              | )          | (0.8             | )          |
| Fair value adjustment of  derivatives                                                                   |       | (4.2        | )          | —           |       | (4.7              | )          | (8.9             | )          |
| Bad debt provision                                                                                      |       | —      |       | (0.5             | )          | —            |       | (0.5             | )          |
| Stock-based compensation                                                                                |       | —      |       | 6.3              |       | 3.3               |       | 9.6              |       |
| Deferred income taxes                                                                                   |       | 4.4         |       | 3.1              |       | 22.3              |       | 29.8             |       |
| Restructuring and other                                                                                 |       | —      |       | 0.1              |       | 2.2               |       | 2.3              |       |
| Changes in assets and liabilities,  net of the effect of foreign currency translation and acquisitions: |       |        |       |             |       |              |       |             |       |
| Accounts receivable                                                                                     |       | —      |       | (22.0            | )          | (55.8             | )          | (77.8            | )          |
| Inventories                                                                                             |       | —      |       | (8.0             | )          | (16.9             | )          | (24.9            | )          |
| Prepaid expenses and other assets                                                                       |       | (4.4        | )          | 13.1             |       | (12.5             | )          | (3.8             | )          |
| Accounts payable                                                                                        |       | —      |       | 6.3              |       | (9.5              | )          | (3.2             | )          |
| Income taxes payable                                                                                    |       | 0.3         |       | 1.2              |       | (2.4              | )          | (0.9             | )          |
| Accrued expenses and other  liabilities                                                                 |       | 8.0         |       | 39.2             |       | 64.9              |       | 112.1            |       |
| Intercompany operating activities,  net                                                                 |       | (28.8       | )          | 22.4             |       | 6.4               |       | —           |       |
| **Net cash (used  in) provided by operating activities**                                                |       | (9.8        | )          | 90.7             |       | 286.6             |       | 367.5            |       |
| **CASH FLOWS FROM  INVESTING ACTIVITIES:**                                                              |       |        |       |             |       |              |       |             |       |
| Acquisitions, including  transaction fees paid, net of cash acquired                                    |       | —      |       | —           |       | (0.9              | )          | (0.9             | )          |
| Capital expenditures, excluding  capital leases                                                         |       | —      |       | (14.1            | )          | (102.1            | )          | (116.2           | )          |
| Proceeds on sale of assets                                                                              |       | —      |       | —           |       | 2.0               |       | 2.0              |       |
| **Net cash used in  investing activities**                                                              |       | —      |       | (14.1            | )          | (101.0            | )          | (115.1           | )          |
| **CASH FLOWS FROM  FINANCING ACTIVITIES:**                                                              |       |        |       |             |       |              |       |             |       |
| Repayment of Titanium Dioxide  Pigments revolving credit facility                                       |       | —      |       | —           |       | (14.3             | )          | (14.3            | )          |
| Prepayment of senior secured debt                                                                       |       | (200.2      | )          | —           |       | —            |       | (200.2           | )          |
| Repayment of senior secured debt                                                                        |       | (8.3        | )          | —           |       | (22.0             | )          | (30.3            | )          |
| Proceeds from other borrowings                                                                          |       | —      |       | —           |       | 19.3              |       | 19.3             |       |
| Payments on other long-term debt                                                                        |       | —      |       | —           |       | (45.2             | )          | (45.2            | )          |
| Deferred financing costs                                                                                |       | (0.3        | )          | —           |       | —            |       | (0.3             | )          |
| Intercompany financing related  activity                                                                |       | 204.5       |       | 56.9             |       | (261.4            | )          | —           |       |
| **Net cash (used  in) provided by financing activities**                                                |       | (4.3        | )          | 56.9             |       | (323.6            | )          | (271.0           | )          |
| Effect of exchange rate changes on  cash and cash equivalents                                           |       | 0.8         |       | (0.6             | )          | (1.3              | )          | (1.1             | )          |
| Net (decrease) increase in cash  and cash equivalents                                                   |       | (13.3       | )          | 132.9            |       | (139.3            | )          | (19.7            | )          |
| Cash and cash equivalents,  beginning of period                                                         |       | 19.8        |       | 40.3             |       | 240.4             |       | 300.5            |       |
| Cash and cash equivalents, end of  period                                                               |       | $           | 6.5        |             | $          | 173.2             |       | $                | 101.1      |   | $ | 280.8 |   |

 

32

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGSTATEMENT OF CASH FLOWS**

**NINE MONTHS ENDEDSEPTEMBER 30, 2009**

**(Dollars inmillions)**

 
| ** **                                                                                              | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                              | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS FROM  OPERATING ACTIVITIES:**                                                              |       |        |       |             |       |              |       |             |       |
| Net income (loss)                                                                                       |       | $           | 139.3      |             | $          | (185.5            | )          | $                | 50.3       |   | $ | 4.1 |   |
| Adjustments to reconcile net  income (loss) to net cash provided by (used in) operating activities:     |       |        |       |             |       |              |       |             |       |
| Income from discontinued  operations, net of tax                                                        |       | (1.0        | )          | (0.2             | )          | (2.1              | )          | (3.3             | )          |
| Depreciation and amortization                                                                           |       | —      |       | 41.0             |       | 167.5             |       | 208.5            |       |
| Deferred financing costs  amortization                                                                  |       | 0.2         |       | 0.8              |       | 5.2               |       | 6.2              |       |
| Loss on early extinguishment of  debt                                                                   |       | 6.7         |       | 2.0              |       | 17.9              |       | 26.6             |       |
| Foreign exchange loss (gain), net                                                                       |       | 3.3         |       | 0.1              |       | (18.8             | )          | (15.4            | )          |
| Fair value adjustment of  derivatives                                                                   |       | (4.9        | )          | —           |       | 3.6               |       | (1.3             | )          |
| Bad debt provision                                                                                      |       | —      |       | 0.2              |       | 0.5               |       | 0.7              |       |
| Stock-based compensation                                                                                |       | —      |       | 2.1              |       | 1.0               |       | 3.1              |       |
| Deferred income taxes                                                                                   |       | 1.1         |       | 5.0              |       | (17.6             | )          | (11.5            | )          |
| Loss on sale of assets and other                                                                        |       | —      |       | (0.1             | )          | 0.2               |       | 0.1              |       |
| Changes in assets and liabilities,  net of the effect of foreign currency translation and acquisitions: |       |        |       |             |       |              |       |             |       |
| Accounts receivable                                                                                     |       | —      |       | (1.0             | )          | (3.6              | )          | (4.6             | )          |
| Inventories                                                                                             |       | —      |       | 41.9             |       | 79.5              |       | 121.4            |       |
| Prepaid expenses and other assets                                                                       |       | 0.5         |       | (6.9             | )          | 6.1               |       | (0.3             | )          |
| Accounts payable                                                                                        |       | —      |       | (3.1             | )          | (29.1             | )          | (32.2            | )          |
| Income taxes payable                                                                                    |       | 6.4         |       | (5.0             | )          | (2.2              | )          | (0.8             | )          |
| Accrued expenses and other  liabilities                                                                 |       | 9.4         |       | (17.7            | )          | (23.8             | )          | (32.1            | )          |
| Intercompany operating activities,  net                                                                 |       | 276.5       |       | (222.6           | )          | (53.9             | )          | —           |       |
| **Net cash provided  by (used in) operating activities**                                                |       | 437.5       |       | (349.0           | )          | 180.7             |       | 269.2            |       |
| **CASH FLOWS FROM  INVESTING ACTIVITIES:**                                                              |       |        |       |             |       |              |       |             |       |
| Acquisitions, including  transaction fees paid, net of cash acquired                                    |       | —      |       | —           |       | (6.4              | )          | (6.4             | )          |
| Capital expenditures, excluding  capital leases                                                         |       | —      |       | (20.5            | )          | (96.0             | )          | (116.5           | )          |
| Contractual advance to Titanium  Dioxide Pigments noncontrolling shareholder                            |       | —      |       | —           |       | (16.0             | )          | (16.0            | )          |
| Proceeds on sale of assets                                                                              |       | —      |       | 2.6              |       | 5.3               |       | 7.9              |       |
| Net cash used in investing  activities of continuing operations                                         |       | —      |       | (17.9            | )          | (113.1            | )          | (131.0           | )          |
| Net cash used in investing  activities of discontinued operations                                       |       | —      |       | (0.5             | )          | —            |       | (0.5             | )          |
| **Net cash used in  investing activities**                                                              |       | —      |       | (18.4            | )          | (113.1            | )          | (131.5           | )          |
| **CASH FLOWS FROM  FINANCING ACTIVITIES:**                                                              |       |        |       |             |       |              |       |             |       |
| Prepayment of 2014 Notes                                                                                |       | (146.8      | )          | —           |       | —            |       | (146.8           | )          |
| Proceeds from Titanium Dioxide  Pigments revolving credit facility                                      |       | —      |       | —           |       | 14.1              |       | 14.1             |       |
| Prepayment of senior secured debt                                                                       |       | (40.8       | )          | —           |       | (61.5             | )          | (102.3           | )          |
| Repayment of senior secured debt                                                                        |       | (19.7       | )          | —           |       | (29.5             | )          | (49.2            | )          |
| Payments on other long-term debt                                                                        |       | —      |       | —           |       | (6.2              | )          | (6.2             | )          |
| Loan from Viance noncontrolling  shareholder                                                            |       | —      |       | —           |       | 2.0               |       | 2.0              |       |
| Fees related to early  extinguishment of debt                                                           |       | (12.0       | )          | —           |       | —            |       | (12.0            | )          |
| Deferred financing costs                                                                                |       | (13.8       | )          | —           |       | —            |       | (13.8            | )          |
| Intercompany financing related  activity                                                                |       | (440.3      | )          | 370.8            |       | 69.5              |       | —           |       |
| **Net cash (used  in) provided by financing activities**                                                |       | (673.4      | )          | 370.8            |       | (11.6             | )          | (314.2           | )          |
| Effect of exchange rate changes on  cash and cash equivalents                                           |       | (0.5        | )          | —           |       | (9.6              | )          | (10.1            | )          |
| Net (decrease) increase in cash  and cash equivalents                                                   |       | (236.4      | )          | 3.4              |       | 46.4              |       | (186.6           | )          |
| Cash and cash equivalents of  continuing operations, beginning of period                                |       | 272.7       |       | 11.5             |       | 184.5             |       | 468.7            |       |
| Cash and cash equivalents of  continuing operations, end of period                                      |       | $           | 36.3       |             | $          | 14.9              |       | $                | 230.9      |   | $ | 282.1 |   |

 

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

 

*The following discussion contains forward-looking statementsthat involve numerous risks and uncertainties. Our actual results could differmaterially from those discussed in the forward-looking statements as a resultof these risks and uncertainties, including those set forth in “Forward-LookingStatements” at the end of this Management’s Discussion and Analysis section andthe risk factors section of the Company’s 2009 Form 10-K. You should readthe following discussion and analysis together with our condensed consolidated*

 

33

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*financial statements and the notes to those statements thatappear elsewhere in this Quarterly Report. Amounts may not recalculate due torounding differences*

 

*Unless otherwise noted, all balance sheet- related itemswhich are denominated in Euros are converted at the September 30, 2010 exchangerate of €1.00 = $1.3634.*

 

**General**

 

Weare a global developer, manufacturer and marketer of technologically advanced,high value-added specialty chemicals and advanced materials. We serve more than60,000 customers across a wide variety of industries and geographic areas. Weoperate through five business segments: (1) Specialty Chemicals;(2) Performance Additives; (3) Titanium Dioxide Pigments;(4) Advanced Ceramics; and (5) Specialty Compounds.

 

Ournet sales consist of sales of our products, net of sales discounts, and productreturns and allowances. In addition, net sales include shipping and handlingcosts billed to customers. Sales are primarily made on a purchase order basis.

 

Ourcost of products sold consists of variable and fixed components. Our variablecosts are proportional to volume and consist principally of raw materials,packaging and related supplies, certain energy costs, and certain distributioncosts including inbound, outbound, and internal shipping and transfer costs.Our fixed costs are not significantly impacted by production volume and consistprincipally of certain fixed manufacturing costs and other distribution networkcosts, including warehousing. Fixed manufacturing costs compriseheadcount-related costs and overhead, including depreciation, periodicmaintenance costs, purchasing and receiving costs, inspection costs and certainenergy costs.

 

Ourselling, general and administrative expenses include research and developmentcosts, sales and marketing, divisional management expenses and corporateservices including cash management, legal, benefit plan administration andother administrative and professional services.

 

Weare focused on growth, productivity, cost reduction, margin expansion, bolt-onacquisitions, divestment of non-core businesses and debt reduction. Inconnection with this focus, among other things:

 

·            We continue to reduceoverhead and eliminate duplicative facilities and positions throughout theCompany as part of our ongoing global cost control initiatives, and we remainfocused on reducing costs, improving productivity, and conserving cash bycontrolling working capital and capital spending;

 

·            In the first half of 2009,we repurchased a portion of our Euro-denominated senior subordinated notes duein 2014, voluntarily prepaid a portion of our senior secured term loans andamended our senior secured credit agreement; and

 

·            As discussed in Note 10, “Long-termDebt,” we voluntarily prepaid $200.2 million of our senior secured term loanson July 29, 2010.

