**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

| **x**      | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**   |
|------------|----------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                               |
| ** ** | **For the quarterly period ended March 31, 2010**                                                   |
| ** ** | ** **                                                                                               |
| ** ** | **Or**                                                                                                   |
| ** ** | ** **                                                                                               |
| **o**      | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**Commission file number 333-109686**

 

**RockwoodSpecialties 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 in Rule 12b-2of 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 May 7, 2010, there were 382,000 outstanding shares of common stockof the Registrant, all of which is held by its parent company RockwoodSpecialties International, Inc.

 

 

 

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**TABLEOF CONTENTS**

 

**FORM 10-Q**

 
|    |   | PART I-  FINANCIAL INFORMATION                                                                       |   |   |
|---------|--------|-----------------------------------------------------------------------------------------------------------|--------|--------|
| Item 1  |   | Financial Statements  (Unaudited)                                                                         |   |   |
|    |   | Condensed  Consolidated Statements of Operations for the three months ended  March 31, 2010 and 2009 |   |   |
|    |   | Condensed  Consolidated Balance Sheets as of March 31, 2010 and December 31,  2009              |   |   |
|    |   | Condensed  Consolidated Statements of Cash Flows for the three months ended  March 31, 2010 and 2009 |   |   |
|    |   | Condensed  Consolidated Statements of Equity for the three months ended March 31,  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**

 

**Item1. Financial Statements (Unaudited).**

 

**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**(Dollarsin millions)**

**(Unaudited)**

 
| ** **                                                               | ** ** | **Three months ended** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                               | ** ** | **March 31,**     | ** ** |
| ** **                                                               | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Net  sales                                                               |       | $                      | 833.9      |   | $ | 660.0 |   |
| Cost  of products sold                                                   |       | 567.2                  |       | 477.9 |   |
| Gross  profit                                                            |       | 266.7                  |       | 182.1 |   |
| Selling,  general and administrative expenses                            |       | 169.3                  |       | 145.1 |   |
| Restructuring  and other severance costs                                 |       | 2.2                    |       | 7.8 |   |
| Loss  on sale of assets and other                                        |       | —                 |       | 0.1 |   |
| Operating  income                                                        |       | 95.2                   |       | 29.1 |   |
| Other  expenses, net:                                                    |       |                   |       |   |   |
| Interest  expense, net (a)                                               |       | (41.8                  | )          | (49.3 | ) |
| Gain  on early extinguishment of debt                                    |       | —                 |       | 2.2 |   |
| Foreign  exchange gain (loss), net                                       |       | 0.3                    |       | (5.6 | ) |
| Other,  net                                                              |       | 0.5                    |       | 0.1 |   |
| Other  expenses, net                                                     |       | (41.0                  | )          | (52.6 | ) |
| Income  (loss) from continuing operations before taxes                   |       | 54.2                   |       | (23.5 | ) |
| Income  tax provision (benefit)                                          |       | 17.5                   |       | (16.7 | ) |
| Income  (loss) from continuing operations                                |       | 36.7                   |       | (6.8 | ) |
| Income  from discontinued operations, net of tax                         |       | —                 |       | 2.3 |   |
| Net  income (loss)                                                       |       | 36.7                   |       | (4.5 | ) |
| Net  loss attributable to noncontrolling interest                        |       | 0.2                    |       | 3.0 |   |
| Net  income (loss) attributable to Rockwood Specialties Group, Inc. |       | $                      | 36.9       |   | $ | (1.5 | ) |
|                                                                     |       |                   |       |   |   |
| Amounts  attributable to Rockwood Specialties Group, Inc.:          |       |                   |       |   |   |
| Income  (loss) from continuing operations                                |       | $                      | 36.9       |   | $ | (3.8 | ) |
| Income  from discontinued operations                                     |       | —                 |       | 2.3 |   |
| Net  income (loss)                                                       |       | $                      | 36.9       |   | $ | (1.5 | ) |

 

----

| (a) Interest  expense, net includes:             |   |   |   |   |   |
|-------------------------------------------------------|--------|--------|--------|--------|--------|
| Interest  expense on debt, net                        |   | $      | (42.3  | )      | $      | (37.3 | ) |
| Mark-to-market  gains (losses) on interest rate swaps |   | 2.1    |   | (9.6   | )      |
| Deferred  financing costs                             |   | (1.6   | )      | (2.4   | )      |
| Total                                                 |   | $      | (41.8  | )      | $      | (49.3 | ) |

 

See accompanyingnotes to condensed consolidated financial statements.

 

3

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Dollarsin millions, except per share amounts)**

**(Unaudited)**

 
| ** **                                                                                       | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                       | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| **ASSETS**                                                                                       |       |               |       |                  |       |
| Current  assets:                                                                                 |       |               |       |                  |       |
| Cash  and cash equivalents                                                                       |       | $                  | 309.4      |                  | $          | 300.5 |   |
| Accounts  receivable, net                                                                        |       | 496.1              |       | 450.4                 |       |
| Inventories                                                                                      |       | 510.9              |       | 517.0                 |       |
| Deferred  income taxes                                                                           |       | 13.8               |       | 12.6                  |       |
| Prepaid  expenses and other current assets                                                       |       | 64.3               |       | 66.5                  |       |
| Total  current assets                                                                            |       | 1,394.5            |       | 1,347.0               |       |
| Property,  plant and equipment, net                                                              |       | 1,612.4            |       | 1,702.5               |       |
| Goodwill                                                                                         |       | 886.7              |       | 939.2                 |       |
| Other  intangible assets, net                                                                    |       | 656.4              |       | 704.7                 |       |
| Deferred  debt issuance costs, net of accumulated amortization of $11.9 and $10.8,  respectively |       | 23.4               |       | 26.0                  |       |
| Deferred  income taxes                                                                           |       | 23.2               |       | 24.8                  |       |
| Other  assets                                                                                    |       | 37.6               |       | 37.5                  |       |
| Total  assets                                                                                    |       | $                  | 4,634.2    |                  | $          | 4,781.7 |   |
| **LIABILITIES**                                                                                  |       |               |       |                  |       |
| Current  liabilities:                                                                            |       |               |       |                  |       |
| Accounts  payable                                                                                |       | $                  | 215.5      |                  | $          | 237.3 |   |
| Income  taxes payable                                                                            |       | 13.8               |       | 11.5                  |       |
| Accrued  compensation                                                                            |       | 89.3               |       | 77.7                  |       |
| Accrued  expenses and other current liabilities                                                  |       | 197.1              |       | 179.0                 |       |
| Deferred  income taxes                                                                           |       | 2.4                |       | 2.6                   |       |
| Long-term  debt, current portion                                                                 |       | 77.9               |       | 94.2                  |       |
| Total  current liabilities                                                                       |       | 596.0              |       | 602.3                 |       |
| Long-term  debt                                                                                  |       | 2,352.8            |       | 2,434.1               |       |
| Pension  and related liabilities                                                                 |       | 389.6              |       | 410.1                 |       |
| Deferred  income taxes                                                                           |       | 72.7               |       | 69.1                  |       |
| Other  liabilities                                                                               |       | 136.4              |       | 144.1                 |       |
| Total  liabilities                                                                               |       | 3,547.5            |       | 3,659.7               |       |
| **EQUITY**                                                                                       |       |               |       |                  |       |
| Rockwood  Specialties Group, Inc. stockholder’s equity:                                |       |               |       |                  |       |
| Common  stock ($0.01 par value, 1,000,000 shares authorized, 382,000 shares  outstanding)        |       | —             |       | —                |       |
| Paid-in  capital                                                                                 |       | 1,044.0            |       | 1,044.0               |       |
| Accumulated  other comprehensive income                                                          |       | 142.7              |       | 207.5                 |       |
| Accumulated  deficit                                                                             |       | (382.6             | )          | (419.5                | )          |
| Total  Rockwood Specialties Group, Inc. stockholder’s equity                           |       | 804.1              |       | 832.0                 |       |
| Noncontrolling  interest                                                                         |       | 282.6              |       | 290.0                 |       |
| Total  equity                                                                                    |       | 1,086.7            |       | 1,122.0               |       |
| Total  liabilities and equity                                                                    |       | $                  | 4,634.2    |                  | $          | 4,781.7 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

4

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(Dollarsin millions)**

**(Unaudited)**

 
| ** **                                                                                               | ** ** | **Three months ended** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                               | ** ** | **March 31,**     | ** ** |
| ** **                                                                                               | ** ** | **2010**               | ** ** | **2009** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                                |       |                   |       |   |   |
| Net  income (loss)                                                                                       |       | $                      | 36.7       |   | $ | (4.5 | ) |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities:                |       |                   |       |   |   |
| Income  from discontinued operations, net of tax                                                         |       | —                 |       | (2.3 | ) |
| Depreciation  and amortization                                                                           |       | 66.9                   |       | 68.1 |   |
| Deferred  financing costs amortization                                                                   |       | 1.6                    |       | 2.4 |   |
| Gain  on early extinguishment of debt, net                                                               |       | —                 |       | (2.2 | ) |
| Foreign  exchange (gain) loss, net                                                                       |       | (0.3                   | )          | 5.6 |   |
| Fair  value adjustment of derivatives                                                                    |       | (2.1                   | )          | 9.6 |   |
| Bad  debt provision                                                                                      |       | (0.4                   | )          | — |   |
| Stock-based  compensation                                                                                |       | 2.6                    |       | 0.8 |   |
| Deferred  income taxes                                                                                   |       | 5.3                    |       | (22.5 | ) |
| Restructuring  and other                                                                                 |       | 1.8                    |       | 0.1 |   |
| Changes  in assets and liabilities, net of the effect of foreign currency translation  and acquisitions: |       |                   |       |   |   |
| Accounts  receivable                                                                                     |       | (62.8                  | )          | 22.2 |   |
| Inventories                                                                                              |       | (12.8                  | )          | 15.7 |   |
| Prepaid  expenses and other assets                                                                       |       | (1.9                   | )          | 9.7 |   |
| Accounts  payable                                                                                        |       | (4.8                   | )          | (37.2 | ) |
| Income  taxes payable                                                                                    |       | 3.3                    |       | (0.5 | ) |
| Accrued  expenses and other liabilities                                                                  |       | 35.8                   |       | (20.5 | ) |
| **Net cash provided by operating activities**                                                            |       | 68.9                   |       | 44.5 |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                                |       |                   |       |   |   |
| Acquisitions,  including transaction fees and payments for prior acquisitions, net of cash  acquired     |       | (1.2                   | )          | (0.7 | ) |
| Capital  expenditures, excluding capital leases                                                          |       | (35.2                  | )          | (44.3 | ) |
| Contractual  advance to Titanium Dioxide Pigments noncontrolling shareholder                             |       | —                 |       | (1.3 | ) |
| Proceeds  on sale of assets                                                                              |       | 0.1                    |       | 2.1 |   |
| Net  cash used in investing activities of continuing operations                                          |       | (36.3                  | )          | (44.2 | ) |
| Net  cash used in investing activities of discontinued operations                                        |       | —                 |       | (0.4 | ) |
| **Net cash used in investing activities**                                                                |       | (36.3                  | )          | (44.6 | ) |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                                |       |                   |       |   |   |
| Repayment  of Titanium Dioxide Pigments revolving credit facility                                        |       | (14.3                  | )          | — |   |
| Prepayment  of 2014 Notes                                                                                |       | —                 |       | (11.9 | ) |
| Prepayment  of senior secured debt                                                                       |       | —                 |       | (102.3 | ) |
| Repayment  of senior secured debt                                                                        |       | (12.9                  | )          | (29.8 | ) |
| Payments  on other long-term debt                                                                        |       | (1.1                   | )          | (2.6 | ) |
| Loan  from Viance noncontrolling shareholder                                                             |       | —                 |       | 2.0 |   |
| Deferred  financing costs                                                                                |       | (0.3                   | )          | — |   |
| **Net cash used in financing activities**                                                                |       | (28.6                  | )          | (144.6 | ) |
| Effect  of exchange rate changes on cash and cash equivalents                                            |       | 4.9                    |       | (2.2 | ) |
| Net  increase (decrease) in cash and cash equivalents                                                    |       | 8.9                    |       | (146.9 | ) |
| Cash  and cash equivalents, beginning of period                                                          |       | 300.5                  |       | 468.7 |   |
| Cash  and cash equivalents, end of period                                                                |       | $                      | 309.4      |   | $ | 321.8 |   |
|                                                                                                     |       |                   |       |   |   |
| Supplemental  disclosures of cash flow information:                                                      |       |                   |       |   |   |
| Interest  paid                                                                                           |       | $                      | 31.8       |   | $ | 25.9 |   |
| Income  taxes paid, net of refunds                                                                       |       | 8.8                    |       | 6.0 |   |
| Non-cash  investing activities:                                                                          |       |                   |       |   |   |
| Acquisition  of capital equipment                                                                        |       | 8.2                    |       | 8.1 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

5

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFEQUITY**

**(Dollarsin millions)**

**(Unaudited)**

 
| ** **                                                                                        | ** ** | **2010**                                                                | ** ** | **2009**                     | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                        | ** ** | **Rockwood  Specialties  Group, Inc.  Stockholder’s  Equity** | ** ** | **Noncontrolling  Interest** | ** ** | **Total  Equity** | ** ** | **Rockwood  Specialties  Group, Inc.  Stockholder’s  Equity** | ** ** | **Noncontrolling  Interest** | ** ** | **Total  Equity** | ** ** |
| Balance  at January 1                                                                        |       | $                                                                       | 832.0      |                         | $          | 290.0 |   | $ | 1,122.0 |   | $ | 810.4 |   | $ | 315.4 |   | $ | 1,125.8 |   |
|                                                                                              |       |                                                                    |       |                         |       |   |   |   |   |   |   |   |   |
| Net  income (loss)                                                                                |       | 36.9                                                                    |       | (0.2                         | )          | 36.7 |   | (1.5 | ) | (3.0 | ) | (4.5 | ) |
| Other  comprehensive loss, net of tax                                                             |       | (64.8                                                                   | )          | —                       |       | (64.8 | ) | (46.6 | ) | (3.9 | ) | (50.5 | ) |
| Comprehensive  loss                                                                               |       | (27.9                                                                   | )          | (0.2                         | )          | (28.1 | ) | (48.1 | ) | (6.9 | ) | (55.0 | ) |
| Change  in estimate of fair value of assets contributed to the Titanium Dioxide Pigments  venture |       | —                                                                  |       | —                       |       | — |   | — |   | (16.5 | ) | (16.5 | ) |
| Foreign  currency translation                                                                     |       | —                                                                  |       | (7.2                         | )          | (7.2 | ) | — |   | (8.0 | ) | (8.0 | ) |
| Balance  at March 31                                                                         |       | $                                                                       | 804.1      |                         | $          | 282.6 |   | $ | 1,086.7 |   | $ | 762.3 |   | $ | 284.0 |   | $ | 1,046.3 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

6

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**Notes To Condensed ConsolidatedFinancial Statements (Unaudited)**

 

**1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:**

 

***Business Description, Background***— Rockwood Specialties Group, Inc.and Subsidiaries is a global developer, manufacturer and marketer of highvalue-added specialty chemicals and advanced materials used for industrial andcommercial purposes. Unless otherwise indicated, any references to “we,” “our,”“us,” the “Company” or “Rockwood” refer to Rockwood Specialties Group, Inc.and its consolidated subsidiaries. The Company is an indirect wholly-ownedsubsidiary of Rockwood Holdings, Inc. (“Holdings”).

 

***Basis of Presentation***— The accompanying financial statements of Rockwoodare presented on a consolidated basis. All intercompany accounts andtransactions have been eliminated in consolidation. In the opinion ofmanagement, this information contains all adjustments necessary for a fairpresentation of the results for the periods presented.

 

The interim financialstatements included herein are unaudited. The results of operations for theinterim periods are not necessarily indicative of the results of operations forthe full year. The condensed consolidated financial statements arepresented based upon accounting principles generally accepted in the UnitedStates of America (“U.S. GAAP”), except that certain information and footnotedisclosures, normally included in financial statements prepared in accordancewith U.S. GAAP, have been condensed or omitted. The accompanying condensedconsolidated financial statements should be read in conjunction with theconsolidated financial statements and the notes thereto contained in theCompany’s 2009 Form 10-K. In the opinion of management, this informationcontains all adjustments necessary, consisting of normal and recurringaccruals, for a fair presentation of the results for the periods presented.

 

The Company’snoncontrolling interest represents the total of the noncontrolling party’sinterest in certain investments (principally the Viance, LLC timber treatmentjoint venture and the Titanium Dioxide Pigments venture) that are consolidatedbut less than 100% owned.

 

Unless otherwise noted,all balance sheet related items which are denominated in Euros are converted atthe March 31, 2010 exchange rate of €1.00 = $1.351.

 

***Stock-Based Compensation***— Holdings has previously granted awards under the2008 Amended and Restated Stock Purchase and Option Plan of Rockwood Holdings, Inc.and Subsidiaries (the “Plan”). Under the Plan, Holdings granted stockoptions, restricted stock and other stock-based awards to the Company’semployees and directors and allowed employees and directors to purchase sharesof its common stock. There were 10,000,000 authorized shares available forgrant under the Plan. However, Holdings will no longer issue equity awardsunder this Plan. In April 2009, Holdings adopted the 2009 StockIncentive Plan (the “New Plan”; together with the Plan, the “Plans”), which has11,000,000 authorized shares.

 

The aggregatecompensation cost for stock options, restricted stock units and Holdings’ Boardof Director stock grants recorded under the Plans caused income from continuingoperations before taxes to decrease by $2.6 million and $0.8 million for thethree months ended March 31, 2010 and 2009, respectively. The totaltax benefit recognized related to stock options was $0.2 million and less than$0.1 million for the three months ended March 31, 2010 and 2009,respectively.

 

In December 2009,Holdings approved an award of 233,657 performance-based restricted stock unitsto management and key employees which will vest on December 31, 2012 aslong as the employee continues to be employed by the Company on this date andupon the achievement of certain performance targets approved by Holdings’Compensation Committee. The number of shares of the Holdings’ common stockultimately awarded upon vesting is determined based on the achievement ofspecified performance criteria over the period January 1, 2010 through December 31,2010. However, the Company did not recognize any compensation cost in 2009 forthis issuance because the performance targets that form the basis for vestingof these restricted stock units were not known as of December 31, 2009.These performance targets were set in January 2010, when such performancetargets were approved by Holdings’ 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.

 

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

 

In June 2009, theFASB issued a statement that requires an enterprise to perform an analysis todetermine whether the enterprise’s variable interest entity or interests giveit a controlling financial interest in a variable interest entity. It requiresadditional disclosures about involvement with variable interest entities andany significant changes in risk exposure due to that involvement. The Companyadopted this statement on January 1, 2010. This statement did nothave a material impact on its financial statements. See Note 3, “VariableInterest Entities,” for the disclosure requirements of this statement.

 

7

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In January 2010, the FASBissued an accounting update that amended guidance and clarified the disclosurerequirements about fair market value measurement. This required a reportingentity to disclose separately the amounts of significant transfers in and outof Level 1 and Level 2 fair value measurements and to describe the reasons forthe transfers. In addition, for measurements utilizing significant unobservableinputs, a reporting entity should present separately information about purchases,sales, issuances, and settlements. The Company adopted this update on January 1,2010. There was no impact upon adoption of this update on the Company’sfinancial statements.

 

**2. COMPREHENSIVE INCOME**

 

Comprehensive incomeincludes net income and the other comprehensive income components which includeunrealized gains and losses from foreign currency translation and from certainintercompany 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 are not adjusted for incometaxes since they relate to indefinite length investments in non-U.S. subsidiariesand certain intercompany debt.

 

Comprehensive income(loss) is summarized as follows:

 
| ** **                                                                | ** ** | **Three months ended** | ** ** |
|---------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                | ** ** | **March 31,**     | ** ** |
| **($ in millions)**                                                  | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Net  income (loss)                                                        |       | $                      | 36.7       |   | $ | (4.5 | ) |
| Pension  related adjustments, net of tax                                  |       | 2.0                    |       | 0.1 |   |
| Foreign  currency translation                                             |       | (28.3                  | )          | (62.0 | ) |
| Intercompany  foreign currency loans                                      |       | (46.9                  | )          | (37.6 | ) |
| Net  investment hedges, net of tax                                        |       | 8.4                    |       | 49.3 |   |
| Foreign  exchange contracts, net of tax                                   |       | —                 |       | (0.3 | ) |
| Comprehensive  loss                                                       |       | (28.1                  | )          | (55.0 | ) |
| Comprehensive  loss attributable to noncontrolling interest               |       | 0.2                    |       | 6.9 |   |
| Comprehensive  loss attributable to Rockwood Specialties Group, Inc. |       | $                      | (27.9      | ) | $ | (48.1 | ) |

 

**3.  VARIABLE INTEREST ENTITIES:**

 

**Viance LLC Joint Venture**

 

In January 2007,Chemical Specialties, Inc. (“CSI”), a wholly-owned subsidiary of theCompany within the Timber Treatment Chemicals business of the PerformanceAdditives segment, and Rohm and Haas Company (a subsidiary of The Dow ChemicalCompany) completed the formation of Viance, LLC (“Viance”), a joint venturethat provides an extensive range of advanced wood treatment technologies andservices to the global wood treatment industry. The Company has concludedthat Rockwood is the primary beneficiary of Viance and as such has consolidatedthe joint venture and reported Rohm and Haas’ interest as noncontrollinginterest. This conclusion was made as Rockwood has the obligation to absorblosses of Viance that could potentially be significant to Viance and/or theright to receive benefits from Viance that could potentially be significant toViance. In addition, CSI has the power to direct activities of Viance that mostsignificantly impact Viance’s performance as Viance does not own manufacturingfacilities. As a result, Viance primarily relies on CSI to provide product and distributionrequirements through a supply agreement.