 

**Factors Which Affect Our Results of Operations**

 

**Our Markets**

 

Becausethe businesses in our segments generally serve many unrelated end-use markets,we discuss the principal market conditions on a segment basis rather than aconsolidated basis. The principal market conditions in our segments andregions in which we operate that impacted our results of operations during theperiods presented include the following:

 

***Specialty Chemicals***

 

·            Demand for Surface Treatmentproducts in our Specialty Chemicals segment generally follows the activitylevels of metal processing manufacturers, including the automotive supply,steel and aerospace industries. In 2009, results declined on lower volumes inmost businesses, partially offset by increased selling prices. In the firstnine months of 2010, results were up from higher volumes in all markets. Salesare expected to continue to be higher throughout the remainder of 2010primarily from higher volumes across most markets.

 

·            Demand for our lithiumcarbonate products in the Fine Chemicals business line of our SpecialtyChemicals segment is generally driven by demand for battery applications, glassceramics, cement, the aluminum industry and the general demand in China. Sales oflithium products specifically used in life science applications depend on thetrends in drug development and growth in pharmaceuticals markets as well asgeneric competition. In 2009, lower volumes in most applications,particularly in 

 

34

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lithiumand metal sulfide applications, had a negative impact on results. In the firstnine months of 2010, results were higher primarily from increased volumes oflithium products and metal sulfide applications. This was partially offset bylower selling prices of potash and lithium carbonate. Higher volumes areexpected for the remainder of 2010 in lithium applications. Results areexpected to be negatively impacted by the highly competitive businessenvironment.

 

***Performance Additives***

 

·            Generally, a trend towardsthe increased use of colored concrete products in the construction market hashistorically had a positive effect on our Color Pigments and Services businessline. However, a general slowdown in the construction market has negativelyimpacted construction sales. North American volumes were lower in 2009 andhave continued to be lower through the first nine months of 2010. Europeanvolumes were lower in 2009. However, European volumes in the first nine monthsof 2010 were comparable to the same period in the prior year. Higher volumes ofcoatings products had a favorable impact on results in the first nine months of2010.

 

·            Demand for our woodprotection products, in particular alkaline copper quaternary, or ACQ, isgenerally driven by both repair and remodeling, as well as newconstruction. The market position of ACQ was negatively impacted in 2009by a general slowdown in the construction market, some customer shifts tosubstitute products and the use of wood substitutes. In the first nine monthsof 2010, volumes of ACQ products decreased slightly. A continued slowdown inthe construction industry and substitute products could have a negative impacton our results in the remainder of 2010.

 

·            In the Clay-based Additivesbusiness, net sales decreased in 2009 as lower volumes in most applicationswere partially offset by increased selling prices. In the first nine months of2010, higher volumes in most markets, particularly oilfield, had a favorableimpact on results. We expect sales growth throughout the remainder of 2010primarily from higher volumes in most market segments.

 

***Titanium Dioxide Pigments***

 

·            Demand for our titaniumdioxide products in anatase grade is driven mainly by demand in the syntheticfiber industry, while demand for titanium dioxide products in rutile grade andour functional additives is driven by demand in the coatings, printing inks,construction, cosmetics, pharmaceutical, food, paper and plasticsindustries. Market conditions, including pricing pressure and industryovercapacity, have negatively impacted this industry in the past. Salesdecreased in 2009 as lower volumes of fiber anatase applications were partiallyoffset by increased selling prices. Sales of titanium dioxide products inrutile grade applications were up in 2009 due to higher volumes as a result ofthe venture with Kemira that was completed on September 1, 2008, andhigher selling prices. In the first nine months of 2010, higher volumes,as well as selling price increases, of both rutile and anatase applications hada favorable impact on results. Our functional additives sales were down in 2009as lower volumes were partially offset by higher selling prices. In the firstnine months of 2010, higher volumes, as well as selling price increases offunctional additives had a favorable impact on results. We expect sales ofrutile, anatase and functional additives applications to continue to be higherthroughout the remainder of 2010.

 

***Advanced Ceramics***

 

·            Demand for our ceramicmedical devices is mainly tied to the aging population in Europe and the UnitedStates. Sales of our medical device applications increased in 2009 and thefirst nine months of 2010 on higher volumes. We expect sales for these applicationsto be higher throughout the remainder of 2010.

 

·            Sales of ceramic productsfor use in cutting tool applications were lower in 2009. Sales ofmechanical systems and applications, electronic applications andmulti-functional applications were also down in 2009 from lower volumes,particularly related to the economic downturn in the automotive industry. Salesof all product applications, including cutting tools, mechanical systems andapplications, electronic applications and multi-functional applications, wereup in the first nine months of 2010 on higher volumes. We expect sales forthese applications to continue to increase throughout the remainder of 2010.

 

***Specialty Compounds***

 

·            Our largest product line inthe Specialty Compounds segment is wire and cable compounds. Sales within thisproduct line are dependent upon the telecommunications market and relatedsectors, specifically demand for high-end voice and data communication wire andcable, for which our Specialty Compounds segment is a significant provider ofsheathing materials. Non-halogen products for wire and cable datacommunication, military and other applications have expanded business in NorthAmerica for those applications and created opportunities inEurope. However, as a result of a general downturn in the wire and cablemarket, volumes of wire and cable products were down in 2009. In the firstnine months of 2010, higher 

 

35

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volumesof wire and cable products had a favorable impact on results. For the remainderof 2010, we expect sales of wire and cable products to be higher.

 

·            Most of the other end-usemarkets for which Specialty Compounds’ products are used generally track growthof gross domestic product, but many are also application specific, such asautomotive. We are focusing more of our efforts towards increasing high marginspecialty products, in particular, thermoplastic elastomers, and less of ourefforts in automotive and footwear. Our net sales in consumer/industrialthermoplastic elastomers and regulated packaging were lower in 2009. Inthe first nine months of 2010, sales of consumer/industrial thermoplasticelastomers and regulated packaging increased on higher volumes. We expect salesfor these applications to be higher throughout the remainder of 2010.

 

·            Raw material prices forpolyvinyl chloride (“PVC”) resin and plasticizers, key raw materials used inthe production of most products, were down in 2009, but were higher in thefirst nine months of 2010. These raw material prices are expected to be slightlyhigher throughout the remainder of 2010.

 

**Global Exposure**

 

Weoperate a geographically diverse business. Of our 2009 net sales, 52% wereshipments to Europe, 27% to North America (predominantly the United States) and21% to the rest of the world. For a geographic description of the origin of ournet sales and location of our long-lived assets, see Note 3, “SegmentInformation” in our 2009 Form 10-K.

 

Weestimate that we sold to customers in more than 60 countries during thisperiod. Currently, we serve our diverse and extensive customer base with 87manufacturing facilities in 24 countries. Consequently, we are exposed toglobal economic and political changes, particularly currency fluctuations thatcould impact our profitability and demand for our products.

 

Oursales and production costs are mainly denominated in U.S. dollars or Euros. Ourresults of operations and financial condition have been historically impactedby the fluctuation of the Euro against our reporting currency, the U.S. dollar.For the three and nine months ended September 30, 2010, the averageexchange rate of the Euro against the U.S. dollar was lower compared to thesame period in 2009. As a result, our net sales, gross profit and operatingincome were negatively impacted. Historically, however, our operating marginshave not been significantly impacted by currency fluctuations because, ingeneral, sales and costs of products sold are generated or incurred in the samecurrency, subject to certain exceptions.

 

**Raw Materials**

 

Rawmaterials constituted approximately 47% of our 2009 cost of products sold. Wehave a broad raw material base, with the cost of no single raw materialrepresenting more than 3% of our cost of products sold in 2009. In 2009, lowerraw material costs had a favorable impact on our results ofoperations. However, higher raw material costs in the first nine months of2010 had an unfavorable impact on our results of operations. The significantprice fluctuations our raw materials have experienced in the past during periodsof high demand have had an adverse impact on our results of operations. Wecannot accurately predict the impact of any future price increases for rawmaterials or any raw material shortages on our business as a whole or inspecific geographic regions. In addition, we may not be able to pass on rawmaterial price increases to our customers. See details of our ten mostsignificant raw materials (in terms of dollars) in Item 1, “Business — RawMaterials” in our 2009 Form 10-K.

 

**Energy Costs**

 

In2009, energy purchases represented approximately 8% of our cost of productssold. However, within certain business lines, such as our Titanium DioxidePigments segment and the Color Pigments and Services and Clay-based Additivesbusinesses of our Performance Additives segment, energy costs are moresignificant. The cost of products sold for certain of our businesses, includingColor Pigments and Services and Clay-based Additives, increases when the priceof natural gas in North America rises. Overall, energy costs in the Company in2009 were lower in a number of our businesses, particularly in North America.For the first nine months of 2010, energy costs were comparable to the sameperiod in the prior year.

 

**Income Taxes**

 

Werecorded an income tax provision of $20.7 million in the third quarter of 2010on income from continuing operations before taxes of $64.2 million. The incometax provision in the third quarter of 2010 was favorably impacted by foreignrate differentials, partially offset by a domestic loss that was not taxeffected due to a valuation allowance.

 

Inthe third quarter of 2010, the worldwide valuation allowance increased by $20.7million. This was primarily due to foreign exchange losses that resulted in atax effect of $8.2 million recorded in other comprehensive income, $10.0million related to increases in domestic deferred tax assets, as well as $3.2million related to taxable losses. Of the $20.7 million increase in thevaluation

 

36

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allowance,$13.2 million impacted the tax provision.

 

**Special Charges and Credits**

 

Duringthe periods presented, we incurred certain special charges that includedsystems/organization establishment expenses, restructuring and other severancecosts and foreign exchange gains and losses. See “Items excluded from AdjustedEBITDA” section in Note 4, “Segment Information,” for a discussion of specialcharges and credits recorded in the three and nine months endedSeptember 30, 2010 and 2009.

 

**Special Note Regarding Non-GAAP Financial Measures**

 

Anon-GAAP financial measure is generally defined by the SEC as one that purportsto measure historical or future financial performance, financial position orcash flows but excludes or includes amounts that would not be so adjusted inthe most comparable U.S. GAAP measure. From time to time in this management’sdiscussion and analysis, we disclose non-GAAP financial measures, primarilyAdjusted EBITDA, as defined below.

 

**Definition of Adjusted EBITDA**

 

Thepresentation of consolidated Adjusted EBITDA contained in this report iscalculated using the definition set forth in the senior secured creditagreement as a basis and reflects management’s interpretations thereof.Adjusted EBITDA, which is referred to under the senior secured credit agreementas “Consolidated EBITDA,” is defined in the senior secured credit agreement asconsolidated earnings (which, as defined in the senior secured creditagreement, equals income (loss) before the deduction of income taxes ofRockwood Specialties Group, Inc. and the Restricted Subsidiaries (as suchterm is defined in the senior secured credit agreement), excludingextraordinary items) plus:

 

·            interest expense;

·            depreciation expense;

·            amortization expense,including amortization of deferred financing fees;

·            extraordinary losses andnon-recurring charges;

·            non-cash charges;

·            losses on asset sales;

·            restructuring charges orreserves (including severance, relocation costs and one-time compensationcharges and costs relating to the closure of facilities);

·            expenses paid by us or anyof our subsidiaries in connection with the Dynamit Nobel Acquisition, thesenior secured credit agreement, the granting of liens under the securitydocuments (as such term is defined in the senior secured credit agreement), theindenture governing the 2014 Notes and the offering of the 2014 Notes and anyother related transactions;

·            any expenses or chargesincurred in connection with any issuance of debt or equity securities;

·            any fees and expensesrelated to permitted acquisitions; and

·            items arising in connectionwith CCA litigation related to our Timber Treatment Chemicals business of ourPerformance Additives segment;

 

less:

 

·            extraordinary gains andnon-recurring gains;

·            non-cash gains; and

·            gains on asset sales,

 

inall cases, subject to certain exclusions.

 

Forpresentation purposes within this report, we use the computation set forth inour senior secured credit agreement as a basis which reflects management’sinterpretations thereof. Management has determined that stock-basedcompensation costs, which are non-cash charges, will not be an adjustment incalculating Adjusted EBITDA as these costs will be a recurring cost to theCompany. These costs are recorded in selling, general and administrative expensesin the condensed consolidated statements of operations. Specifically, thecalculation of Adjusted EBITDA according to the indenture underlying our 2014Notes and the facility agreement governing our Titanium Dioxide Pigmentsventure excludes certain adjustments prescribed within our senior securedcredit agreement. Given that borrowings under our senior secured creditagreement are secured by most of our assets and given that the calculation doesnot materially differ from the calculation of Adjusted EBITDA for performancemeasurement purposes, we believe this is the most appropriate computation ofAdjusted EBITDA to present.

 

37

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**Management’s Uses**

 

Weuse Adjusted EBITDA on a consolidated basis to assess our operatingperformance. We believe this financial measure on a consolidated basis ishelpful in highlighting trends in our overall business because the itemsexcluded in calculating Adjusted EBITDA have been deemed by management to havelittle or no bearing on our day-to-day operating performance. It is also themost significant criterion in our calculation of performance-based cash bonusesand our determination of whether certain performance-based stock options andrestricted stock units vest, all of which are substantially tied to AdjustedEBITDA targets.