 

8

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At March 31, 2010and December 31, 2009, no consolidated assets of the Company were pledgedas collateral for any joint venture obligations and the general creditors ofthe joint venture had no recourse against the Company. The partners haveprovided $4.0 million of short-term financing to the venture. However, thisfinancing is not subordinated and management believes that such financing couldhave been readily obtained externally. All intercompany accounts, balances andtransactions have been eliminated. Viance’s assets can only be used to settle direct obligations of Viance.The carrying values of the assets and liabilities of the Viance joint ventureincluded in the condensed consolidated balance sheets are as follows:

 
| ** **                                     | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| **ASSETS**                                     |       |               |       |                  |       |
| Current assets:                                |       |               |       |                  |       |
| Cash and cash equivalents                      |       | $                  | 4.5        |                  | $          | 6.3 |   |
| Accounts receivable, net                       |       | 9.8                |       | 6.9                   |       |
| Inventories                                    |       | 0.9                |       | 1.1                   |       |
| Prepaid expenses and other current assets      |       | 4.7                |       | 4.4                   |       |
| Total current assets                           |       | 19.9               |       | 18.7                  |       |
| Property, plant and equipment, net             |       | 2.0                |       | 2.0                   |       |
| Other intangible assets, net                   |       | 76.3               |       | 78.0                  |       |
| Other assets                                   |       | 1.9                |       | 1.9                   |       |
| Total assets                                   |       | $                  | 100.1      |                  | $          | 100.6 |   |
| **LIABILITIES**                                |       |               |       |                  |       |
| Current liabilities:                           |       |               |       |                  |       |
| Accounts payable                               |       | $                  | 2.1        |                  | $          | 1.5 |   |
| Income taxes payable                           |       | 0.1                |       | 0.1                   |       |
| Accrued compensation                           |       | 0.6                |       | 1.5                   |       |
| Accrued expenses and other current liabilities |       | 2.2                |       | 2.0                   |       |
| Long-term debt, current portion                |       | 2.0                |       | 2.0                   |       |
| Total current liabilities                      |       | 7.0                |       | 7.1                   |       |
| Deferred income taxes                          |       | 0.1                |       | 0.1                   |       |
| Other liabilities                              |       | 0.8                |       | 0.8                   |       |
| Total liabilities                              |       | $                  | 7.9        |                  | $          | 8.0 |   |

 

**Titanium Dioxide Pigments Venture**

 

In September 2008,the Company completed the formation of a Titanium Dioxide Pigments venture withKemira Oyj (“Kemira”) that focuses on specialty titanium dioxide pigments. Theventure combines the Company’s titanium dioxide pigments and functionaladditives businesses, which are part of the Titanium Dioxide Pigments segment,including its production facility in Duisburg, Germany, and Kemira’s titaniumdioxide business, including Kemira’s titanium dioxide plant in Pori,Finland. The Company has not identified significant variable interests inthis venture and accordingly has concluded that this venture does not meet thedefinition of a variable interest entity (“VIE”). The Company owns 61% of theventure and consolidates it based on the “voting interest” model given itsmajority ownership and ability to control decision making. Kemira only hascertain “protective rights” to limit Rockwood’s control.

 

In conjunction with thisventure, there is a power plant that is legally owned and operated by a Finnishpower cooperative (“PVO”).  Kemira is acooperative participant and has an indirect interest in the power plant via ownershipof a special share class. The venture utilizes the majority of power supplied.This power plant was determined to be a VIE as the equity holders of the powerplant as a group (including Kemira) lack the ability to influence decisionmaking since PVO effectively controls the power plant. It was determined thatRockwood and Kemira jointly form the primary beneficiary of the power plant.The venture has a long-term agreement expiring in August 2018 to purchasesteam and electricity (“energy”) from Kemira. Due to the terms of thisagreement under which Kemira has the risks and benefits of the majority of theexpected life of the power plant, the Company concluded that Kemira is theparty most closely associated with the venture and therefore is the primarybeneficiary within the related party group. Accordingly, the Company does notconsolidate the power plant. The venture purchased $9.9 million and $8.0million, respectively, of energy from Kemira in the three months ended March 31,2010 and 2009, respectively. In 2009, the venture also made a contractualadvance of $16.0 million in connection with this energy agreement. Minimumannual payments under the energy agreement are approximately $16.2 million. Inconnection with this energy arrangement, the venture has approximately $28.9million of non-interest bearing notes receivable from Kemira that are due in August 2028.The carrying value of the notes receivable were $5.2 million at March 31,2010. Interest is imputed at an effective rate of 8.96%. Apart from routinepayables to Kemira or PVO in connection with this agreement, no results orbalances of the power plant are reflected in the Company’s financialstatements.

 

9

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**Other**

 

Rockwood’s SpecialtyChemicals segment has several unconsolidated ventures. Two of these ventures donot fit the criteria for classification as a VIE as they are financiallyself-sustaining, “50/50” ventures both as to control and economics. Otherventures manufacture and market products in China and an additional venture isa service provider at a key manufacturing facility. As the parties share risksand benefits disproportionate to their voting interests, the Company hasconcluded that these ventures are VIEs. However, the Company has also concludedthat it should not consolidate these VIEs as it is not the primary beneficiary.The Company does not have the power and/or ability to direct the activitiesmost affecting venture performance due to governance structure and significantexpertise provided and/or functions performed by its venture partners. As of March 31,2010, Rockwood’s aggregate net investment in these ventures was $11.0 million.This investment is classified as “Other assets” in the condensed consolidatedbalance sheet and represents Rockwood’s approximate net exposure to losses onthese investments. Rockwood does not guarantee debt or have other financialsupport obligations for these ventures.

 

**4. SEGMENT INFORMATION:**

 

Rockwood operates in fivereportable segments according to the nature and economic characteristics of itsproducts and services as well as the manner in which the information is usedinternally by the Company’s key decision maker, who is the Company’s ChiefExecutive Officer. The five segments are: (1) Specialty Chemicals, whichconsists of the surface treatment and fine chemicals business lines; (2) PerformanceAdditives, which consists of color pigments and services, timber treatmentchemicals and clay-based additives; (3) Titanium Dioxide Pigments; (4) AdvancedCeramics; and (5) Specialty Compounds.

 

Items that cannot bereadily attributed to individual segments have been classified as “Corporateand other.” Corporate and other operating loss primarily represents payroll,professional fees and other operating expenses of centralized functions such astreasury, tax, legal, internal audit and consolidation accounting as well asthe cost of operating the Company’s central offices (including some costsmaintained based on legal or tax considerations). The primary components ofCorporate and other loss, in addition to operating loss, are interest expenseon external debt (including the amortization of deferred financing costs),foreign exchange losses or gains, and mark-to-market gains or losses onderivatives. Major components within the reconciliation of income before taxes(described more fully below) include systems/organization establishmentexpenses, interest expense on external debt, foreign exchange losses or gains,and refinancing expenses related to external debt. Corporate and otheridentifiable assets primarily represent deferred financing costs that have beencapitalized in connection with corporate external debt financing, deferredincome tax assets and cash balances maintained in accordance with centralizedcash management techniques. The Corporate and other classification alsoincludes the results of operations, assets (primarily real estate) andliabilities (including pension and environmental) of legacy businesses formerlybelonging to Dynamit Nobel and the wafer reclaim business. The wafer reclaimbusiness works with semiconductor manufacturers to refurbish used test wafersand return them to the manufacturer for reuse in test and process monitorapplications.

 

Summarized financialinformation for each of the reportable segments is provided in the followingtable:

 
| ** **                                 | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **     | ** ** | ** **       | ** ** |
|--------------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|----------------|------------|------------------|------------|
| ** **                                 | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | **Corporate**  | ** ** | ** **       | ** ** |
| **($ in  millions)**                  | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **and  other** | ** ** | **Consolidated** | ** ** |
| **Three months ended March 31, 2010** |       |          |       |            |       |         |       |         |       |          |       |           |       |             |       |
| Net  sales                                 |       | $             | 289.6      |            | $          | 177.2        |       | $            | 181.1      |          | $          | 124.7          |       | $                | 59.8       |   | $ | 1.5 |   | $ | 833.9 |   |
| Total  Adjusted EBITDA                     |       | 73.8          |       | 29.5            |       | 30.7         |       | 37.0         |       | 9.1           |       | (15.1          | )          | 165.0            |       |
| **Three months ended March 31, 2009** |       |          |       |            |       |         |       |         |       |          |       |           |       |             |       |
| Net  sales                                 |       | $             | 225.3      |            | $          | 155.3        |       | $            | 139.0      |          | $          | 87.9           |       | $                | 51.1       |   | $ | 1.4 |   | $ | 660.0 |   |
| Total  Adjusted EBITDA                     |       | 50.3          |       | 20.6            |       | 21.5         |       | 17.8         |       | 7.8           |       | (8.8           | )          | 109.2            |       |

 
| ** **                  | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **     | ** ** | ** **            | ** ** | ** **       | ** ** |
|-----------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|----------------|------------|-----------------------|------------|------------------|------------|
| ** **                  | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | **Corporate**  | ** ** | ** **            | ** ** | ** **       | ** ** |
| **($ in  millions)**   | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **and  other** | ** ** | **Eliminations  (a)** | ** ** | **Consolidated** | ** ** |
| Identifiable  assets as of: |       |          |       |            |       |         |       |         |       |          |       |           |       |                  |       |             |       |
| March 31,  2010        |       | $             | 2,047.6    |            | $          | 756.7        |       | $            | 871.9      |          | $          | 829.9          |       | $                     | 133.3      |             | $          | 339.4 |   | $ | (344.6 | ) | $ | 4,634.2 |   |
| December 31,  2009     |       | 2,088.9       |       | 762.7           |       | 945.1        |       | 866.3        |       | 124.9         |       | 323.6          |       | (329.8                | )          | 4,781.7          |       |
|                             |            |               |            |                 |            |              |            |              |            |               |            |                |            |                       |            |                  |            |  |  |  |  |  |  |  |  |

 

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(a)         Amounts contained in the “Eliminations” columnrepresent the individual subsidiaries’ retained interest in their cumulativenet cash balance (deposits less withdrawals) included in the corporate centralizedcash system and within the identifiable assets of the respective segment. Theseamounts are eliminated as the corporate centralized cash system is included inthe Corporate and other segment’s identifiable assets.

 

Geographic informationregarding net sales based on seller’s location and long-lived assets aredescribed in Note 3, “Segment Information,” in the Company’s 2009 Form 10-K.

 

10

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On a segment basis, theCompany defines Adjusted EBITDA as operating income excluding depreciation andamortization, certain non-cash gains and charges, certain other special gainsand charges deemed by senior management to be non-recurring gains and chargesand certain items deemed by senior management to have little or no bearing onthe day-to-day operating performance of its business segments and reportingunits. The adjustments made to operating income directly correlate with theadjustments to net income in calculating Adjusted EBITDA on a consolidatedbasis pursuant to the Company’s senior secured credit agreement, which reflectsmanagement’s interpretations thereof. The indenture governing the seniorsubordinated notes, due in 2014 (“2014 Notes”) and the facility agreementrelated to the Titanium Dioxide Pigments venture excludes certain adjustmentspermitted under the senior credit agreement. Senior management uses AdjustedEBITDA on a segment basis as the primary measure to evaluate the ongoingperformance of the Company’s business segments and reporting units. Becausethe Company views Adjusted EBITDA on a segment basis as an operatingperformance measure, the Company uses income (loss) from continuing operationsbefore taxes as the most comparable GAAP measure.

 
| ** **                                             | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **     | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|----------------|------------|------------------|------------|
| ** **                                             | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | **Corporate**  | ** ** | ** **       | ** ** |
| **($ in  millions)**                              | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **and  other** | ** ** | **Consolidated** | ** ** |
| **Three months ended March 31, 2010**             |       |          |       |            |       |         |       |         |       |          |       |           |       |             |       |
| Income  (loss) from continuing operations before taxes |       | $             | 39.8       |            | $          | 4.6          |       | $            | 8.2        |          | $          | 16.7           |       | $                | 4.5        |   | $ | (19.6 | ) | $ | 54.2 |   |
| Interest  expense, net (a)                             |       | 16.4          |       | 7.7             |       | 4.6          |       | 8.2          |       | 2.5           |       | 2.4            |       | 41.8             |       |
| Depreciation  and amortization                         |       | 18.6          |       | 14.7            |       | 17.7         |       | 12.6         |       | 2.1           |       | 1.2            |       | 66.9             |       |
| Restructuring  and other severance costs               |       | 0.1           |       | 2.0             |       | —       |       | —       |       | —        |       | 0.1            |       | 2.2              |       |
| Systems/organization  establishment expenses           |       | 0.4           |       | 0.2             |       | 0.2          |       | 0.1          |       | —        |       | —         |       | 0.9              |       |
| Acquisition  and disposal costs                        |       | 0.1           |       | —          |       | —       |       | —       |       | —        |       | 0.1            |       | 0.2              |       |
| Foreign  exchange (gain) loss, net                     |       | (1.0          | )          | 0.1             |       | —       |       | (0.6         | )          | —        |       | 1.2            |       | (0.3             | )          |
| Other                                                  |       | (0.6          | )          | 0.2             |       | —       |       | —       |       | —        |       | (0.5           | )          | (0.9             | )          |
| Total  Adjusted EBITDA                                 |       | $             | 73.8       |            | $          | 29.5         |       | $            | 30.7       |          | $          | 37.0           |       | $                | 9.1        |   | $ | (15.1 | ) | $ | 165.0 |   |
| **Three months ended March 31, 2009**             |       |          |       |            |       |         |       |         |       |          |       |           |       |             |       |
| Income  (loss) from continuing operations before taxes |       | $             | 13.2       |            | $          | (5.4         | )          | $            | (7.4       | )             | $          | (6.8           | )          | $                | 2.8        |   | $ | (19.9 | ) | $ | (23.5 | ) |
| Interest  expense, net (a)                             |       | 14.8          |       | 7.2             |       | 9.8          |       | 8.0          |       | 2.3           |       | 7.2            |       | 49.3             |       |
| Depreciation  and amortization                         |       | 18.8          |       | 15.1            |       | 17.9         |       | 11.9         |       | 2.7           |       | 1.7            |       | 68.1             |       |
| Restructuring  and other severance costs               |       | 1.6           |       | 2.9             |       | 0.1          |       | 3.1          |       | —        |       | 0.1            |       | 7.8              |       |
| Systems/organization  establishment expenses           |       | 0.3           |       | 0.5             |       | 1.1          |       | 0.1          |       | —        |       | 0.1            |       | 2.1              |       |
| Loss  (gain) on early extinguishment of debt           |       | 0.4           |       | —          |       | —       |       | 0.3          |       | —        |       | (2.9           | )          | (2.2             | )          |
| Loss  on sale of assets and other                      |       | 0.1           |       | —          |       | —       |       | —       |       | —        |       | —         |       | 0.1              |       |
| Foreign  exchange loss, net                            |       | 0.7           |       | —          |       | —       |       | 1.2          |       | —        |       | 3.7            |       | 5.6              |       |
| Other                                                  |       | 0.4           |       | 0.3             |       | —       |       | —       |       | —        |       | 1.2            |       | 1.9              |       |
| Total  Adjusted EBITDA                                 |       | $             | 50.3       |            | $          | 20.6         |       | $            | 21.5       |          | $          | 17.8           |       | $                | 7.8        |   | $ | (8.8 | ) | $ | 109.2 |   |

 

----

(a)         Includes gains of $2.1 million and losses of $9.6million for the three months ended March 31, 2010 and 2009, respectively,representing the movement in the mark-to-market valuation of the Company’sinterest rate and cross-currency hedging instruments.

 

The summary of segmentinformation above includes “Adjusted EBITDA,” a financial measure used by theCompany’s chief decision maker and senior management to evaluate the operatingperformance of each segment.

 

*Itemsexcluded from Adjusted EBITDA*

 

Certain items are addedto or subtracted from income (loss) from continuing operations before taxes toderive Adjusted EBITDA, as defined below. These items include the following:

 

·                  *Restructuring and other severancecosts*: Restructuringand other severance costs of $2.2 million and $7.8 million were recorded in thethree months ended March 31, 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 establishmentexpenses*: Forthe three months ended March 31, 2010, expenses of $0.9 million wererecorded primarily related to costs incurred in conjunction with reorganizingcertain business functions within the Specialty Chemicals segment and theintegration of the Titanium Dioxide Pigments venture completed in September 2008. Forthe three months ended March 31, 2009, expenses of $2.1 million wererecorded related to the integration of businesses acquired, primarily relatedto the acquisition of the Elementis plc business in the Performance Additivessegment in August 2007.

 

·                  *Gain on early extinguishment of debt*: For the three months ended March 31,2009, the Company recorded a gain of $2.2

 

11

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million related to therepurchase of €12.2 million ($15.5 million based on the exchange rate in effecton the date of repurchase) of its senior subordinated notes due in 2014, andthe prepayment of €63.2 million ($85.1 million based on the exchange rate ineffect on the date of payment) and $17.2 million of its senior secured termloans related to amortization payments due between 2009 — 2011.

 

·                  *Foreign exchange (gain) loss, net*: For the three months ended March 31,2009, foreign exchange losses of $5.6 million were recorded due to the impactof the weaker Euro as of March 31, 2009 versus December 31, 2008, inconnection with non-operating Euro-denominated transactions.

 

·                  *Other*: For the three months ended March 31, 2010,the Company recorded income of $0.9 million primarily related to a gainrecorded on the sale of an investment previously accounted for under the equitymethod in the Specialty Chemicals segment and the reversal of a reservecovering legacy obligations assumed in connection with the acquisition of theDynamit Nobel businesses in 2004. For the three months ended March 31,2009, the Company recorded an expense of $1.9 million primarily related to anincrease in reserves covering two legacy obligations assumed in connection withthe acquisition of the Dynamit Nobel businesses in 2004.

 

**5. DERIVATIVES:**

 

The Company is exposed tomarket risk from changes in interest rates and foreign currency exchange rates.The Company manages its exposure to these market risks through regularoperating and financing activities and through the use of derivatives. Whenused, derivatives are employed as risk management tools and not for tradingpurposes.

 

**InterestRate Risk**

 

The Company had $1,161.9million (a portion of which is subject to a Libor or Euribor floor of 2.00%)and $1,186.9 million of variable rate debt (after hedging) outstanding as of March 31,2010 and December 31, 2009, respectively. Any borrowings under the seniorsecured revolving credit facility and the Titanium Dioxide Pigments venturerevolving credit facility are at a variable rate (with the senior securedrevolving credit facility subject to a Libor or Euribor floor of 2.00%). Therewere no outstanding borrowings under the senior secured revolving creditfacility and the Titanium Dioxide Pigments venture revolving credit facility asof March 31, 2010. Historically, the Company has entered into interestrate swaps to manage its exposure to changes in interest rates related tovariable rate debt. As of March 31, 2010 and December 31, 2009,these contracts cover notional amounts of €477.2 million (at interest rates rangingfrom 2.995% to 4.416%) and €482.2 million (at interest rates ranging from2.995% to 4.416%), respectively. These derivative contracts effectively converta portion of the senior secured credit obligations and a portion of theobligations under the Titanium Dioxide Pigments term loan facility to fixedrate obligations. These hedges will mature between December 2010 and July 2012.The Company has not applied hedge accounting for these interest rate swaps andhas recorded the mark-to-market of these derivatives as a component of interestexpense in its condensed consolidated statements of operations. The Company mayin the future consider adjusting the amounts covered by these derivativecontracts to better suit its capital structure. The Company may allow all or aportion of these swaps to lapse, enter into replacement swaps or settle theseswaps prior to expiration.

 

During 2003, theCompany entered into a cross-currency interest rate swap with a notional amountof $20.3 million that effectively converted $20.3 million U.S. dollarborrowings into Euro-based obligations at an effective interest rate of Euriborplus 4.00%. As of March 31, 2010 and December 31, 2009, the notionalamounts of this cross-currency interest rate hedge were $19.0 million and €16.7million and $19.1 million and €17.0 million, respectively. This contract had afinal maturity date of July 2010. In April 2010, the Company settledthis swap and paid $3.3 million to the counterparty. The Company has notapplied hedge accounting for this cross-currency interest rate swap and hasrecorded the mark-to-market of this derivative as a component of interestexpense in its condensed consolidated statements of operations.