 

Wealso use Adjusted EBITDA on a consolidated basis as a liquidity measure. Webelieve this financial measure on a consolidated basis is important inanalyzing our liquidity because our senior secured credit agreement andindenture governing the 2014 Notes contain financial covenants that aredetermined based on Adjusted EBITDA. These covenants are material terms ofthese agreements, because they govern substantially all of our long-term debt, whichin turn represents a substantial portion of our capitalization. Non-compliancewith these financial covenants under our senior secured credit facilities—ourmaximum total leverage ratio and our minimum interest coverage ratio, inparticular—could result in the lenders requiring us to immediately repay allamounts borrowed. Any such acceleration could also lead to the noteholdersaccelerating the maturity of the 2014 Notes. In addition, if we cannot satisfythese financial covenants in the indenture governing the 2014 Notes, we cannotengage in certain activities, such as incurring additional indebtedness ormaking certain payments. Consequently, Adjusted EBITDA is critical to ourassessment of our liquidity.

 

Wealso use Adjusted EBITDA on a segment basis as the primary measure used by ourchief operating decision maker, our Chief Executive Officer, to evaluate theongoing performance of our business segments and reporting units. On a segmentbasis, we define Adjusted EBITDA as operating income excluding depreciation andamortization, certain non-cash gains and charges, certain other special gainsand charges determined by our senior management to be non-recurring gains andcharges and certain items deemed by our senior management to have little or nobearing on the day-to-day operating performance of our business segments andreporting units. The adjustments made to operating income directly correlatewith the adjustments to net income in calculating Adjusted EBITDA on aconsolidated basis pursuant to the senior secured credit agreement, whichreflects management’s interpretations thereof.

 

**Limitations**

 

AdjustedEBITDA has limitations as an analytical tool, and should not be viewed inisolation and is not a substitute for U.S. GAAP measures of earnings and cashflows. Material limitations associated with making the adjustments to ourearnings and cash flows to calculate Adjusted EBITDA, and using this non-GAAPfinancial measure as compared to the most directly comparable U.S. GAAPfinancial measures, include:

 

·            the cash portion of interestexpense, net, income tax provision (benefit), and restructuring as well asnon-recurring charges related to securities issuance, acquisition activities,and systems/organization establishment, generally represent charges (gains)which may significantly affect funds available to use in our operating,investing and financing activities;

 

·            non-operating foreignexchange gains (losses), although not immediately affecting cash used ininvesting activities, may affect the amount of funds needed to service our debtif those currency impacts remain in place as we meet our future principalrepayment obligations; and

 

·            depreciation, amortization,non-cash (gains) charges and impairment charges, though not directly affectingour current cash position, represent the wear and tear and/or reduction invalue of the plant, equipment and intangible assets which permit us tomanufacture and/or market our products; these items may be indicative of futureneeds for capital expenditures, for development or acquisition of intangibleassets or relevant trends causing asset value changes.

 

Aninvestor or potential investor may find any one or all of these items importantin evaluating our performance, results of operations, financial position andliquidity. Management compensates for the limitations of using non-GAAPfinancial measures by using them only to supplement our U.S. GAAP results toprovide a more complete understanding of the factors and trends affecting ourbusiness. Adjusted EBITDA is not an alternative to net income (loss) or income(loss) from continuing operations before taxes or operating income or cashflows from operating activities as calculated and presented in accordance withU.S. GAAP. You should not rely on Adjusted EBITDA as a substitute for any suchU.S. GAAP financial measures. We strongly urge you to review thereconciliations of Adjusted EBITDA to U.S. GAAP financial measures and otherfinancial information, in each case included elsewhere in this Quarterly Reportand in our 2009 Form 10-K. We also strongly urge you not to rely on anysingle financial measure to evaluate our business. Our measure of AdjustedEBITDA may not be comparable to those of other companies.

 

38

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**Results of Operations**

 

**Actual Results of Operations**

 

Thefollowing table presents the major components of our operations on an actualbasis and Adjusted EBITDA (the reconciliation from net income is set forthin—Reconciliation of Net Income Attributable to Rockwood SpecialtiesGroup, Inc. to Adjusted EBITDA for the three and nine months endedSeptember 30, 2010 and 2009), including as a percentage of net sales, forthe periods presented. See Note 4, “Segment Information,” for segmentinformation and a reconciliation to income (loss) from continuing operationsbefore taxes to Adjusted EBITDA on a segment basis.

 

39

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| ** **                                                        | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                        | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **($ in millions)**                                     | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Statement of  operations data:**                                |       |                             |       |                            |       |   |   |   |   |
| **Net sales:**                                                    |       |                             |       |                            |       |   |   |   |   |
| Specialty Chemicals                                               |       | $                                | 283.6      |                            | $          | 261.5 |   | $ | 860.5 |   | $ | 723.0 |   |
| Performance Additives                                             |       | 187.8                            |       | 182.2                           |       | 564.4 |   | 517.6 |   |
| Titanium Dioxide Pigments                                         |       | 192.7                            |       | 177.5                           |       | 564.1 |   | 480.8 |   |
| Advanced Ceramics                                                 |       | 131.0                            |       | 108.6                           |       | 385.3 |   | 293.6 |   |
| Specialty Compounds                                               |       | 63.9                             |       | 54.8                            |       | 189.9 |   | 157.5 |   |
| Corporate and other                                               |       | 1.9                              |       | 1.6                             |       | 5.1 |   | 4.1 |   |
| Total net sales                                                   |       | 860.9                            |       | 786.2                           |       | 2,569.3 |   | 2,176.6 |   |
|                                                              |       |                             |       |                            |       |   |   |   |   |
| Gross profit                                                      |       | 276.7                            |       | 231.2                           |       | 824.9 |   | 616.5 |   |
|                                                              |       | 32.1                             | %          | 29.4                            | %          | 32.1 | % | 28.3 | % |
| Selling, general and  administrative expenses                     |       | 171.6                            |       | 154.8                           |       | 514.4 |   | 450.9 |   |
|                                                              |       | 19.9                             | %          | 19.7                            | %          | 20.0 | % | 20.7 | % |
| Restructuring and other severance  costs                          |       | 1.5                              |       | 4.2                             |       | 4.9 |   | 16.0 |   |
| Loss (gain) on sale of assets and  other                          |       | 0.1                              |       | (0.4                            | )          | 0.2 |   | (0.3 | ) |
| **Operating income  (loss):**                                     |       |                             |       |                            |       |   |   |   |   |
| Specialty Chemicals                                               |       | 52.2                             |       | 47.7                            |       | 161.6 |   | 113.9 |   |
|                                                              |       | 18.4                             | %          | 18.2                            | %          | 18.8 | % | 15.8 | % |
| Performance Additives                                             |       | 19.7                             |       | 10.6                            |       | 53.8 |   | 16.8 |   |
|                                                              |       | 10.5                             | %          | 5.8                             | %          | 9.5 | % | 3.2 | % |
| Titanium Dioxide Pigments                                         |       | 18.2                             |       | 4.0                             |       | 44.5 |   | 6.8 |   |
|                                                              |       | 9.4                              | %          | 2.3                             | %          | 7.9 | % | 1.4 | % |
| Advanced Ceramics                                                 |       | 27.6                             |       | 17.1                            |       | 80.5 |   | 31.3 |   |
|                                                              |       | 21.1                             | %          | 15.7                            | %          | 20.9 | % | 10.7 | % |
| Specialty Compounds                                               |       | 7.2                              |       | 5.6                             |       | 22.3 |   | 16.9 |   |
|                                                              |       | 11.3                             | %          | 10.2                            | %          | 11.7 | % | 10.7 | % |
| Corporate and other                                               |       | (21.4                            | )          | (12.4                           | )          | (57.3 | ) | (35.8 | ) |
| Total operating income                                            |       | 103.5                            |       | 72.6                            |       | 305.4 |   | 149.9 |   |
| **Other expenses,  net:**                                         |       |                             |       |                            |       |   |   |   |   |
| Interest expense, net                                             |       | (38.6                            | )          | (53.6                           | )          | (116.7 | ) | (131.4 | ) |
| Loss on early extinguishment of  debt                             |       | (1.6                             | )          | (0.9                            | )          | (1.6 | ) | (26.6 | ) |
| Foreign exchange gain, net                                        |       | 0.9                              |       | 4.5                             |       | 0.8 |   | 15.4 |   |
| Other, net                                                        |       | —                           |       | —                          |       | 0.5 |   | 0.4 |   |
| Other expenses, net                                               |       | (39.3                            | )          | (50.0                           | )          | (117.0 | ) | (142.2 | ) |
| **Income from  continuing operations before taxes**               |       | 64.2                             |       | 22.6                            |       | 188.4 |   | 7.7 |   |
| Income tax provision                                              |       | 20.7                             |       | 13.0                            |       | 53.4 |   | 6.9 |   |
| Income from continuing operations                                 |       | 43.5                             |       | 9.6                             |       | 135.0 |   | 0.8 |   |
| (Loss) income from discontinued  operations, net of tax           |       | —                           |       | (0.1                            | )          | — |   | 3.3 |   |
| Net income                                                        |       | 43.5                             |       | 9.5                             |       | 135.0 |   | 4.1 |   |
| Net (income) loss attributable to  noncontrolling interest        |       | (3.0                             | )          | 0.6                             |       | (5.2 | ) | 6.2 |   |
| Net income attributable to  Rockwood Specialties Group, Inc. |       | $                                | 40.5       |                            | $          | 10.1 |   | $ | 129.8 |   | $ | 10.3 |   |
|                                                              |       |                             |       |                            |       |   |   |   |   |
| **Adjusted EBITDA:**                                              |       |                             |       |                            |       |   |   |   |   |
| Specialty Chemicals                                               |       | $                                | 70.8       |                            | $          | 68.1 |   | $ | 218.0 |   | $ | 175.9 |   |
|                                                              |       | 25.0                             | %          | 26.0                            | %          | 25.3 | % | 24.3 | % |
| Performance Additives                                             |       | 34.1                             |       | 28.3                            |       | 100.6 |   | 71.2 |   |
|                                                              |       | 18.2                             | %          | 15.5                            | %          | 17.8 | % | 13.8 | % |
| Titanium Dioxide Pigments                                         |       | 34.2                             |       | 24.6                            |       | 94.5 |   | 65.6 |   |
|                                                              |       | 17.7                             | %          | 13.9                            | %          | 16.8 | % | 13.6 | % |
| Advanced Ceramics                                                 |       | 40.3                             |       | 31.4                            |       | 117.9 |   | 75.3 |   |
|                                                              |       | 30.8                             | %          | 28.9                            | %          | 30.6 | % | 25.6 | % |
| Specialty Compounds                                               |       | 9.4                              |       | 8.8                             |       | 28.6 |   | 25.5 |   |
|                                                              |       | 14.7                             | %          | 16.1                            | %          | 15.1 | % | 16.2 | % |
| Corporate and other                                               |       | (19.7                            | )          | (10.1                           | )          | (53.3 | ) | (27.9 | ) |
| Total Adjusted EBITDA                                             |       | $                                | 169.1      |                            | $          | 151.1 |   | $ | 506.3 |   | $ | 385.6 |   |

 

40

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The following table presents the changes in the majorcomponents of our operations on a historical basis in dollars and percentages:

 
| ** **                                                        | ** ** | **Change: Three months ended September 30, 2010 versus 2009** | ** ** | **Change: Nine months ended September 30, 2010 versus 2009** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|
| ** **                                                        | ** ** | ** **                                                                                            | ** ** | ** **                                                                                           | ** ** | **Constant** | ** ** | **Constant** | ** ** | ** ** | ** ** | ** ** | ** ** | **Constant** | ** ** | **Constant** | ** ** |
| ** **                                                        | ** ** | ** **                                                                                            | ** ** | **%**                                                                                                | ** ** | **Currency** | ** ** | **Currency** | ** ** | ** ** | ** ** | **%** | ** ** | **Currency** | ** ** | **Currency** | ** ** |
| **($ in millions)**                                     | ** ** | **Total**                                                                                             | ** ** | **Change**                                                                                           | ** ** | **Effect (a)** | ** ** | **Basis** | ** ** | **Total** | ** ** | **Change** | ** ** | **Effect (a)** | ** ** | **Basis** | ** ** |
| **Statement of operations data:**                                 |       |                                                                                                  |       |                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net sales:**                                                    |       |                                                                                                  |       |                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty Chemicals                                               |       | $                                                                                                     | 22.1       |                                                                                                 | 8.5        | % | $ | (12.2 | ) | $ | 34.3 |   | $ | 137.5 |   | 19.0 | % | $ | (0.7 | ) | $ | 138.2 |   |
| Performance Additives                                             |       | 5.6                                                                                                   |       | 3.1                                                                                                  |       | (6.3 | ) | 11.9 |   | 46.8 |   | 9.0 |   | (5.3 | ) | 52.1 |   |
| Titanium Dioxide Pigments                                         |       | 15.2                                                                                                  |       | 8.6                                                                                                  |       | (20.4 | ) | 35.6 |   | 83.3 |   | 17.3 |   | (23.5 | ) | 106.8 |   |
| Advanced Ceramics                                                 |       | 22.4                                                                                                  |       | 20.6                                                                                                 |       | (11.3 | ) | 33.7 |   | 91.7 |   | 31.2 |   | (12.0 | ) | 103.7 |   |
| Specialty Compounds                                               |       | 9.1                                                                                                   |       | 16.6                                                                                                 |       | (1.2 | ) | 10.3 |   | 32.4 |   | 20.6 |   | 0.5 |   | 31.9 |   |
| Corporate and other                                               |       | 0.3                                                                                                   |       | 18.8                                                                                                 |       | (0.2 | ) | 0.5 |   | 1.0 |   | 24.4 |   | (0.2 | ) | 1.2 |   |
| Total net sales                                                   |       | 74.7                                                                                                  |       | 9.5                                                                                                  |       | (51.6 | ) | 126.3 |   | 392.7 |   | 18.0 |   | (41.2 | ) | 433.9 |   |
|                                                              |       |                                                                                                  |       |                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross profit                                                      |       | 45.5                                                                                                  |       | 19.7                                                                                                 |       | (16.2 | ) | 61.7 |   | 208.4 |   | 33.8 |   | (12.1 | ) | 220.5 |   |
| Selling, general and administrative expenses                      |       | 16.8                                                                                                  |       | 10.9                                                                                                 |       | (9.6 | ) | 26.4 |   | 63.5 |   | 14.1 |   | (6.2 | ) | 69.7 |   |
| Restructuring and other severance costs                           |       | (2.7                                                                                                  | )          |                                                                                                 |       |   |   | (2.7 | ) | (11.1 | ) |   |   |   |   | (11.1 | ) |
| Loss (gain) on sale of assets and other                           |       | 0.5                                                                                                   |       |                                                                                                 |       |   |   | 0.5 |   | 0.5 |   |   |   |   |   | 0.5 |   |
| Total operating expenses                                          |       | 14.6                                                                                                  |       | 9.2                                                                                                  |       | (9.6 | ) | 24.2 |   | 52.9 |   | 11.3 |   | (6.2 | ) | 59.1 |   |
| **Operating income (loss):**                                      |       |                                                                                                  |       |                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty Chemicals                                               |       | 4.5                                                                                                   |       | 9.4                                                                                                  |       | (1.7 | ) | 6.2 |   | 47.7 |   | 41.9 |   | (0.1 | ) | 47.8 |   |
| Performance Additives                                             |       | 9.1                                                                                                   |       | 85.8                                                                                                 |       | (0.7 | ) | 9.8 |   | 37.0 |   | 220.2 |   | (0.9 | ) | 37.9 |   |
| Titanium Dioxide Pigments                                         |       | 14.2                                                                                                  |       | 355.0                                                                                                |       | (1.8 | ) | 16.0 |   | 37.7 |   | 554.4 |   | (2.4 | ) | 40.1 |   |
| Advanced Ceramics                                                 |       | 10.5                                                                                                  |       | 61.4                                                                                                 |       | (2.7 | ) | 13.2 |   | 49.2 |   | 157.2 |   | (3.0 | ) | 52.2 |   |
| Specialty Compounds                                               |       | 1.6                                                                                                   |       | 28.6                                                                                                 |       | (0.1 | ) | 1.7 |   | 5.4 |   | 32.0 |   | 0.1 |   | 5.3 |   |
| Corporate and other                                               |       | (9.0                                                                                                  | )          | (72.6                                                                                                | )          | 0.4 |   | (9.4 | ) | (21.5 | ) | (60.1 | ) | 0.4 |   | (21.9 | ) |
| Total                                                             |       | 30.9                                                                                                  |       | 42.6                                                                                                 |       | (6.6 | ) | 37.5 |   | 155.5 |   | 103.7 |   | (5.9 | ) | 161.4 |   |
| **Other expenses, net:**                                          |       |                                                                                                  |       |                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense, net                                             |       | 15.0                                                                                                  |       | (28.0                                                                                                | )          | 1.9 |   | 13.1 |   | 14.7 |   | (11.2 | ) | 2.0 |   | 12.7 |   |
| Loss on early extinguishment of debt                              |       | (0.7                                                                                                  | )          |                                                                                                 |       |   |   |   |   | 25.0 |   |   |   |   |   |   |   |
| Foreign exchange gain, net                                        |       | (3.6                                                                                                  | )          |                                                                                                 |       |   |   |   |   | (14.6 | ) |   |   |   |   |   |   |
| Other, net                                                        |       | —                                                                                                |       |                                                                                                 |       |   |   |   |   | 0.1 |   |   |   |   |   |   |   |
| Other expenses, net                                               |       | 10.7                                                                                                  |       |                                                                                                 |       |   |   |   |   | 25.2 |   |   |   |   |   |   |   |
| **Income from continuing operations before  taxes**               |       |                                                                                                  |       |                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty Chemicals                                               |       | 4.2                                                                                                   |       |                                                                                                 |       |   |   |   |   | 56.1 |   |   |   |   |   |   |   |
| Performance Additives                                             |       | 9.8                                                                                                   |       |                                                                                                 |       |   |   |   |   | 39.2 |   |   |   |   |   |   |   |
| Titanium Dioxide Pigments                                         |       | 16.5                                                                                                  |       |                                                                                                 |       |   |   |   |   | 46.5 |   |   |   |   |   |   |   |
| Advanced Ceramics                                                 |       | 12.8                                                                                                  |       |                                                                                                 |       |   |   |   |   | 59.9 |   |   |   |   |   |   |   |
| Specialty Compounds                                               |       | 1.9                                                                                                   |       |                                                                                                 |       |   |   |   |   | 6.0 |   |   |   |   |   |   |   |
| Corporate and other                                               |       | (3.6                                                                                                  | )          |                                                                                                 |       |   |   |   |   | (27.0 | ) |   |   |   |   |   |   |
| Total                                                             |       | 41.6                                                                                                  |       |                                                                                                 |       |   |   |   |   | 180.7 |   |   |   |   |   |   |   |
| Income tax provision                                              |       | 7.7                                                                                                   |       |                                                                                                 |       |   |   |   |   | 46.5 |   |   |   |   |   |   |   |
| Income from continuing operations                                 |       | 33.9                                                                                                  |       |                                                                                                 |       |   |   |   |   | 134.2 |   |   |   |   |   |   |   |
| (Loss) income from discontinued operations, net of tax            |       | 0.1                                                                                                   |       |                                                                                                 |       |   |   |   |   | (3.3 | ) |   |   |   |   |   |   |
| Net income                                                        |       | 34.0                                                                                                  |       |                                                                                                 |       |   |   |   |   | 130.9 |   |   |   |   |   |   |   |
| Net (income) loss attributable to noncontrolling interest         |       | (3.6                                                                                                  | )          |                                                                                                 |       |   |   |   |   | (11.4 | ) |   |   |   |   |   |   |
| Net income attributable to Rockwood Specialties  Group, Inc. |       | $                                                                                                     | 30.4       |                                                                                                 |       |   |   |   |   |   | $ | 119.5 |   |   |   |   |   |   |   |
| **Adjusted EBITDA:**                                              |       |                                                                                                  |       |                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty Chemicals                                               |       | $                                                                                                     | 2.7        |                                                                                                 | 4.0        | % | $ | (2.4 | ) | $ | 5.1 |   | $ | 42.1 |   | 23.9 | % | $ | (0.5 | ) | $ | 42.6 |   |
| Performance Additives                                             |       | 5.8                                                                                                   |       | 20.5                                                                                                 |       | (1.3 | ) | 7.1 |   | 29.4 |   | 41.3 |   | (1.5 | ) | 30.9 |   |
| Titanium Dioxide Pigments                                         |       | 9.6                                                                                                   |       | 39.0                                                                                                 |       | (3.6 | ) | 13.2 |   | 28.9 |   | 44.1 |   | (4.3 | ) | 33.2 |   |
| Advanced Ceramics                                                 |       | 8.9                                                                                                   |       | 28.3                                                                                                 |       | (3.8 | ) | 12.7 |   | 42.6 |   | 56.6 |   | (4.0 | ) | 46.6 |   |
| Specialty Compounds                                               |       | 0.6                                                                                                   |       | 6.8                                                                                                  |       | (0.2 | ) | 0.8 |   | 3.1 |   | 12.2 |   | 0.1 |   | 3.0 |   |
| Corporate and other                                               |       | (9.6                                                                                                  | )          | (95.0                                                                                                | )          | 0.3 |   | (9.9 | ) | (25.4 | ) | (91.0 | ) | 0.3 |   | (25.7 | ) |
| Total Adjusted EBITDA                                             |       | $                                                                                                     | 18.0       |                                                                                                 | 11.9       | % | $ | (11.0 | ) | $ | 29.0 |   | $ | 120.7 |   | 31.3 | % | $ | (9.9 | ) | $ | 130.6 |   |

 

----

(a)                Theconstant currency effect is the translation impact calculated based on thechange in the applicable rate, primarily the Euro, to the U.S. dollar exchangerate for the applicable period.

 

41

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***Three months ended September 30, 2010compared to three months ended September 30, 2009***

 

**Overview**

 

Netsales increased $74.7 million, or 9.5%, in the third quarter of 2010 comparedwith the same period in the prior year primarily due to higher volumes, as wellas higher selling prices and a favorable product mix. This was partially offsetby the negative impact of currency changes of $51.6 million. See furtherdiscussion by segment below.

 

Operatingincome and Adjusted EBITDA increased in the third quarter of 2010 compared withthe same period in the prior year primarily due to the higher net sales notedabove. This was partially offset by higher raw material, production andmaintenance costs, as well as increased variable compensation-related costs andthe negative impact of currency changes.

 

Netincome from continuing operations increased $33.9 million to $43.5 million inthe third quarter of 2010 from $9.6 million in the same period in the prioryear primarily due to the reasons noted above, lower interest expense and alower effective tax rate in the third quarter of 2010. This was partiallyoffset by decreased foreign exchange gains on financing activities.

 

Netincome attributable to noncontrolling interest of $3.0 million in the thirdquarter of 2010 was primarily related to higher earnings in the TitaniumDioxide Pigments venture in the third quarter of 2010. Net loss attributable tononcontrolling interest of $0.6 million in the third quarter of 2009 wasprimarily related to losses recorded in our Titanium Dioxide Pigment’s venture.

 

Netincome attributable to Rockwood Specialties Group, Inc. increased $30.4million to $40.5 million in the third quarter of 2010 from $10.1 million in thesame period in the prior year due to the reasons noted above.

 

**Net sales**

 

*Specialty Chemicals*.  Netsales increased $22.1 million, or 8.5%, over the prior year primarily due tohigher volumes, partially offset by the negative impact of currency changes of$12.2 million. In the Fine Chemicals business, higher volumes of lithiumproducts were partially offset by lower selling prices of potash and lithiumcarbonate. Net sales in the Surface Treatment business were higher on increasedvolumes in all markets, particularly in automotive and general industrialapplications.

 

*Performance Additives*. Net sales increased $5.6 million, or 3.1%, over the prior year primarily due tohigher volumes of oilfield and other applications in our Clay-based Additivesbusiness and a favorable product mix and increased selling prices in our ColorPigments and Services business. This was partially offset by the negativeimpact of currency changes of $6.3 million and lower construction volumes inthe United States.

 

*Titanium Dioxide Pigments*.  Netsales increased $15.2 million, or 8.6%, over the prior year primarily fromhigher selling prices, as well as increased volumes in all applications and afavorable product mix. This was partially offset by the negative impact ofcurrency changes of $20.4 million.

 

*Advanced Ceramics*.  Netsales increased $22.4 million, or 20.6%, over the prior year from highervolumes in all applications, primarily medical, automotive and electronicapplications. This was partially offset by the negative impact of currencychanges of $11.3 million and lower selling prices.

 

*Specialty Compounds*.  Netsales increased $9.1 million, or 16.6%, over the prior year from higher sellingprices, as well as increased volumes in most applications, primarily in wireand cable.

 

**Gross profit**

 

Grossprofit increased $45.5 million, or 19.7%, over the prior year primarily due tothe volume increases noted above. This was partially offset by the negativeimpact of currency changes of $16.2 million and higher raw material, productionand maintenance costs. Gross profit as a percentage of net sales were32.1% in the third quarter of 2010 compared to 29.4% in the third quarter of2009.

 

**Selling, general and administrative expenses**

 

Selling,general and administrative expenses (“SG&A”) increased $16.8 million, or10.9%, over the prior year primarily due to the impact of the higher net salesnoted above and higher variable compensation-related costs. This was partiallyoffset by the impact of currency changes of $9.6 million. SG&A expenses asa percentage of net sales were 19.9% in the third quarter of 2010 compared to19.7% in the third quarter of 2009.

 

42

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**Restructuring and other severance costs**

 

Werecorded restructuring and other severance costs of $1.5 million and $4.2million in the three months ended September 30, 2010 and 2009,respectively, for miscellaneous restructuring activities, including headcountreductions, asset write-offs and facility closures. See Note 13, “Restructuringand Other Severance Costs,” for further details.

 

**Operating income**

 

*Specialty Chemicals*.  Operatingincome increased $4.5 million, or 9.4%, over the prior year primarily due tothe higher net sales discussed above and lower restructuring and otherseverance costs of $2.2 million. This increase was partially offset byhigher raw material costs and the negative impact of currency changes of $1.7million.

 

*Performance Additives*. Operatingincome increased $9.1 million, or 85.8%, over the prior year primarily due tothe higher net sales noted above, lower depreciation and amortization costs of$1.9 million and lower restructuring and other severance costs of $0.7 million.This was partially offset by higher raw material costs and the negative impactof currency changes of $0.7 million.

 

*Titanium Dioxide Pigments*.  Operatingincome increased $14.2 million to $18.2 million in the third quarter of 2010from $4.0 million in the same period in the prior year primarily due to thehigher net sales noted above and lower depreciation and amortization costs of$3.3 million. This was partially offset by higher raw material and productioncosts and the negative impact of currency changes of $1.8 million.