 

**ForeignCurrency Risk**

 

In December 2008,the Company entered into foreign currency forward contracts to manage itsexposure to fluctuations in currency rates on certain forecasted salesdenominated in a currency other than the functional currency of the legalentity. These foreign currency forward contracts hedged the exposure tomovements in foreign exchange rates for forecasted transactions for twelvemonths, and expired in December 2009. The instruments were designatedas foreign exchange cash flow hedges and were effective at generatingoffsetting changes in the fair value or cash flows of the hedged item ortransaction. There was no gain or loss reclassified from accumulated othercomprehensive income into earnings as a result of the discontinuance of cashflow hedges because it was not probable that the original forecastedtransactions would not occur.

 

In February 2010,the Company entered into foreign currency forward contracts to manage itsexposure to fluctuations in currency rates on forecasted sales denominated in acurrency other than the functional currency of the legal entity. As of March 31,2010, the Company had notional amounts outstanding for these foreign currencyforward contracts of $4.1 million. The Company has not

 

12

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applied hedge accountingfor these foreign currency forward contracts.

 

In connection with theoffering of the 2014 Notes, the Company entered into a cross-currency interestrate swap with a five-year term which expired in November 2009 and anotional amount of €155.6 million that effectively converts the U.S. dollarfixed rate debt in respect of the 2014 dollar-denominated notes sold into Eurofixed rate debt. The Company paid $32.9 million in connection with thesettlement of this cross-currency swap in November 2009. The Companydesignated this contract as a hedge of the foreign currency exposure of its netinvestment in its Euro-denominated operations. In addition, the Company hasdesignated a portion of its Euro-denominated debt that is recorded on its U.S.books as a net investment hedge of its Euro-denominated investments (Euro debtof €103.1 million at March 31, 2010; $139.3 million). Any foreign currencygains and losses resulting from the designated portion of Euro-denominated debtdiscussed above is accounted for as a component of accumulated othercomprehensive income for as long as the hedge remains effective. There was noineffective portion of the net investment hedge as of March 31, 2010.

 

The following tableprovides the fair value and balance sheet location of the Company’s derivativeinstruments as of March 31, 2010 and December 31, 2009:

 
| ** **                                                | ** ** | ** **                                      | ** ** | **Asset  Derivatives**   | ** ** | **Liability  Derivatives**  | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                | ** ** | ** **                                      | ** ** | **Fair  Value as of**    | ** ** | **Fair  Value as of**       | ** ** |
| **(in  millions)**                                        | ** ** | **Balance  Sheet Location**                     | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
| **Derivatives designated as hedging****instruments:**     |       |                                            |       |                     |       |                        |       |   |   |   |   |
| Foreign  exchange contracts                               |       | Prepaid  expenses and other current assets      |       | $                        | 0.2        |                        | $          | — |   | $ | — |   | $ | — |   |
| Total  derivatives designated as hedging instruments      |       |                                            |       | $                        | 0.2        |                        | $          | — |   | $ | — |   | $ | — |   |
|                                                      |       |                                            |       |                     |       |                        |       |   |   |   |   |
| **Derivatives not designated as hedging****instruments:** |       |                                            |       |                     |       |                        |       |   |   |   |   |
| Interest  rate swaps                                      |       | Accrued  expenses and other current liabilities |       | $                        | —     |                        | $          | — |   | $ | 7.3 |   | $ | 8.8 |   |
|                                                      |       | Other  liabilities                              |       | —                   |       | —                      |       | 23.6 |   | 23.5 |   |
| Cross-currency  interest rate swaps                       |       | Accrued  expenses and other current liabilities |       | —                   |       | —                      |       | 3.7 |   | 5.2 |   |
| Total  derivatives not designated as hedging instruments  |       |                                            |       | $                        | —     |                        | $          | — |   | $ | 34.6 |   | $ | 37.5 |   |
| **Total derivatives**                                     |       |                                            |       | $                        | 0.2        |                        | $          | — |   | $ | 34.6 |   | $ | 37.5 |   |

 

The following tableprovides the gains and losses reported in “Other Comprehensive Income” (“OCI”)within Equity for the three months ended March 31, 2010 and 2009:

 
| ** **                                                                                   | ** ** | **Amount of Gain or (Loss) Recognized in** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                   | ** ** | **OCI on Derivatives and Other Financial** | ** ** |
| ** **                                                                                   | ** ** | **Instruments (Effective Portion)**        | ** ** |
| ** **                                                                                   | ** ** | **Three months ended March 31,**      | ** ** |
| **(in millions)**                                                                            | ** ** | **2010**                                   | ** ** | **2009** | ** ** |
| **Derivatives in Cash Flow Hedging Relationships:**                                          |       |                                       |       |   |   |
| Foreign  exchange contracts                                                                  |       | $                                          | —     |   | $ | (0.5 | ) |
|                                                                                         |       |                                       |       |   |   |
| **Derivatives and Other Financial Instruments in Net****Investment  Hedging Relationships:** |       |                                       |       |   |   |
| Cross-currency  interest rate swaps - net investment hedge                                   |       | $                                          | —     |   | $ | 10.1 |   |
| Euro-denominated  debt                                                                       |       | 8.4                                        |       | 47.4 |   |
|                                                                                         |       | $                                          | 8.4        |   | $ | 57.5 |   |

 

In the three months endedMarch 31, 2010 and 2009, no gains or losses were reclassified fromaccumulated other comprehensive income into income.

 

13

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The following tableprovides the gains and losses reported in the condensed consolidated statementsof operations for the three months ended March 31, 2010 and 2009:

 
| ** **                                               | ** ** | **Amount of Gain or (Loss)**            | ** ** | ** **                                         | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                               | ** ** | **Recognized in Income on Derivatives** | ** ** | **Location of Gain or (Loss)** | ** ** |
| ** **                                               | ** ** | **Three months ended March 31,**        | ** ** | **Recognized in Income on**         | ** ** |
| **(in millions)**                                   | ** ** | **2010**                                                    | ** ** | **2009**                                           | ** ** | **Derivatives** | ** ** |
| **Derivatives Not Designated as Hedging****Instruments** | ** ** | ** **                                                  | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Interest  rate contracts                                 |       | $                                                           | 1.0        |                                               | $          | (10.8 | ) | Interest expense |   |
| Cross-currency  interest rate swaps                      |       | 1.1                                                         |       | 1.2                                                |       | Interest expense |   |
|                                                     |       | $                                                           | 2.1        |                                               | $          | (9.6 | ) |   |   |

 

**6. FAIR VALUE MEASUREMENTS:**

 

The Company follows afair value measurement hierarchy to measure assets and liabilities. As of March 31,2010 and December 31, 2009, the assets and liabilities measured at fairvalue on a recurring basis are derivatives and marketable securities. Inaddition, the Company measures its pension plan assets at fair value (see Note15, “Employee Benefit Plans” in the Company’s 2009 Form 10-K for furtherdetails). The Company’s financial assets and liabilities are measured usinginputs from the three levels of the fair value hierarchy. The three levels areas follows:

 

Level 1 — Inputs areunadjusted quoted market prices in active markets for identical assets or liabilitiesthat the Company has the ability to access at the measurement date.

 

Level 2 — Inputs aredirectly or indirectly observable, which include quoted prices for similarassets and liabilities in active markets, quoted prices for identical orsimilar assets or liabilities in markets that are not active, inputs other thanquoted prices that are observable for the asset or liability and inputs thatare derived principally from or corroborated by observable market data bycorrelation or other means.

 

Level 3 — Inputs areunobservable inputs that are used to measure fair value to the extentobservable inputs are not available. The Company does not have anyfinancial assets or liabilities that are classified as Level 3 inputs as of March 31,2010 and December 31, 2009.

 

In accordance with thefair value hierarchy, the following table provides the fair value of theCompany’s financial assets and liabilities that are required to be measured atfair value as of March 31, 2010 and December 31, 2009:

 
| ** **                              | ** ** | **As of**               | ** ** | **Fair Value Measurements** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **(in millions)**                       | ** ** | **March 31, 2010** | ** ** | **Level 1**                 | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Assets                                  | ** ** | ** **              | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Marketable  securities (a)              |       | $                       | 232.9      |                        | $          | 232.9 |   | $ | — |   | $ | — |   |
| Foreign  exchange contracts (b)         |       | 0.2                     |       | —                      |       | 0.2 |   | — |   |
| Total  assets at fair value             |       | $                       | 233.1      |                        | $          | 232.9 |   | $ | 0.2 |   | $ | — |   |
|                                    |       |                         |       |                        |       |   |   |   |   |
| Liabilities                             | ** ** | ** **              | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest  rate swaps (b)                |       | $                       | 30.9       |                        | $          | — |   | $ | 30.9 |   | $ | — |   |
| Cross-currency  interest rate swaps (b) |       | 3.7                     |       | —                      |       | 3.7 |   | — |   |
| Total  liabilities at fair value        |       | $                       | 34.6       |                        | $          | — |   | $ | 34.6 |   | $ | — |   |

 

14

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| ** **                              | ** ** | **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)               These primarily represent money market funds with anoriginal maturity of three months or less.

 

(b)               See Note 5, “Derivatives,” for further details of theCompany’s derivative instruments.

 

The fair values ofmarketable securities are based on unadjusted quoted market prices from variousfinancial information service providers and securities exchanges. The fairvalues of derivatives are based on quoted market prices from various banks forsimilar instruments. The valuation of these instruments reflects thecontractual terms of the derivatives, including the period to maturity, anduses observable market-based inputs, including forward curves.

 

***Counter-party risk***—****TheCompany manages counter-party risk by entering into derivative contracts withonly major financial institutions of investment grade quality and by limitingthe amount of exposure to each financial institution. The Company hasconsidered credit adjustments in its determination of the fair value of itsderivative assets and liabilities as of March 31, 2010 and December 31,2009 based on market participant assumptions. In addition, based on the creditevaluation of each counter-party institution to its derivatives as of March 31,2010 and December 31, 2009, the Company believes the carrying values to befully realizable.

 

***Debt*******—The Company estimates that its debt under the seniorsecured credit facility and Titanium Dioxide Pigments venture facilityagreement, based on current interest rates and terms, approximates fairvalue. Based on quoted market prices at March 31, 2010, the Companyestimates the fair value of its 2014 Notes approximated $543.4 million. Asof March 31, 2010, the aggregate principal carrying amount of the 2014Notes was $537.9 million.

 

***Cash and Cash Equivalents*****-**All highly liquid instruments and moneymarket funds with an original maturity of three months or less are consideredto be cash equivalents. The carrying amount approximates fair valuebecause of the short maturities of these instruments.

 

**7. INVENTORIES:**

 

Inventories are comprisedof the following:

 
| ** **               | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------|------------|--------------------|------------|-----------------------|------------|
| **($ in millions)** | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| Raw  materials           |       | $                  | 151.7      |                  | $          | 165.6 |   |
| Work-in-process          |       | 72.5               |       | 73.7                  |       |
| Finished  goods          |       | 279.7              |       | 270.7                 |       |
| Packaging  materials     |       | 7.0                |       | 7.0                   |       |
| Total                    |       | $                  | 510.9      |                  | $          | 517.0 |   |

 

15

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**8. GOODWILL:**

 

Below are goodwillbalances and activity by segment:

 
| ** **                       | ** ** | **Specialty** | ** ** | **Advanced** | ** ** | ** ** | ** ** |
|----------------------------------|------------|---------------|------------|--------------|------------|------------|------------|
| **($ in millions)**         | ** ** | **Chemicals** | ** ** | **Ceramics** | ** ** | **Total**  | ** ** |
| Balance,  December 31, 2009 |       | $             | 661.7      |         | $          | 277.5      |       | $ | 939.2 |   |
| Foreign  exchange                |       | (36.4         | )          | (16.1        | )          | (52.5      | )          |
| Balance,  March 31, 2010    |       | 625.3         |       | 261.4        |       | 886.7      |       |
|                                  |            |               |            |              |            |            |            |  |  |  |

 

**9. OTHER INTANGIBLE ASSETS:**

 

Other intangible assets,net consist of:

 
| ** **                               | ** ** | **As of March 31, 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 |       | $                             | 368.0      |                             | $          | (133.9 | ) | $ | 234.1 |   | $ | 384.3 |   | $ | (133.0 | ) | $ | 251.3 |   |
| Trade  names and trademarks              |       | 138.7                         |       | (33.8                            | )          | 104.9 |   | 146.3 |   | (33.7 | ) | 112.6 |   |
| Customer  relationships                  |       | 374.9                         |       | (121.1                           | )          | 253.8 |   | 390.1 |   | (117.7 | ) | 272.4 |   |
| Supply  agreements                       |       | 60.7                          |       | (13.3                            | )          | 47.4 |   | 62.8 |   | (12.3 | ) | 50.5 |   |
| Other                                    |       | 43.1                          |       | (26.9                            | )          | 16.2 |   | 48.8 |   | (30.9 | ) | 17.9 |   |
| Total                                    |       | $                             | 985.4      |                             | $          | (329.0 | ) | $ | 656.4 |   | $ | 1,032.3 |   | $ | (327.6 | ) | $ | 704.7 |   |

 

Amortization of otherintangible assets was $20.0 million and $19.5 million for the three monthsended March 31, 2010 and 2009, respectively.

 

Estimated amortizationexpense for each of the five succeeding fiscal years is as follows:

 
| **($ in millions)** | ** ** | **Amortization** | ** ** |
|--------------------------|------------|------------------|------------|
| **Year ended**           | ** ** | **Expense**      | ** ** |
| 2010                     |       | $                | 79.1       |   |
| 2011                     |       | 75.8             |       |
| 2012                     |       | 72.3             |       |
| 2013                     |       | 69.8             |       |
| 2014                     |       | 65.6             |       |
|                          |            |                  |            |  |

 

16

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**10. LONG-TERM DEBT**

 

Long-term debt and loanspayable are summarized as follows:

 
| ** **                                                                                               | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **($ and € in millions)**                                                                      | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| Senior  secured credit facilities:                                                                       |       |               |       |                  |       |
| Tranche  A-1 term loans (€3.8 and €4.2, respectively)                                          |       | $                  | 5.1        |                  | $          | 6.0 |   |
| Tranche  A-2 term loans (€32.8 and €36.5, respectively)                                        |       | 44.4               |       | 52.3                  |       |
| Tranche  E term loans                                                                                    |       | 138.7              |       | 139.4                 |       |
| Tranche  G term loans (€64.8 and €65.1, respectively)                                          |       | 87.5               |       | 93.2                  |       |
| Tranche  H term loans                                                                                    |       | 932.5              |       | 937.2                 |       |
| Tranche  I term loans (€193.7 and €194.7, respectively)                                        |       | 261.7              |       | 278.8                 |       |
| 2014  Notes (€250.1 and $200.0 as of March 31, 2010 and December 31,  2009)               |       | 537.9              |       | 558.2                 |       |
| Titanium  Dioxide Pigments venture term loans (€240.0)                                              |       | 324.2              |       | 343.7                 |       |
| Titanium  Dioxide Pigments venture revolving short-term loans (€10.0 as of December 31,  2009) |       | —             |       | 14.3                  |       |
| Capitalized  lease obligations (€31.2 and €31.9, respectively)                                 |       | 42.2               |       | 45.7                  |       |
| Other  loans                                                                                             |       | 56.5               |       | 59.5                  |       |
|                                                                                                     |       | 2,430.7            |       | 2,528.3               |       |
| Less  current maturities                                                                                 |       | (77.9              | )          | (94.2                 | )          |
|                                                                                                     |       | $                  | 2,352.8    |                  | $          | 2,434.1 |   |

 

**11. INCOME TAXES:**

 

The effective tax ratefor the three months ended March 31, 2010 and 2009 was 32.3% and 71.1%,respectively. The decrease in the effective tax rate from the prior year isprimarily related to the mix of domestic losses and foreign income in 2010compared to 2009. In both periods, federal taxes were zero as a result of afull valuation allowance. The domestic losses in 2010 have been significantlyreduced over 2009 resulting in a benefit in the effective tax rate for thethree months ended March 31, 2010. The difference between the effectiverate and the U.S. statutory rate of 35.0% in the three months ended March 31,2010 primarily relates to favorable foreign rate differentials. The differencebetween the effective tax rate and the U.S. statutory rate of 35.0% for thethree months ended March 31, 2009 primarily relates to a nonrecurring taxbenefit related to foreign currency changes as well as domestic tax benefitsallocated from other comprehensive income.

 

In the three months endedMarch 31, 2010, the Company decreased its worldwide valuation allowancesby $2.0 million. The decrease in the valuation allowance was due to domesticgains recorded in other comprehensive income partially offset by an increase indomestic and foreign tax losses. The change in the valuation allowance for thethree months ended March 31, 2010 increased the tax provision by $1.4million. The following table reflects the activity in the valuation allowancefor worldwide net operating losses and other deferred income tax assets:

 
| ** **                                   | ** ** | **Valuation** | ** ** |
|----------------------------------------------|------------|---------------|------------|
| **($ in millions)**                     | ** ** | **Allowance** | ** ** |
| Balance  as of December 31, 2009        |       | $             | 133.1      |   |
| Increase  as reflected in income tax expense |       | 1.4           |       |
| Other  (a)                                   |       | (3.4          | )          |
| Balance  as of March 31, 2010           |       | $             | 131.1      |   |

 

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(a)               Related to temporary differences of the mark-to-marketof the Company’s Euro-denominated debt.

 

In the three months endedMarch 31, 2010, based on the Company’s policy and review of availableinformation, including the Company’s steady-state analysis, it was determinedthat there was not sufficient positive evidence of future taxable income torelease the U.S. federal valuation allowance that has been recorded. During thethree months ended March 31, 2010, the Company’s net U.S. federal deferredtax assets and liabilities were maintained at a zero level, other than anoncurrent deferred tax liability relating to goodwill with an indefinitereversal period and a noncurrent deferred tax asset relating to a FederalAlternative Minimum Tax (“AMT”) Credit. 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.

 

17

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Unrecognized tax benefitsat March 31, 2010 were $18.2 million. The Company had accrued $8.2 millionfor interest and penalties as of March 31, 2010. The Company recognizesinterest and penalties related to unrecognized tax benefits in its income taxprovision. Of the $26.4 million, there are tax benefits of $26.0 million thatif recognized, would affect the effective tax rate, and tax benefits of $0.4million that if recognized, would result in an adjustment to other taxaccounts.

 

During the next twelvemonths, it is reasonably possible that resolution of uncertain tax liabilitiescould result in a benefit of up to $11.9 million or a cost of up to $21.4million. Audit outcomes and the timing of audit settlements are subject tosignificant uncertainty.

 

The Company is subject totaxation in the U.S., various states, and foreign jurisdictions. The Company’stax filings in major jurisdictions are open to investigation by taxauthorities; in the U.S. from 2005, in the U.K. from 2007, and in Germany from2000.

 

**12. EMPLOYEE BENEFIT PLANS:**

 

The following tablerepresents the net periodic benefit costs and related components in accordancewith the accounting guidance on compensation and retirement benefits:

 
| ** **                          | ** ** | **Three months ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **March 31,**               | ** ** |
| **($ in millions)**       | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| Service  cost                       |       | $                                | 2.0        |   | $ | 2.0 |   |
| Interest  cost                      |       | 8.6                              |       | 8.4 |   |
| Expected  return on assets          |       | (3.8                             | )          | (3.6 | ) |
| Amortization  of actuarial losses   |       | 0.6                              |       | 0.2 |   |
| Amortization  of prior service cost |       | 0.2                              |       | — |   |
| Total  pension cost                 |       | $                                | 7.6        |   | $ | 7.0 |   |

 

**13. RESTRUCTURING AND OTHER SEVERANCE COSTS:**

 

The Company recordsrestructuring liabilities that represent charges incurred in connection withconsolidations and cessations of certain of its operations, includingoperations from acquisitions, as well as headcount reduction programs. Thesecharges consist primarily of severance and facility closure costs. Severancecharges are based on various factors including the employee’s length ofservice, 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.

 

For the three monthsended March 31, 2010, the Company expensed $1.9 million of restructuringcharges, primarily representing an asset write-off in connection with theelimination of a duplicate manufacturing facility in the Performance Additivessegment.

 

For the three monthsended March 31, 2009, the Company expensed $1.4 million of restructuringcharges. The major components of the restructuring charge included $0.8 millionin the Color Pigments and Services business in the Performance Additivessegment in connection with the integration of the businesses acquired fromElementis plc and $0.4 million in the Specialty Chemicals segment.

 

“Restructuring and otherseverance costs” in the condensed consolidated statements of operations for thethree months ended March 31, 2010 and 2009 also included otherseverance-related costs of $0.3 million and $6.4 million, respectively, relatedto headcount reductions undertaken throughout the Company.