 

*Advanced Ceramics*.  Operatingincome increased $10.5 million, or 61.4%, over the prior year primarily due tothe higher net sales noted above and lower depreciation and amortization costsof $1.4 million. This was partially offset by higher maintenance costs and thenegative impact of currency changes of $2.7 million.

 

*Specialty Compounds*.  Operatingincome increased $1.6 million, or 28.6%, over the prior year primarily due tothe higher net sales noted above and lower depreciation and amortization costsof $1.1 million. This was partially offset by higher raw material costs.

 

*Corporate and other*.  Operatingloss increased $9.0 million, or 72.6%, primarily due to higher variablecompensation-related costs.

 

**Other income (expenses)**

 

*Interest expense, net*.  Interestexpense, net decreased $15.0 million, or 28.0%, over the prior year. The thirdquarter of 2010 and 2009 included non-cash gains and losses of $1.2 million and$(1.3) million, respectively, representing the movement in the mark-to-marketvaluation of our interest rate hedges. Excluding the impact of these gains andlosses, interest expense, net decreased $12.5 million primarily due to thetermination of interest rate swaps in November 2009 and debt repayments.

 

*Loss on early extinguishment of debt*. In the third quarter of 2010, we recorded a loss on earlyextinguishment of debt of $1.6 million related to the write-off of deferred financingcosts associated with the voluntary prepayment of $200.2 million of our seniorsecured term loans in July 2010. In the third quarter of 2009, we recordeda loss on early extinguishment of debt of $0.9 million primarily related tolender fees to extend the maturity of our revolving credit facility.

 

*Foreign exchange, net*. Inthe third quarter of 2010, we had foreign exchange gains of $0.9 millionprimarily related to Euro-denominated debt, cash and intercompany loans. In thethird quarter of 2009, we recorded foreign exchange gains of $4.5 millionprimarily due to the impact of the stronger Euro as of September 30, 2009versus June 30, 2009 in connection with non-operating Euro-denominatedtransactions.

 

**Provision for income taxes**

 

Werecorded an income tax provision of $20.7 million in the third quarter of 2010on income from continuing operations before taxes of $64.2 million. The incometax provision in the third quarter of 2010 was favorably impacted by foreignrate differentials, partially offset by a domestic loss that was not taxeffected due to a valuation allowance.

 

Werecorded an income tax provision of $13.0 million in the third quarter of 2009on income from continuing operations before taxes of $22.6 million. The incometax provision in the third quarter of 2009 was negatively impacted by theabsence of a tax benefit for the Company’s domestic losses as a result of afull valuation allowance.

 

**Income from continuing operations**

 

Incomefrom continuing operations for the third quarter of 2010 was $43.5 million ascompared to income from continuing operations

 

43

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of$9.6 million for same period in the prior year for the reasons described above.

 

**Net (income) loss attributable to noncontrolling interest**

 

Netincome attributable to noncontrolling interest of $3.0 million in the thirdquarter of 2010 was primarily related to higher earnings in the TitaniumDioxide Pigments venture in the third quarter of 2010. Net loss attributable tononcontrolling interest of $0.6 million in the third quarter of 2009 wasprimarily related to losses recorded in our Titanium Dioxide Pigment’s venture.

 

**Net income attributable to Rockwood****Specialties Group****, Inc.**

 

Netincome attributable to Rockwood Specialties Group, Inc. for the thirdquarter of 2010 was $40.5 million as compared to net income attributable toRockwood Specialties Group, Inc. of $10.1 million for the same period inthe prior year for the reasons described above.

 

**Adjusted EBITDA**

 

*Specialty Chemicals*.  AdjustedEBITDA increased $2.7 million, or 4.0%, over the prior year primarily due tothe higher net sales discussed above. This increase was partially offsetby higher raw material costs and the negative impact of currency changes of$2.4 million.

 

*Performance Additives*. AdjustedEBITDA increased $5.8 million, or 20.5%, over the prior year primarily due tothe higher net sales noted above. This was partially offset by higher rawmaterial costs and the negative impact of currency changes of $1.3 million.

 

*Titanium Dioxide Pigments*.  AdjustedEBITDA increased $9.6 million, or 39.0%, over the prior year primarily due tothe higher net sales noted above. This was partially offset by higher rawmaterial and production costs and the negative impact of currency changes of$3.6 million.

 

*Advanced Ceramics*.  AdjustedEBITDA increased $8.9 million, or 28.3%, over the prior year primarily due tothe higher net sales noted above. This was partially offset by the negativeimpact of currency changes of $3.8 million.

 

*Specialty Compounds*.  AdjustedEBITDA increased $0.6 million, or 6.8%, over the prior year primarily due tothe higher net sales noted above. This was partially offset by higher rawmaterial costs.

 

*Corporate and other*.  AdjustedEBITDA loss increased $9.6 million, or 95.0%, primarily due to higher variablecompensation-related costs.

 

***Nine months ended September 30, 2010compared to nine months ended September 30, 2009***

 

**Overview**

 

Netsales increased $392.7 million, or 18.0%, in the nine months ended September 30,2010 compared with the same period in the prior year primarily due to highervolumes, partially offset by the negative impact of currency changes of $41.2million. See further discussion by segment below.

 

Operatingincome and Adjusted EBITDA increased in the nine months endedSeptember 30, 2010 compared with the same period in the prior yearprimarily due to higher sales volumes. This was partially offset by higher rawmaterial, production and maintenance costs, as well as increased variable compensation-relatedcosts and the negative impact of currency changes.

 

Netincome from continuing operations increased $134.2 million to $135.0 millionfor the nine months ended September 30, 2010 from $0.8 million in the sameperiod in the prior year primarily due to the reasons noted above, a loss onearly extinguishment of debt of $26.6 million recorded in the nine months endedSeptember 30, 2009 and lower interest expense. This was partially offsetby decreased foreign exchange gains on financing activities.

 

Incomefrom discontinued operations, net of tax was $3.3 million in the nine monthsended September 30, 2009 and was primarily due to the favorable resolutionof a claim against the Company’s former Groupe Novasep business and thereversal of certain reserves in connection with the sale of the Electronicsbusiness in December 2007.

 

Netincome attributable to noncontrolling interest of $5.2 million in the ninemonths ended September 30, 2010 was primarily related to higher earningsin the Titanium Dioxide Pigments venture, partially offset by losses recordedin our Viance venture. Net loss attributable to noncontrolling interest of $6.2million in the nine months ended September 30, 2009 was due to lossesrecorded in our

 

44

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Vianceand Titanium Dioxide Pigment’s ventures.

 

Netincome attributable to Rockwood Specialties Group, Inc. increased $119.5million to $129.8 million in the nine months ended September 30, 2010 from$10.3 million in the same period in the prior year due to the reasons notedabove.

 

**Net sales**

* *

*Specialty Chemicals*.  Netsales increased $137.5 million, or 19.0%, over the prior year primarily due tohigher sales volumes. In the Fine Chemicals business, higher volumes oflithium products and metal sulfide applications were partially offset by lowerselling prices of potash and lithium carbonate. Net sales in the SurfaceTreatment business were higher on increased volumes in all markets,particularly in automotive, coil/cold forming and general industrialapplications.

 

*Performance Additives*.  Netsales increased $46.8 million, or 9.0%, over the prior year primarily due tohigher volumes of oilfield and other applications in our Clay-based Additivesbusiness and higher volumes of coatings applications in our Color Pigments andServices business. This was partially offset by the negative impact of currencychanges of $5.3 million and lower construction volumes in the United States.

 

*Titanium Dioxide Pigments*.  Netsales increased $83.3 million, or 17.3%, over the prior year primarily fromhigher volumes in all applications, as well as higher selling prices. This waspartially offset by the negative impact of currency changes of $23.5 million.

 

*Advanced Ceramics*.  Netsales increased $91.7 million, or 31.2%, over the prior year primarily fromhigher volumes in all applications, primarily medical, electronics andmulti-functional applications. This was partially offset by the negative impactof currency changes of $12.0 million and lower selling prices.

 

*Specialty Compounds*.  Netsales increased $32.4 million, or 20.6%, over the prior year primarily due tohigher volumes in most applications, particularly in wire and cableapplications, as well as increased selling prices.

 

**Gross profit**

 

Grossprofit increased $208.4 million, or 33.8%, over the prior year primarily due tothe net sales increases noted above, partially offset by the negative impact ofcurrency changes of $12.1 million and higher raw material, production andmaintenance costs. Gross profit as a percentage of net sales were 32.1%and 28.3% in the nine months ended September 30, 2010 and 2009,respectively.

 

**Selling, general and administrative expenses**

 

Selling,general and administrative expenses (“SG&A”) increased $63.5 million, or14.1%, over the prior year primarily due to the impact of the higher net salesnoted above, higher variable compensation-related costs and the negative impactof currency changes of $6.2 million. SG&A expenses in the nine months endedSeptember 30, 2009 include the reversal of discretionary profit-sharingplan accruals of $2.6 million and the reversal of certain long-term incentivecompensation program accruals of $2.7 million for which related targets were nolonger expected to be achieved. SG&A expenses as a percentage of netsales decreased to 20.0% in the nine months ended September 30, 2010 from20.7% in the same period in the prior year.

 

**Restructuring and other severance costs**

 

Werecorded restructuring and other severance costs of $4.9 million in the ninemonths ended September 30, 2010 for miscellaneous restructuringactivities, including asset write-offs, headcount reductions and facilityclosures. For the nine months ended September 30, 2009, we recordedrestructuring and other severance costs of $16.0 million primarily related toheadcount reductions as part of our global cost initiatives. See Note 13, “Restructuringand Other Severance Costs,” for further details.

 

**Operating income**

 

*Specialty Chemicals*. Operating income increased $47.7 million, or 41.9%, over the prior yearprimarily due to the higher net sales noted above, lower raw material costs inour Surface Treatment business, particularly for phosphoric acid, and lowerrestructuring and other severance costs of $3.7 million. This increase waspartially offset by lower selling prices, particularly for potash and lithiumcarbonate in our Fine Chemicals business.

 

*Performance Additives*. Operatingincome increased $37.0 million to $53.8 million in the nine months ended September 30,2010 from $16.8 million in the same period in the prior year primarily due tothe higher net sales noted above, lower depreciation and amortization costs of$3.5 million and lower restructuring and other severance costs of $2.7 million.This increase was partially offset by higher raw material costs.

 

45

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*Titanium Dioxide Pigments*.  Operatingincome increased $37.7 million to $44.5 million in the nine months ended September 30,2010 from $6.8 million in same period in the prior year primarily due to thehigher net sales noted above, lower depreciation and amortization costs of $6.2million and lower systems/organization establishment expenses of $2.2 millionrelated to the formation of the venture completed in September 2008. This waspartially offset by higher production and raw material costs and the negativeimpact of currency changes of $2.4 million. In addition, operating income inthe nine months ended September 30, 2009 included the termination of along-term incentive plan of $2.6 million and the receipt of a vendor rebaterelated to prior years of $1.7 million.

 

*Advanced Ceramics*.  Operatingincome increased $49.2 million to $80.5 million in the nine months ended September 30,2010 from $31.3 million in the same period in the prior year primarily due tothe higher net sales noted above, decreased restructuring and other severancecosts of $4.7 million and lower depreciation and amortization costs of $1.6million. This increase was partially offset by higher maintenance and productioncosts, lower selling prices and the negative impact of currency changes of $3.0million.

 

*Specialty Compounds*.  Operatingincome increased $5.4 million, or 32.0%, over the prior year primarily due tothe higher net sales noted above and lower depreciation and amortization costsof $2.3 million. This was partially offset by higher raw material costs,primarily PVC resin, ethylene and plasticizer costs.

 

*Corporate and other*.  Operatingloss increased $21.5 million, or 60.1% over the prior year primarily due tohigher variable compensation-related costs. Corporate compensation-relatedcosts in the nine months ended September 30, 2009 included the reversal ofcertain long-term incentive compensation accruals of $2.7 million related toperformance targets that were no longer expected to be achieved.

 

**Other income (expenses)**

 

*Interest expense, net*.  Interestexpense, net decreased $14.7 million, or 11.2%, over the prior year. The ninemonths ended September 30, 2010 and 2009 included non-cash gains of $8.9million and $1.3 million, respectively, representing the movement in themark-to-market valuation of our interest rate hedging instruments. Excludingthe impact of these gains, interest expense, net decreased $7.1 millionprimarily due to the termination of interest rate swaps in November 2009and debt repayments, partially offset by higher interest rates related to theamendment of our senior secured credit facility in June 2009.

 

*Loss on early extinguishment of debt*. For the nine months ended September 30, 2010, we recorded aloss on early extinguishment of debt of $1.6 million related to the write-offof deferred financing costs associated with the voluntary prepayment of $200.2million of our senior secured term loans in July 2010. For the nine monthsended September 30, 2009, we recorded a loss on early extinguishment ofdebt of $26.6 million primarily related to the write-off of deferred financingcosts of $20.9 million and lender fees related to the early extinguishment ofdebt of $12.0 million, partially offset by a discount of $6.3 million relatedto the repurchase of $153.2 million in aggregate principal amount of the 2014Notes.

 

*Foreign exchange, net*.  Forthe nine months ended September 30, 2010, foreign exchange gains of $0.8million were reported primarily related to Euro-denominated debt, cash andintercompany loans. For the nine months ended September 30, 2009, foreignexchange gains of $15.4 million were reported primarily due to the impact ofthe stronger pound sterling, as well as a stronger euro, as of September 30,2009 versus December 31, 2008, in connection with non-operatingEuro-denominated transactions.