 

All restructuring actionsstill in progress as of March 31, 2010 are expected to be substantiallycomplete by the end of the year. However, payouts of certain liabilitiesresulting from these actions will take place over several years. In particular,as of March 31, 2010, restructuring liabilities of $5.5 million includes$1.8 million in the Corporate and other segment related to an unexpired leasein connection with the 2006 restructuring of the Wafer Reclaim business.Management believes that the majority of the remaining $3.7 million obligationwill be utilized in 2010. Selected information for outstanding liabilities fromrecent restructuring actions is as follows:

 

18

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| ** **                                 | ** ** | **Severance/** | ** ** | **Facility** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|----------------|------------|--------------|------------|------------|------------|
| **($ in millions)**                   | ** ** | **Relocation** | ** ** | **Closure**  | ** ** | **Total**  | ** ** |
| Liability  balance, December 31, 2009 |       | $              | 4.2        |         | $          | 3.3        |       | $ | 7.5 |   |
| Restructuring  charge in 2010 (a)          |       | —         |       | 0.1          |       | 0.1        |       |
| Utilized                                   |       | (1.2           | )          | (0.6         | )          | (1.8       | )          |
| Foreign  exchange and other                |       | (0.2           | )          | (0.1         | )          | (0.3       | )          |
| Liability  balance, March 31, 2010    |       | $              | 2.8        |         | $          | 2.7        |       | $ | 5.5 |   |

 

----

(a)                Excludes asset write-off described above.

 

Restructuring reserves bysegment are as follows:

 
| ** **               | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------|------------|--------------------|------------|-----------------------|------------|
| **($ in millions)** | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| Specialty  Chemicals     |       | $                  | 2.3        |                  | $          | 3.7 |   |
| Performance  Additives   |       | 0.4                |       | 0.7                   |       |
| Advanced  Ceramics       |       | 0.8                |       | 1.0                   |       |
| Corporate  and other     |       | 2.0                |       | 2.1                   |       |
|                     |       | $                  | 5.5        |                  | $          | 7.5 |   |

 

**14. COMMITMENTS AND CONTINGENCIES:**

 

***Legal Proceedings***—The Company is involved in various legal proceedings,including commercial, intellectual property, product liability andenvironmental matters of a nature considered normal to its business. It is theCompany’s policy to accrue for amounts related to these matters if it isprobable that a liability has been incurred and an amount can be reasonablyestimated. It is the Company’s policy to disclose such matters when there is atleast a reasonable possibility that a material loss may have been incurred.

 

**AdvertisingMatter**

 

On March 3, 2009,Osmose, Inc. (“OI”) filed an action against Viance, the joint venture inthe Timber Treatment Chemicals business, Rockwood Holdings, Inc., andcertain individuals, in the U.S. District Court, Northern District of Georgia,claiming that recent advertisements by Viance comparing its ACQ product and OI’sMCQ product were false and misleading in violation of the Lanham Act,constituted unfair competition, violated the Georgia Deceptive Trade PracticesAct, were defamatory and that Viance tortiously interfered with OI’s businessrelationships. OI is seeking damages related to their attorney’s fees and costsand punitive damages. OI also sought a temporary restraining order (“TRO”) anda preliminary injunction prohibiting Viance from continuing to make certainclaims in advertisements related to their MCQ product. On March 20,2009, the district court granted Osmose’s motion for a TRO. Viance raisedcertain counterclaims related to OI’s advertisements and both parties’ claimswere heard at a recent hearing. In September 2009, the district courtissued a preliminary injunction prohibiting Viance from making certain claimsrelated to MCQ in its advertisements and denied Viance’s request for apreliminary injunction related to certain claims in Osmose’s advertisements,which Viance subsequently appealed. The U.S. Court of Appeals, Eleventh Circuithas scheduled oral arguments for May 20, 2010. The Company will continueto vigorously defend this matter. While the Company believes thedefendants have meritorious defenses against OI’s claims and does not believethat resolution of this matter will have a material adverse effect on itsbusiness 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.

 

**EC HeatStabilizers Investigation**

 

The European Commission (“EC”)has investigated possible infringement of certain antitrust regulations in themarket for heat stabilizers from 1986 until at least 2000 by certain industryparticipants, which included a business sold by a subsidiary in the SpecialtyChemicals segment in 2000. On March 23, 2009, the EC confirmed thatit commenced a proceeding against certain participants in the heat stabilizersmarket, including the business formerly owned by this subsidiary and theCompany’s subsidiary. Neither the Company nor any of its subsidiaries areactive in the market for heat stabilizers; however, the business sold in 2000was active in this market. On November 11, 2009, the EC issued itsdecision imposing fines on several companies including a fine jointly andseverally against the Company’s subsidiary and two other parties in the amountof €1.9 million, and against the Company’s subsidiary and one other party inthe amount of €1.4 million. By decision of February 8, 2010, the ECamended its decision of November 11, 2009 to apply the cap pursuantto the applicable European Council Regulation. The Company expects its portionof the fine to not exceed €1.1 million. The Company does not believe thatresolution of this matter will have a material adverse effect on

 

19

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its business, results ofoperations or financial condition.

 

**LanxessMatter**

 

On January 18, 2010,Lanxess Deutschland GmbH filed suit in the District Court of Pori, Finlandagainst Sachtleben Pigments Oy (“Sachtleben”), a subsidiary of the Company’sTitanium Dioxide Pigments venture, claiming breach of contract in connectionwith Sachtleben’s termination of a supply agreement with plaintiff. Theplaintiff is seeking up to €7.0 million in damages plus accrued interest andlegal fees. Sachtleben’s answer was filed on March 19, 2010. TheCompany believes Sachtleben has meritorious defenses against the plaintiff’sclaims, and although Sachtleben does not believe that resolution of this matterwill have a material adverse effect on its business or financial condition, theCompany cannot predict the ultimate outcome of this litigation, and the resolutionof this matter may have a material adverse effect on its results of operationsor cash flows in any quarterly or annual reporting period.

 

**FormerGlass Sealants Business**

 

A subsidiary in theSpecialty Chemicals segment that formerly manufactured sealants for insulatingglass and resins for laminated glass prior to and after the sale of thisbusiness has been named as a defendant in several lawsuits relating to allegednegligent manufacturing of those products. Pursuant to the sale and purchaseagreement with respect to the divested “glass” business, this subsidiary may berequired to pay indemnity claims related to these lawsuits. Although theCompany expects its subsidiary to have coverage under its product liabilityinsurance policies should damages ultimately be awarded or agreed to, in suchan event, its insurance may not cover such claims and, if not, its subsidiarymay not have sufficient cash flow to pay these claims. Although the Companydoes not believe that resolution of these matters will have a material adverseeffect on its business or financial condition, the Company cannot predict theultimate outcome of these claims, and the resolution of one or more of theseclaims may have a material adverse effect on its results of operations or cashflows in any quarterly or annual reporting period.

 

**OtherMatters**

 

Although the Companyexpects to continue to pay legal fees in connection with the above matters andother legal actions such as chromated copper arsenate and other productliability matters, based on currently available facts, the Company does notbelieve that any other individual action will have a material adverse effect onthe financial condition, results of operations or liquidity of the Company.

 

Reserves in connectionwith product liability matters do not individually exceed $1.0 million and inthe aggregate $2.9 million as of March 31, 2010. The Company’s reserveestimates are based on available facts, including damage claims and input fromits internal and external legal counsel, past experience, and, in someinstances where defense costs are being paid by its insurer, known insurancerecoveries. The Company is unable to estimate the amount or range of anypotential incremental charges should facts and circumstances change and may in thefuture 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 inconnection with certain matters related to acquired businesses. Althoughthe Company has no reason to believe that the financial condition of thoseparties who may have indemnification obligations to the Company is other thansound, in the event the Company seeks indemnity under any of these agreementsor through other means, there can be no assurance that any party who may haveobligations to indemnify the Company will adhere to their obligations and theCompany may have to resort to legal action to enforce its rights under theindemnities. For example, the Company has made several claims against Kemirarelated to the Titanium Dioxide Pigments venture. Although the Company cannotpredict the likelihood of recoverability of such claims from Kemira , theCompany does not expect the recovery of such claims to have a material impacton its results of operations or cash flows. In cases where the Company’sindemnification claims to such third parties are uncontested, the Companyexpects to realize recoveries within the short term.

 

In addition, the Companymay be subject to indemnity claims relating to properties or businesses itdivested. The Company has agreed to indemnify the buyer of its formerElectronics 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.

 

In the opinion ofmanagement, and based upon information currently available, the ultimateresolution of any indemnification obligations owed to the Company or by theCompany 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.

 

20

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

 

**General**

 

The Company is subject toextensive environmental, health and safety laws in the United States, theEuropean Union (“EU”) and elsewhere at the international, national, state, andlocal levels. Many of these laws impose requirements relating to clean up ofcontamination, and impose liability in the event of damage to human beings,natural resources or property, and provide for substantial fines, injunctionsand potential criminal sanctions for violations. The products, including theraw materials handled, are also subject to rigorous industrial hygieneregulations and investigation. The nature of the Company’s operations exposesit to risks of liability for breaches of these laws and regulations as a resultof the production, storage, transportation and sale of materials that can causecontamination or personal injury when released into the environment.Environmental laws are subject to change and have tended to become stricterover time. Such changes in environmental laws, or the enactment of new environmentallaws, could result in materially increased capital, operating and compliancecosts.

 

**Safety,Health and Environmental Management Systems**

 

The Company is committedto achieving and maintaining compliance with all applicable safety, health andenvironmental (“SHE”) legal requirements. The Company’s subsidiaries havedeveloped policies and management systems that are intended to identify the SHElegal requirements applicable to their operations, enhance compliance with suchrequirements, ensure the safety of the Company’s employees, contractors,community neighbors and customers and minimize the production and emission ofwastes and other pollutants. Although SHE legal requirements are constantlychanging, these SHE management systems are designed to assist the Company inmeeting its compliance goals and minimizing overall risk.

 

**SHECapital Expenditures**

 

The Company may incurfuture costs for capital improvements and general compliance under SHE laws.For the year ended December 31, 2009, the capital expenditures for SHEmatters totaled $17.9 million, excluding costs to maintain and repair pollutioncontrol equipment. For 2010, the Company estimates capital expenditures forcompliance with SHE laws to be at similar levels; however, because capitalexpenditures for these matters are subject to changes in existing and new SHElaws, the Company cannot provide assurance that its recent expenditures will beindicative of future amounts required to comply with these laws.

 

**RegulatoryDevelopments**

 

Greenhouse gases haveincreasingly become the subject of international, national, state and localattention. On September 22, 2009, the Environmental Protection Agency(“EPA”) passed its final greenhouse gas monitoring and reporting rule thatrequires certain facilities in the U.S. to measure their greenhouse gasesbeginning January 1, 2010 and begin reporting these measurements on March 31,2011. Currently, the Company believes that this rule will affect fourof its facilities. The Company does not believe, based upon currentlyavailable information, that this rule will have a material impact on itsresults of operations. However, further legislation of greenhouse gasesand carbon dioxide has been proposed in the U.S., U.K. and otherjurisdictions. Any such laws may directly and indirectly have a materialadverse impact on our results of operations, such as through higher costs forenergy and certain raw materials and additional capital expenditures to complywith such laws.