 

**Provision for income taxes**

 

Werecorded an income tax provision of $53.4 million in the nine months ended September 30,2010 on income from continuing operations before taxes of $188.4 million. Theincome tax provision was favorably impacted by domestic income that was not taxeffected due to a valuation allowance and the favorable settlement of certaintax positions. As a result of these benefits and geographic earnings mix, theeffective tax rate was 28.3% for the nine months ended September 30, 2010.

 

Werecorded an income tax provision of $6.9 million in the nine months endedSeptember 30, 2009 on income from continuing operations before taxes of$7.7 million. The income tax provision in the nine months endedSeptember 30, 2009 was negatively impacted by the absence of a tax benefitfor the Company’s domestic tax losses as a result of a full valuation allowanceand was positively impacted by a nonrecurring tax benefit related to foreigncurrency changes and favorable foreign rate differentials.

 

**Income (loss) from continuing operations**

 

Incomefrom continuing operations for the nine months ended September 30, 2010was $135.0 million as compared to income from continuing operations of $0.8million for the nine months ended September 30, 2009 for the reasonsdescribed above.

 

46

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**Income from discontinued operations, net of tax**

 

Incomefrom discontinued operations, net of tax was $3.3 million in the nine monthsended September 30, 2009 and was due to the favorable resolution of aclaim against the Company’s former Groupe Novasep business and the reversal ofcertain reserves no longer deemed necessary in connection with the sale of theElectronics business in December 2007.

 

**Net (income) loss attributable to noncontrolling interest**

 

Netincome attributable to noncontrolling interest of $5.2 million in the ninemonths ended September 30, 2010 was primarily related to higher earningsin the Titanium Dioxide Pigments venture, partially offset by losses recordedin our Viance venture. Net loss attributable to noncontrolling interest of $6.2million in the nine months ended September 30, 2009 was due to lossesrecorded in our Viance and Titanium Dioxide Pigment’s ventures.

 

**Net income attributable to Rockwood****Specialties Group****, Inc.**

 

Netincome attributable to Rockwood Specialties Group, Inc. for the ninemonths ended September 30, 2010 and 2009 was $129.8 million and $10.3million, respectively, for the reasons described above.

 

**Adjusted EBITDA**

 

*Specialty Chemicals*. AdjustedEBITDA increased $42.1 million, or 23.9%, over the prior year primarily due tothe higher net sales noted above and lower raw material costs in our SurfaceTreatment business, particularly for phosphoric acid. This increase waspartially offset by lower selling prices, particularly for potash and lithiumcarbonate in our Fine Chemicals business.

 

*Performance Additives*. AdjustedEBITDA increased $29.4 million, or 41.3% over the prior year primarily due tothe higher net sales noted above. This increase was partially offset by higherraw material costs.

 

*Titanium Dioxide Pigments*.  AdjustedEBITDA increased $28.9 million, or 44.1% over the prior year primarily due tothe higher net sales noted above. This was partially offset by higherproduction and raw material costs and the negative impact of currency changesof $4.3 million. In addition, Adjusted EBITDA in the nine months ended September 30,2009 included the termination of a long-term incentive plan of $2.6 million andthe receipt of a vendor rebate related to prior years of $1.7 million.

 

*Advanced Ceramics*.  AdjustedEBITDA increased $42.6 million, or 56.6% over the prior year primarily due tothe higher net sales noted above. This increase was partially offset by highermaintenance and production costs, lower selling prices and the negative impactof currency changes of $4.0 million.

 

*Specialty Compounds*.  AdjustedEBITDA increased $3.1 million, or 12.2% over the prior year due to the highernet sales noted above. This was partially offset by higher raw material costs,primarily PVC resin, ethylene and plasticizer costs.

 

*Corporate and other*.  AdjustedEBITDA loss increased $25.4 million, or 91.0% over the prior year primarily dueto higher variable compensation-related costs. Corporate compensation-relatedcosts in the nine months ended September 30, 2009 included the reversal ofcertain long-term incentive compensation accruals of $2.7 million related toperformance targets that were no longer expected to be achieved.

 

47

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***Reconciliation of Net Income Attributableto Rockwood******Specialties Group******, Inc. to Adjusted EBITDA***

 

Becausewe view Adjusted EBITDA on both a consolidated basis and a segment basis as anoperating performance measure, we use net income as the most comparable U.S.GAAP measure on a consolidated basis. The following table, which sets forth theapplicable components of Adjusted EBITDA, presents a reconciliation of netincome attributable to Rockwood Specialties Group, Inc. to Adjusted EBITDAon a consolidated basis:

 
| ** **                                                        | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                        | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **($ in millions)**                                     | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net income attributable to  Rockwood Specialties Group, Inc. |       | $                                | 40.5       |                            | $          | 10.1 |   | $ | 129.8 |   | $ | 10.3 |   |
| Net income (loss) attributable to  noncontrolling interest        |       | 3.0                              |       | (0.6                            | )          | 5.2 |   | (6.2 | ) |
| Net income                                                        |       | 43.5                             |       | 9.5                             |       | 135.0 |   | 4.1 |   |
| Income tax provision                                              |       | 20.7                             |       | 13.0                            |       | 53.4 |   | 6.9 |   |
| Income from discontinued  operations, net of tax                  |       | —                           |       | 0.1                             |       | — |   | (3.3 | ) |
| Income from continuing operations  before taxes                   |       | 64.2                             |       | 22.6                            |       | 188.4 |   | 7.7 |   |
| Interest expense, net (a)                                         |       | 38.6                             |       | 53.6                            |       | 116.7 |   | 131.4 |   |
| Depreciation and amortization                                     |       | 63.5                             |       | 71.5                            |       | 193.4 |   | 208.5 |   |
| Restructuring and other severance  costs                          |       | 1.5                              |       | 4.2                             |       | 4.9 |   | 16.0 |   |
| Systems/organization establishment  expenses                      |       | 0.1                              |       | 2.4                             |       | 1.5 |   | 5.5 |   |
| Acquisition and disposal costs                                    |       | 0.4                              |       | —                          |       | 1.0 |   | — |   |
| Loss on early extinguishment of  debt                             |       | 1.6                              |       | 0.9                             |       | 1.6 |   | 26.6 |   |
| Loss (gain) on sale of assets and  other                          |       | 0.1                              |       | (0.4                            | )          | 0.2 |   | (0.3 | ) |
| Foreign exchange gain, net                                        |       | (0.9                             | )          | (4.5                            | )          | (0.8 | ) | (15.4 | ) |
| Other                                                             |       | —                           |       | 0.8                             |       | (0.6 | ) | 5.6 |   |
| Total Adjusted EBITDA                                             |       | $                                | 169.1      |                            | $          | 151.1 |   | $ | 506.3 |   | $ | 385.6 |   |

 

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(a)                Includes gains of$1.2 million and losses of $1.3 million for the three months ended September 30,2010 and 2009, respectively, and gains of $8.9 million and $1.3 million for thenine months ended September 30, 2010 and 2009, respectively, representingthe movement in the mark-to-market valuation of the Company’s interest rate andcross-currency hedging instruments.

 

**Liquidity and Capital Resources**

 

**Cash Flows**

 

*Operating Activities*.  Netcash provided by operating activities was $367.5 million and $269.2 million forthe nine months September 30, 2010 and 2009, respectively. This increasewas primarily due to higher net income and lower cash interest expense,partially offset by the higher use of operating cash from working capitalchanges.

 

*Investing Activities*.  Netcash used in investing activities was $115.1 million and $131.5 million for thenine months September 30, 2010 and 2009, respectively, and was primarilycomprised of capital expenditures, as well as a $16.0 million contractualadvance to the Titanium Dioxide Pigments noncontrolling shareholder for thenine months ended September 30, 2009.

 

*Financing Activities*.  Netcash used in financing activities was $271.0 million and $314.2 million for thenine months ended September 30, 2010 and 2009, respectively, and includedscheduled payments for long-term debt and revolver payments. In addition,the nine months ended September 30, 2010 included the voluntary prepaymentof $200.2 million of our senior secured loans. In the nine months ended September 30,2009, we used $146.8 million of cash to prepay, at a discount, $153.2 millionin aggregate principal amount of our Euro-denominated senior subordinated notesdue in 2014, $102.3 million to prepay our senior secured term loans, and $25.8million related to the amendment of the senior secured credit facility inJune 2009.

 

**Liquidity**

 

Ourprimary source of liquidity has been and will continue to be cash generatedfrom the operations of our subsidiaries. Our primary liquidity requirements areworking capital, debt service, capital expenditures and acquisitions. Our debtservice requirements in future years are significant. We believe thatbased on current conditions in our industry and markets, our cash reserves,cash flows from operations and borrowings available under our revolving creditfacility will be adequate sources of liquidity. However, an economicdownturn or recession may have a material adverse impact on our results ofoperations, cash flows from operations and our liquidity. See Item 1, “Business,”and Item 1A, “Risk Factors” in our 2009 Form 10-K.

 

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Inaddition, our liquidity may be negatively impacted due to funding obligationsrelated to certain pension plans. We have several pension plans located inGermany, Finland, the United Kingdom and the United States, which werenegatively impacted by market conditions in late 2008 and early 2009. Webelieve we are currently adequately funded in our pension plans. The Company’s overall unfunded position inits defined benefit plans as of September 30, 2010 is $415.2 million andthe funded status of our plans is 38%. However, 82% of the Company’s unfundedposition is concentrated in plans mostly in Germany, where funding is neitherlegally required nor customary. When only the plans that have fundingrequirements are considered, the unfunded portion is $74.2 million, and thefunded status is 76%. The Company was in compliance with local fundingrequirements as of September 30, 2010. Almost all of the Company’s pension obligations are long-term innature. The Company’s annual cash outflows to meet funding requirements andbenefit obligations historically have not significantly exceeded its pensionexpense. Such cash outflows were less than pension expense in 2009 and during thenine months ended September 30, 2010. The measurement of our pensionobligations and plan assets is dependent on a variety of assumptions used byour actuaries and is performed annually. Therefore, the funded status as of December 31,2010 could differ significantly.

 

Althoughrecent investment performance of assets in pension plans covering our employeesin these countries has reduced the amount of any immediate funding obligationsand we have entered into long-term funding arrangements for pension planslocated in Germany and the U.K., we may have to make a one-time payment and/orenter into a long-term funding arrangement for the Finnish Plan. However, ourfunding obligations could change significantly based on the investmentperformance of the pension plan assets and changes in actuarial assumptions forlocal statutory funding valuations. Any deterioration of the capital markets orreturns available in such markets may negatively impact our pension plan assetsand increase our funding obligations for one or more of these plans andnegatively impact our liquidity. We cannot predict the impact of this or anyfurther market disruption on our pension funding obligations.

 

Asof September 30, 2010, we had actual total indebtedness of $2,195.6million. In July 2010, the availability under the revolving creditfacility was reduced to $180.0 million providing for additional borrowings ofup to $146.4 million as of September 30, 2010. There were no outstandingborrowings under this revolving credit facility as of September 30, 2010,although we had outstanding letters of credit of $33.6 million that reduced ouravailability under the senior secured credit facility. The €30.0 million ($40.9million) revolving credit facility under the Titanium Dioxide Pigments venturefacility provided for additional borrowings of up to €12.9 million ($17.6million) as of September 30, 2010 after an outstanding bank guarantee of€17.1 million ($23.3 million) related to a defined benefit pension obligation.

 

Asof September 30, 2010, we had cash and cash equivalents of $280.8 million.We may use available cash to reduce our term debt or repurchase additional 2014Notes at any time, subject to certain limitations contained in our seniorsecured credit facility. As discussed in Note 10, “Long-Term Debt,” wevoluntarily prepaid $200.2 million of our senior secured term loans onJuly 29, 2010. This prepayment was funded with available cash and cashequivalents.

 

*Senior secured credit facilities. *As of September 30, 2010 the senior secured credit facilities, asamended, consisted of:

 

·            a tranche A-1 term loanin an aggregate principal amount of €3.4 million ($4.6 million) and a trancheA-2 term loan in an aggregate principal amount of €29.2 million ($39.8million), each maturing on July 30, 2011 and bearing interest at a Euriborfloor of 2.00% plus 3.00% (Euribor is the Euro inter-bank offered rate);

 

·            a tranche E term loanin an aggregate principal amount of $116.1 million, maturing on July 30,2012 and bearing interest at a Libor floor of 2.00% plus 2.50% (Libor is theLondon inter-bank offered rate);

 

·            a tranche G term loanin an aggregate principal amount of €59.8 million ($81.5 million) maturing onJuly 30, 2012 and bearing interest at a Euribor floor of 2.00% plus 2.75%;

 

·            a tranche H term loanin an aggregate principal amount of $781.1 million maturing on May 15,2014 and bearing interest at a Libor floor of 2.00% plus 4.00%;

 

·            a tranche I term loanin an aggregate principal amount of €178.7 million ($243.6 million) maturing onMay 15, 2014 and bearing interest at a Euribor floor of 2.00% plus 4.25%;and

 

·            a revolving credit facilityin an aggregate principal amount of $180.0 million maturing onJuly 30, 2012 and bearing interest at the Company’s option of either(i) Libor (subject to Libor floor of 2.00%) plus 4.50% or (ii) ABRplus 3.25%. There were no outstanding borrowings under this revolving creditfacility as of September 30, 2010, although we had outstanding letters ofcredit of $33.6 million that reduced our availability under the senior securedcredit facility.

 

Asof September 30, 2010, the weighted average interest rate for the Companyis 6.8%, excluding deferred financing costs and the

 

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mark-to-marketvaluation of our interest-rate swaps.

 

ABRis the alternate base rate, which is the greater of (a) Credit Suisse’sPrime Rate, (b) the Federal Funds Effective Rate plus 0.50% or(c) the Eurodollar Rate for a one-month interest period plus 1.00%.Tranche A-1 and A-2 term loans are payable in January andJuly of each year at escalating percentages of the amended principalamount. As a result of the voluntary prepayment of $200.2 million of our seniorsecured term loans in July 2010, Tranches E, G, H and I are payableat the final maturity date.

 

TheCompany’s borrowings and the borrowings of our wholly-owned subsidiary RockwoodSpecialties Limited under the senior secured credit facilities are guaranteedand secured by certain assets and pledges of capital stock.

 

Thesenior secured credit agreement, as amended, provides for a Libor (Euribor forEuro-denominated tranches) floor of 2.00% subject to pricing based on Libor orEuribor with the following applicable margins above Libor or Euribor:applicable margins for Tranches A-1 and A-2 of 3.00%; Tranche E of 2.75%;Tranche G of 3.00%; Tranche H of 4.25%; and Tranche I of 4.50%, in each caseper annum, each with a 0.25% reduction for achieving a designated creditrating, with the exception of Tranches A-1 and A-2. As of September 30,2010, the Company continued to qualify for the 0.25% interest rate reduction asthe designated credit ratings were achieved.

 

TheCompany may elect interest periods of one, two, three or six months (or in thecase of revolving credit loans, nine or twelve months, to the extent availablefrom all lenders under the revolving credit facility) for Libor and Euriborborrowings. Interest is payable quarterly in the case of ABR loans and at theend of each interest period and, in any event, at least every three months, inthe case of Libor and Euribor borrowings. The senior secured credit facilitiesrequire payment of customary commitment, letter of credit and other fees.

 

Thesenior secured credit agreement also contains the following financial covenantsthat are determined based on our Adjusted EBITDA (including certain adjustmentsfor, among other items, acquisitions and related synergies), which reflectsmanagement’s interpretations thereof:

 

·            a leverage ratio: for thetwelve-month period ended September 30, 2010, net senior secured debt(senior secured debt plus capital lease obligations, minus cash up to a maximumof $100.0 million) to Adjusted EBITDA must be less than 4.25 to 1; for suchperiod, our ratio equaled 2.32 to 1; and

 

·            an interest coverage ratio:for the twelve-month period ended September 30, 2010, Adjusted EBITDA tocash interest expense (interest expense, net excluding deferred debt issuancecost amortization and the movements in the mark-to market value of our interestrate and cross-currency interest rate derivatives) must be at least 2.00 to 1;for such period, our ratio equaled 3.94 to 1.

 

Thesenior secured credit agreement, as amended, replaced the total debt toconsolidated Adjusted EBITDA ratio covenant with a senior secured debt toconsolidated Adjusted EBITDA ratio covenant such that the Company may notpermit its senior secured debt ratio to exceed 4.25 to 1.00 on the last day ofany fiscal quarter through September 30, 2010, and 4.00 to 1.00 on thelast day of any fiscal quarter thereafter. The senior secured creditagreement, as amended, also reset the asset sales basket and modified certainother baskets.

 

Thesecovenants are material terms of the senior secured credit agreement.Non-compliance with these covenants or other covenants could result in adefault under the senior secured credit agreement and the lenders could electto declare all amounts borrowed immediately due and payable. Any suchacceleration would also result in a default under the indenture governing the2014 Notes, which could lead to the note holders electing to declare theprincipal, premium, if any, and accrued and unpaid interest on the thenoutstanding notes immediately due and payable. The senior secured creditagreement contains a cross default provision for indebtedness in excess of$30.0 million; therefore, a default under the indenture governing the 2014Notes, the Titanium Dioxide Pigments term loans or other indebtedness may causethe lenders to declare the principal and accrued and unpaid interest on thethen outstanding senior secured credit facilities immediately due and payable.

 

Inaddition to the financial covenants described above, the Company’s seniorsecured credit facilities contain various affirmative and restrictivecovenants. The restrictive covenants limit our ability to, among other things,incur indebtedness and other liabilities; create liens; merge or consolidate;dispose of assets; make investments; pay dividends and make payments toshareholders; make payments on certain indebtedness or to amend documentsrelated to certain indebtedness and to enter into sale-leaseback transactions.In connection with the senior secured credit agreement, as amended inJune 2009, some of the baskets relating to the above restrictions werereset.

 

SeeItem 7, Management’s Discussion and Analysis of Financial Condition and Resultsof Operations—“Definitions of Adjusted EBITDA,” for a discussion of thedefinition of Adjusted EBITDA used in calculating our financial covenants.

 

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Wewere in compliance with the above covenants as of September 30, 2010.

 

*2014 Notes.*  Asof September 30, 2010, the 2014 Notes have an aggregate principal amountof €250.1 million ($341.0 million) in the case of the Euro notes and $200.0million in the case of the U.S. Dollar notes, and mature on November 15,2014. Interest on the 2014 Notes is payable semi-annually on May 15 andNovember 15 and accrues at the rate of 7.625% in the case of the Euronotes and 7.500% in the case of the U.S. Dollar notes. Certain of our domesticsubsidiaries guarantee the 2014 Notes on a senior subordinated unsecured basis(see Note 15, “Consolidating Financial Information,” for furtherdetails). In the first half of 2009, we repurchased at a discount €113.9million ($153.2 million) in aggregate principal amount of our 2014Notes. We may use available cash to repurchase additional 2014 Notes atany time, subject to certain limitations contained in our senior secured creditfacility.

 

The2014 Notes contain various affirmative and restrictive covenants. Therestrictive covenants limit our ability, and the ability of our restrictedsubsidiaries, to, among other things, incur or guarantee additionalindebtedness (as described below), pay dividends or make other equitydistributions or repurchase capital stock, make investments or other restrictedpayments, create liens, transfer or sell assets, restrict dividends or otherpayments to us, engage in transactions with affiliates, and merge orconsolidate with other companies or sell substantially all of our assets.

 

Theindenture governing the 2014 Notes prohibits us from incurring additional debt,subject to certain permitted incurrences, unless the fixed charge coverageratio, which is the ratio of Adjusted EBITDA (as defined therein excludingcertain adjustments permitted under the senior secured credit agreement) tofixed charges (as defined therein), for the most recently ended four fiscalquarters is at least 2.00 to 1. In addition, the indenture prohibits us frommaking restricted payments (such as dividends or other equity distributions,repurchases of capital stock or restricted investments), subject to certainpermitted payments, unless, among other things, the fixed charge coverage ratiofor the most recently ended four fiscal quarters is at least 2.00 to 1. For thefour-fiscal quarter period ended September 30, 2010, the fixed chargecoverage ratio equaled 3.94 to 1. This covenant is a material term of theindenture governing the 2014 Notes.

 

Becausethe indenture governing the 2014 Notes defines an event of default to include,among other things, a default under any other debt obligation in excess of$35.0 million that could cause the acceleration of such obligation, anyacceleration under the senior secured credit agreement or other debt agreementwould also result in a default under the indenture governing these notes, whichcould lead to the note holders electing to declare the principal, premium, ifany, and accrued and unpaid interest on the then outstanding notes immediatelydue and payable.

 

*Titanium Dioxide Pigments venture term loans, revolvingcredit facility and assumed debt.*  Asof September 30, 2010, the Titanium Dioxide Pigments venture had €230.0million ($313.6 million) outstanding under the term loans of its facilityagreement. The facility also provides for a revolving credit facility of €30.0million ($40.9 million). This facility provided for additional borrowings of upto €12.9 million ($17.6 million) as of September 30, 2010 after anoutstanding bank guarantee of €17.1 million ($23.3 million) related to adefined benefit pension obligation. Both the term loan and revolving creditfacility mature in June 2013.

 

Asof September 30, 2010, the interest rate on the term loan and revolvingcredit facility is Euribor (or Libor if the currency is in USD) plus 2.25%,subject to a step down determined by reference to a leverage ratio test. Theterm loan is payable in installments over a five-year period from the date ofthe facility agreement, with payments that commenced twelve months from suchdate and the remainder due at the final maturity date. The term loan andrevolving credit facility may be repaid in advance without penalty.

 

Inaddition, the Titanium Dioxide Pigments venture has other debt of €9.2 million($12.6 million), primarily due to a defined benefit plan, at interest ratesranging from 3.65% to 5.00%.

 

Thefacility agreement contains affirmative and restrictive covenants, subject tocertain thresholds and exceptions. The restrictive covenants limit the venture’sability to undertake certain actions, including but not limited to acquiring ordisposing of assets, creating liens on assets, entering into a merger orcorporate restructuring, and incurring additional indebtedness. These covenantsare calculated in accordance with International Financial Reporting Standardsand are based solely on the results of the venture’s European operations. Inaddition, the facility agreement requires the venture to meet certain financialcovenants, including:

 

·            A leverage coverage ratio:for the twelve-month period ended September 30, 2010, net debt to EBITDA(which is substantially similar to the definition of Adjusted EBITDA in oursenior secured credit agreement), subject to certain adjustments must be lessthan 3.50 to 1; for such period, our ratio equaled 2.13 to 1;

 

·            An interest coverage ratio:for the twelve-month period ended September 30, 2010, EBITDA, subject tocertain adjustments, to cash interest expense (net of interest income), must begreater than 3.50 to 1; for such period, our ratio equaled 6.53 to 1; and

 

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·            Cash flow coverage ratio:for the twelve-month period ended September 30, 2010, cash generated forfinancing activities (EBITDA, subject to certain adjustments, less workingcapital changes, capital expenditures and interest) to debt service (interest expenseand amortization of debt) must be greater than 1.10; for such period, our ratioequaled 1.80 to 1.

 

Wewere in compliance with the above covenants as of September 30, 2010.

 

Theloans are secured by the assets of the venture. In the event that either Kemira’sor Rockwood’s ownership interest changes, any lender may cancel its commitmentand demand repayment of its respective portion of the loans, including accruedand unpaid interest. The facility agreement contains customary events ofdefault, subject to remedy periods, thresholds and exceptions. Upon theoccurrence of an event of default under the facility agreement, the lenders canterminate the commitments and declare all amounts, including accrued and unpaidinterest, to be due and payable.

 

Givenour use of Adjusted EBITDA (see “Special Note Regarding Non-GAAP FinancialMeasures” for the definition of Adjusted EBITDA and management’s uses ofAdjusted EBITDA) as a liquidity measure, the following table presents areconciliation of net cash provided by operating activities from continuingoperations to Adjusted EBITDA:

 
| ** **                                                                                                            | ** ** | **Nine months ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                            | ** ** | **September 30,**          | ** ** |
| **($ in millions)**                                                                                         | ** ** | **2010**                        | ** ** | **2009** | ** ** |
| Net cash provided by operating  activities from continuing operations                                                 |       | $                               | 367.5      |   | $ | 269.2 |   |
| Changes in assets and liabilities,  net of the effect of foreign currency translation and acquisitions                |       | (13.4                           | )          | (54.6 | ) |
| Current portion of income tax  provision                                                                              |       | 23.6                            |       | 18.4 |   |
| Interest expense, net, excluding  amortization of deferred financing costs and unrealized losses/gains on derivatives |       | 121.1                           |       | 126.5 |   |
| Restructuring and other severance  costs                                                                              |       | 4.9                             |       | 16.0 |   |
| Systems/organization establishment  expenses                                                                          |       | 1.5                             |       | 5.5 |   |
| Acquisition and disposal costs                                                                                        |       | 1.0                             |       | — |   |
| Bad debt provision                                                                                                    |       | 0.5                             |       | (0.7 | ) |
| Loss (gain) on sale of assets and  other                                                                              |       | 0.2                             |       | (0.3 | ) |
| Other                                                                                                                 |       | (0.6                            | )          | 5.6 |   |
| Total Adjusted EBITDA                                                                                                 |       | $                               | 506.3      |   | $ | 385.6 |   |

 

***Contractual Obligations***

 

TheCompany is obligated to make future payments under various contracts such asdebt agreements (including scheduled cash interest payments), operating lease agreements,and unconditional purchase obligations. A discussion of these contractualobligations is included in the Company’s 2009 Form 10-K. As notedabove, we voluntarily prepaid $200.2 million of our senior secured term loanson July 29, 2010. Except for this debt prepayment, there have not beensignificant changes to these contractual obligations as of September 30,2010.

 

***Capital Expenditures***

 

Rockwood’scapital expenditures for the nine months ended September 30, 2010consisted primarily of replacements of worn, obsolete or damaged equipment aswell as investments in new equipment. For the nine months ended September 30,2010 and 2009, our capital expenditures, excluding capital leases, were $116.2million and $116.5 million, respectively. Capital expenditures for each of ourreporting segments are provided in the following table:

 
| ** **                                 | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **             | ** ** | ** **       | ** ** |
|--------------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|------------------------|------------|------------------|------------|
| ** **                                 | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | **Corporate and** | ** ** | ** **       | ** ** |
| **($ in millions)**              | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **other**              | ** ** | **Consolidated** | ** ** |
| Nine months ended September 30,  2010 |       | $             | 28.6       |            | $          | 18.3         |       | $            | 43.4       |          | $          | 20.5                   |       | $                | 4.8        |   | $ | 0.6 |   | $ | 116.2 |   |
| Nine months ended September 30,  2009 |       | 35.6          |       | 20.5            |       | 30.3         |       | 24.7         |       | 4.3           |       | 1.1                    |       | 116.5            |       |
|                                            |            |               |            |                 |            |              |            |              |            |               |            |                        |            |                  |            |  |  |  |  |  |  |  |

 

Wewill incur future costs for capital improvements and general compliance underSHE laws. For the year ended December 31, 2009, 

 

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ourcapital expenditures for SHE matters totaled $17.9 million, excluding costs tomaintain and repair pollution control equipment. For 2010, we estimate capitalexpenditures for compliance with SHE laws to be at similar levels; however,because capital expenditures for these matters are subject to changes in andnew SHE laws, we cannot provide assurance that our recent expenditures will beindicative of future amounts required to comply with these laws, including theEU’s REACH legislation. See Note 15, “Commitments and Contingencies,” “RegulatoryDevelopments” for a discussion of REACH.

 

***Foreign currency related transactions***

 

Asof September 30, 2010, $1,087.1 million of the debt outstanding isdenominated in Euros.

 

**Recent Accounting Standards**

 

SeeNote 1, “Description of Business and Summary of Significant AccountingPolicies,” for a discussion of recent accounting standards.

 

**Off-Balance Sheet Arrangements**

 

Inthe normal course of business, the Company incurs obligations which includeguarantees related to contract completion, regulatory compliance and productperformance. Under certain circumstances, these obligations are supported throughthe issuance of letters of credit and other bank guarantees. As of September 30,2010, the Company had approximately $37.7 million of letters of credit andother bank guarantees, of which $37.3 million will expire in 2010 through 2014.The remaining guarantees have no specified expiration date. This amountincludes outstanding letters of credit of $33.6 million that reduced ouravailability under our senior secured credit facility. In the opinion ofmanagement, such obligations will not significantly affect the Company’sfinancial position, results of operations or cash flows as the Companyanticipates fulfilling its performance obligations.

 

**Commitments and Contingencies**

 

SeeNote 14, “Commitments and Contingencies,” for a discussion of the Company’sCommitments and Contingencies.

 

**Critical Accounting Policies and Estimates**

 

Ourdiscussion and analysis of our financial condition and results of operationsare based upon our condensed consolidated financial statements, which have beenprepared in accordance with U.S. GAAP. The preparation of these financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and the relateddisclosure of contingent assets and liabilities. These estimates includeassessing, among other things:

 

·            the use and recoverabilityof inventory;

 

·            the valuation of deferredtax assets;

 

·            the amount of unrecognizedtax benefits;

 

·            impairment of goodwill,property, plant and equipment and other intangible assets;

 

·            the useful lives of tangibleand intangible assets: and

 

·            the fair values of assetsacquired and liabilities assumed in business combinations.

 

Weevaluate our estimates on an ongoing basis, based on historical experience andvarious other assumptions that we believe to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates underdifferent assumptions or conditions.

 

Thesignificant accounting policies of the Company are described in Note 1, “Descriptionof Business and Summary of Significant Accounting Policies,” to our unauditedcondensed consolidated financial statements and the critical accounting policiesand estimates are described in the “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” section in the Company’s 2009Form 10-K. There have been no significant changes to these criticalaccounting policies and estimates as of September 30, 2010.

 

Oneof our critical accounting policies relates to the impairment of goodwill,property, plant and equipment and other intangible 

 

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assets. Therecoverability of goodwill is reviewed on an annual basis during the fourthquarter. Additionally, the recoverability of goodwill, property, plant andequipment and other intangible assets is reviewed when events or changes incircumstances occur indicating that the carrying value of the assets may not berecoverable. For instance, we are monitoring the recoverability of certainintangible assets in our Viance timber treatment chemicals joint venture withinour Performance Additives segment and will review such assets if events orcircumstances indicate the carrying value of such assets may not berecoverable.

 

**Forward-Looking Statements**

 

Thisdocument contains forward-looking statements. Forward-looking statements withinthe context of the Private Securities Litigation Reform Act of 1995 are notstatements of historical fact and may involve a number of risks anduncertainties.

 

Forward-lookingstatements give our current expectations or forecasts of future events andestimates of amounts not yet determinable. We have used the words “anticipate,”“estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “predict,” “could,”“may” and other words and terms of similar meaning, including references toassumptions, in this report to identify forward-looking statements. Theseforward-looking statements are made based on expectations and beliefsconcerning future events affecting us and are subject to uncertainties andfactors relating to our operations and business environment, all of which aredifficult to predict and many of which are beyond our control, that could causeour actual results to differ materially from those expressed in or implied bythese forward-looking statements. In particular, these factors include, amongother things:

 

·            our business strategy;

·            changes in the general economicconditions in North America and Europe and in other locations in which wecurrently do business;

·            competitive pricing orproduct development activities affecting demand for our products;

·            technological changesaffecting production of our materials;

·            fluctuations in interestrates, exchange rates and currency values;

·            availability and pricing ofraw materials;

·            governmental andenvironmental regulations and changes in those regulations;

·            fluctuations in energyprices;

·            changes in the end-use marketsin which our products are sold;

·            our ability to accesscapital markets;

·            hazards associated withchemicals manufacturing;

·            our high level ofindebtedness;

·            risks associated withnegotiating, consummating and integrating acquisitions;

·            risks associated withcompetition and the introduction of new competing products, especially from theAsia-Pacific region; and

·            risks associated withinternational sales and operations.

 

Youshould keep in mind that any forward-looking statements made by us in this documentor elsewhere speak only as of the date on which we make them. New risks anduncertainties come up from time to time, and it is impossible for us to predictthese events or how they may affect us. We disclaim any obligation to update orrevise any forward-looking statements, whether as a result of new information,future events or otherwise.

 

**Item 3.  Quantitative and Qualitative Disclosures AboutMarket Risk.**

 

Weare exposed to market risk from changes in interest rates, foreign currencyexchange rates and commodity prices. We manage our exposure to these marketrisks through regular operating and financing activities and through the use ofderivatives. When used, derivatives are employed as risk management tools andnot for trading purposes. A discussion and analysis of the Company’smarket risk is included in the Company’s 2009 Form 10-K. There have beenno significant changes to these market risks as of September 30, 2010.

 

**Item 4T.  Controls and Procedures**

 

Ourdisclosure controls and procedures are designed to ensure that (a) informationrequired to be disclosed in our reports under the Securities Exchange Act of1934 is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms and (b) such information isaccumulated and communicated to our management, including our Chief ExecutiveOfficer and Chief Financial Officer, to allow timely decisions regardingrequired disclosures. Any controls and procedures, no matter how well designedand operated, can provide only reasonable assurance of achieving the desiredcontrol objectives. Our management, with the participation of our ChiefExecutive Officer and Chief Financial Officer, evaluated the effectiveness ofthe design and operation of our disclosure controls and procedures as of September 30,2010 and concluded that, as of September 30, 2010, our disclosure controlsand procedures are effective to accomplish their objectives at the reasonableassurance level.

 

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Therewere no changes in our internal control over financial reporting during thethird quarter of 2010 that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

**PART II — OTHER INFORMATION**

 

**Item 1.  Legal Proceedings.**

 

Weare involved in legal proceedings from time to time in the ordinary course ofour business, including with respect to product liability, intellectualproperty and environmental matters. In addition, we may be required to makeindemnity payments in connection with certain product liability andenvironmental claims. See Item 1, “Business,” and Item 1A, “Risk Factors,”“Environmental Indemnities—We may be subject to environmental indemnity claimsrelating to properties we have divested”; “Product Liability— Due to the natureof our business and products, we may be liable for damages arising out ofproduct liability claims”; and “Product Liability—Due to the nature of ourbusiness and products, we may be liable for damages arising out of certainindemnity claims” in our 2009 Form 10-K.

 

**AdvertisingMatter**

 

In September 2009,the district court issued a preliminary injunction prohibiting Viance frommaking certain claims related to MCQ in its advertisements and denied Viance’srequest for a preliminary injunction related to certain claims in Osmose’sadvertisements, which Viance subsequently appealed. The U.S. Court of Appeals,Eleventh Circuit heard oral arguments on May 20, 2010 and rendered itsdecision on July 30, 2010 remanding in part, affirming in part, andvacating in part the preliminary injunction. The trial court entered an orderrevising the preliminary injunction and an order lifting the stay andcommencing discovery.

 

**LanxessMatter**

 

On January 18,2010, Lanxess Deutschland GmbH filed suit in the District Court of Satakunta,Finland against Sachtleben Pigments Oy (“Sachtleben”), a subsidiary of ourTitanium Dioxide Pigment’s venture, claiming breach of contract in connectionwith Sachtleben’s termination of a supply agreement with plaintiff. The Courtheld a hearing on October 28, 2010 related to the proper jurisdiction forthis matter and the Company is awaiting the Court’s ruling.

 

Wedo not believe that any individual legal proceeding, government action or arbitrationis likely to have a material adverse effect on our business, results ofoperations, cash flows or financial condition. However, we cannot predict theoutcome of any legal proceeding or the potential for futureproceedings. See Note 14, “Commitments and Contingencies,” in thisForm 10-Q and Item 3, Legal Proceedings in our 2009 Form 10-K.

 

**Item 1A. Risk Factors.**

 

Adiscussion of the Company’s risk factors is included in the Company’sForm 10-K for the year ended December 31, 2009. There have been no materialchanges to these risk factors.

 

**Item 2.  Unregistered Sales of Equity Securities and Useof Proceeds.**

 

None.

 

**Item 3.  Defaults upon Senior Securities.**

 

None.

 

**Item 4.  (Removed and Reserved).**

 

**Item 5.  Other Information.**

 

None.

 

**Item 6.  Exhibits**

 

Seethe Exhibit Index immediately following the signature page to thisreport. Such Exhibit Index is hereby incorporated by reference.

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
|   |   | ROCKWOOD  SPECIALTIES GROUP, INC. |
|--------|--------|----------------------------------------|
|   |   |                                   |
|   |   |                                   |
|   |   | By:                                    | /s/  SEIFI GHASEMI |
|   |   |                                   | Seifi  Ghasemi |
|   |   |                                   | Chairman  and Chief Executive Officer |
|   |   |                                   | Date:  November 5, 2010 |
|   |   |                                   |   |
|   |   |                                   |
|   |   | ROCKWOOD  SPECIALTIES GROUP, INC. |
|   |   |                                   |
|   |   |                                   |   |
|   |   | By:                                    | /s/  ROBERT J. ZATTA |
|   |   |                                   | Robert  J. Zatta |
|   |   |                                   | Senior  Vice President and Chief Financial Officer |
|   |   |                                   | Date:  November 5, 2010 |

 

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**Exhibit Index**

 
| **Exhibit No.** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                                                                 |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **           | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.1*                |       | Amended and Restated Credit Agreement, dated as of  June 15, 2009, among Rockwood Specialties Group, Inc., Rockwood  Specialties Limited, Rockwood Specialties International, Inc., the lenders  party thereto, Credit Suisse, as Administrative agent and Collateral agent,  and UBS Securities LLC and Goldman Sachs Credit Partners L.P., as  Co-Syndication Agents.               |
| ** **           | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.2*                |       | Facility Agreement, made  between Deukalion Einhundertvierundzwanzigste Vermogensveraltungs GmbH, Sachtleben Chemie GmbH, White Pigments Holding  Oy, and Kemira Pigments Oy, Merchant Banking, Skandinaviska Enskilda Banken  AB as Agent, Security Agent and Issuing Bank; and Nordea Bank Finland Plc as  Arranger and Original Lender; and the lenders party thereto.                            |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.3*                |       | Facility Agreement, as amended and restated, made  between Deukalion Einhundertvierundzwanzigste Vermogensveraaltungs Gmbh,  Sachtleben Chemie GmbH, White Pigments Holding Oy, and Kemira Pigments Oy,  Merchant Banking, Skandinaviska Enskilda Banken AB as Agent, Security Agent  and Issuing Bank; and Nordea Bank Finland Plc as Arranger and Original  Lender; and the lenders party thereto. |
| ** **           | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.4*                |       | Merger and Transfer Agreement, dated September 28,  2010, of The Rockwood Specialties, Inc. Money Purchase Pension Plan and  the Profit-Sharing/401(K) Plan for Employees of Rockwood Specialties  Inc., effective as of December 31, 2010                                                                                                                                       |
| ** **           | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                           |
| 31.1*                |       | Rule 13a-14(a)/15d-14(a) Certification  of Chief Executive Officer.                                                                                                                                                                                                                                                                                                                        |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                 |
| 31.2*                |       | Rule 13a-14(a)/15d-14(a) Certification  of Chief Financial Officer.                                                                                                                                                                                                                                                                                                                        |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                 |
| 32.1                 |       | Section 1350  Certification of Chief Executive Officer. This certification accompanies this  report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and  shall not be deemed filed by the Company for purposes of Section 18 or  any other provision of the Securities Exchange Act of 1934, as amended.                                                                    |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                 |
| 32.2                 |       | Section 1350  Certification of Chief Financial Officer. This certification accompanies this  report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and  shall not be deemed filed by the Company for purposes of Section 18 or  any other provision of the Securities Exchange Act of 1934, as amended.                                                                    |

 

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*              Filedherewith.

 

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