 

On June 1, 2007, theRegistration, Evaluation and Authorization of Chemicals (“REACH”) legislationbecame effective in the EU. REACH requires manufacturers and importers ofcertain chemicals to register those chemicals, perform health and environmentalrisk analyses of those chemicals, and in certain instances, obtainauthorizations 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 with REACH,which included the pre-registration of its products. The Company does notbelieve these costs will have a material impact on its results of operations,financial position or liquidity. In addition, it is possible that REACH mayaffect raw material supply, customer demand for certain products and theCompany’s decision to continue to manufacture and sell certain products.

 

The Company is alsosubject to the Homeland Security Agency’s regulations, which address chemicalplant safety, the Kyoto Protocol, which relates to the emission of greenhousegases and the European Union Integrated Pollution Prevention and ControlDirective, which relates to environmental permitting programs for individualfacilities.  In addition, legislation was recently introduced in Congressseeking to reform the Toxic Control Substances Act, which among other things,would require manufacturers to develop and 

 

21

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submit additional safetydata for each chemical it produces, similar to REACH. The Company does notbelieve, based upon currently available information, that these regulationswill have a material adverse impact on its results of operations, financialposition or liquidity.

 

**RemediationLiabilities**

 

Environmental laws have asignificant effect on the nature and scope of any clean-up of contamination atcurrent and former operating facilities, the costs of transportation andstorage of chemicals and finished products and the costs of the storage anddisposal of wastes. In addition, “Superfund” statutes in the United States aswell as statutes in other jurisdictions impose strict, joint and severalliability for clean-up costs on the entities that generated waste and/orarranged for its disposal at contaminated third party sites, as well as thepast and present owners and operators of contaminated sites. All responsibleparties may be required to bear some or all clean-up costs regardless of fault,legality of the original disposal or ownership of the disposal site.

 

The following tableprovides a list of the Company’s present and former facilities withenvironmental contamination for which the Company has reserved for at March 31,2010:

 
| **Country**      | ** ** | **Location**                     | ** ** | **(a)** | ** ** | **(b)** | ** ** | **(c)** | ** ** | **(d)** | ** ** | **(e)** | ** ** |
|------------------|------------|----------------------------------|------------|---------|------------|---------|------------|---------|------------|---------|------------|---------|------------|
| Brazil           |       | Diadema                          |       |    |       |    |       | 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 is currently operating groundwatermonitoring and/or remediation systems at these locations.

 

(b)               The Company is currently operating groundwatermonitoring and/or remediation systems at these locations for which prior ownersor insurers have assumed responsibility.

 

(c)                The Company is currently conducting investigationsinto additional possible soil and/or groundwater contamination at theselocations.

 

(d)               The Company has land restoration obligations relatingto landfill activities or surface mining at these locations.

 

(e)                The Company is responsible for liabilities related toenvironmental matters at these closed facilities.

 

22

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The Company is alsoresponsible for environmental matters at some of its former off-site disposallocations owned by third parties. These sites are considered Superfund sites asdefined by the EPA or state regulatory authority. The Company is a potentiallyresponsible party or*de minimis*participant at the following Superfund locations: Casmalia, CA; Laurel, MD;Niagara Falls, NY; South Gate, CA; and Whittier, CA and has reserves for thesematters totaling $0.1 million at March 31, 2010. In addition, the Germanauthorities have ordered the Company to investigate and, depending on theresults, potentially remediate a portion of a former site in Liebenau, Germany.The Company is currently in the process of gathering additional informationregarding the site and cannot predict the potential scope of any suchremediation.

 

Although the Companycannot provide assurances in this regard, the Company does not believe thatthese issues will have a material adverse effect on its business or financialcondition, but may have a material adverse effect on the results of operationsor 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***

 

The Company hasestablished financial reserves relating to anticipated environmental cleanupobligations, site reclamation and remediation and closure costs, which arereviewed at least quarterly based on currently available information. Liabilitiesare recorded when potential liabilities are either known or believed to beprobable and can be reasonably estimated. In the event that the Companyestablishes a financial reserve in connection with site remediation costs, theCompany records a reserve for the estimated cost of the remediation, eventhough the costs of the remediation will likely be spread out over many years.The Company does not include unasserted claims in its reserves.

 

The Company’s liabilityestimates are based upon available facts, existing technology, indemnities fromthird parties, past experience and, in some instances, insurance recoverieswhere the remediation costs are being paid by its insurers, and are generatedby several means, including State-mandated schedules, environmental consultantsand internal experts, depending on the circumstances. On a consolidated basis,the Company has accrued $51.7 million and $55.1 million for known environmentalliabilities as of March 31, 2010 and December 31, 2009,respectively. As of March 31, 2010 and December 31, 2009, $50.3million and $53.6 million, respectively, were classified as other non-currentliabilities in the consolidated balance sheets. Included in the $51.7million as of March 31, 2010 is $22.0 million that is discounted usingdiscount rates ranging from 5.0% to 7.5%, with the undiscounted amount of thesereserves equaling $32.3 million. Included in the $55.1 million as of December 31,2009 is $22.8 million that is discounted using discount rates ranging from 5.0%to 7.5%, with the undiscounted amount of these reserves equaling $33.5 million.In certain cases, the Company’s remediation liabilities are payable overperiods of up to 30 years. At a number of the sites described above, the extentof contamination has not yet been fully investigated or the final scope ofremediation is not yet determinable and could potentially affect the range. TheCompany estimates that the potential range for such environmental matters as ofMarch 31, 2010 is from $51.7 million to $87.4 million. For the threemonths ended March 31, 2010, the Company recorded charges of $0.4 millionto increase its environmental liabilities and made payments of $1.4 million forclean-up and remediation costs, which reduced its environmental liabilities.For the three months ended March 31, 2010, the recurring cost of managinghazardous substances for ongoing operations is $11.6 million.

 

The Company believesthese accruals are adequate based on currently available information. TheCompany may incur losses in excess of the amounts accrued; however, based oncurrently available information, it does not believe the additional amount ofpotential losses would have a material effect on its results of operations orfinancial condition, but may have a material effect on the results ofoperations or cash flows in any given quarterly or annual reporting period. TheCompany does not believe that any known individual environmental matter wouldhave a material effect on its results of operations or financial condition. TheCompany is unable to estimate the amount or range of any potential incrementalcharges should facts and circumstances change and may in the future revise itsestimates based on new information becoming available.

 

The Company is obligatedto undertake soil remediation at two facilities in Europe in the eventmanufacturing operations are discontinued there at some future date. Inaddition, in the event that manufacturing operations are discontinued at any ofthe Company’s other facilities with known contamination, regulatory authoritiesmay impose more stringent requirements on the Company including soilremediation. The Company does not contemplate any such action occurring in theforeseeable future, as these facilities’ remaining lives are indefinite. Giventhe 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 potentialsettlement dates for its obligations. Consequently, the Company cannot employ apresent value technique to estimate fair value and, accordingly, has notaccrued for any environmental-related costs to remediate soil at thesefacilities.

 

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**15. CONSOLIDATING FINANCIAL INFORMATION:**

 

The Company issued the2014 Notes in November 2004. The following consolidating financialstatements present the results of operations, financial condition and cashflows in separate columns of the parent company (Rockwood Specialties Group, Inc.),which is the issuer of the 2014 Notes, guarantor subsidiaries, eliminationadjustments and consolidated totals.

 

**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGSTATEMENT OF OPERATIONS**

**THREEMONTHS ENDED MARCH 31, 2010**

**(Dollarsin millions)**

 
| ** **                                                               | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                               | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| Net  sales                                                               |       | $           | —     |             | $          | 174.8             |       | $                | 659.1      |   | $ | 833.9 |   |
| Cost  of products sold                                                   |       | —      |       | 125.4            |       | 441.8             |       | 567.2            |       |
| Gross  profit                                                            |       | —      |       | 49.4             |       | 217.3             |       | 266.7            |       |
| Selling,  general and administrative expenses                            |       | —      |       | 42.5             |       | 126.8             |       | 169.3            |       |
| Restructuring  and other severance costs                                 |       | —      |       | —           |       | 2.2               |       | 2.2              |       |
| Operating  income                                                        |       | —      |       | 6.9              |       | 88.3              |       | 95.2             |       |
| Other  income (expenses), net:                                           |       |        |       |             |       |              |       |             |       |
| Intergroup  interest, net                                                |       | 39.7        |       | (14.1            | )          | (25.6             | )          | —           |       |
| Interest  expense, net                                                   |       | (35.3       | )          | (0.5             | )          | (6.0              | )          | (41.8            | )          |
| Intergroup  other, net                                                   |       | —      |       | 4.4              |       | (4.4              | )          | —           |       |
| Foreign  exchange gain (loss), net                                       |       | 1.4         |       | (0.3             | )          | (0.8              | )          | 0.3              |       |
| Other,  net                                                              |       | —      |       | —           |       | 0.5               |       | 0.5              |       |
| Other  income (expenses), net                                            |       | 5.8         |       | (10.5            | )          | (36.3             | )          | (41.0            | )          |
| Income  (loss) from continuing operations before taxes                   |       | 5.8         |       | (3.6             | )          | 52.0              |       | 54.2             |       |
| Income  tax provision                                                    |       | 0.2         |       | 1.9              |       | 15.4              |       | 17.5             |       |
| Net  income (loss)                                                       |       | 5.6         |       | (5.5             | )          | 36.6              |       | 36.7             |       |
| Net  loss attributable to the noncontrolling interest                    |       | —      |       | —           |       | 0.2               |       | 0.2              |       |
| Net  income (loss) attributable to Rockwood Specialties Group, Inc. |       | $           | 5.6        |             | $          | (5.5              | )          | $                | 36.8       |   | $ | 36.9 |   |

 

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATING STATEMENT OF OPERATIONS**

**THREEMONTHS ENDED MARCH 31, 2009**

**(Dollarsin millions)**

 
| ** **                                                               | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                               | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| Net  sales                                                               |       | $           | —     |             | $          | 156.5             |       | $                | 503.5      |   | $ | 660.0 |   |
| Cost  of products sold                                                   |       | —      |       | 118.4            |       | 359.5             |       | 477.9            |       |
| Gross  profit                                                            |       | —      |       | 38.1             |       | 144.0             |       | 182.1            |       |
| Selling,  general and administrative expenses                            |       | —      |       | 33.7             |       | 111.4             |       | 145.1            |       |
| Restructuring  and other severance costs                                 |       | —      |       | 1.8              |       | 6.0               |       | 7.8              |       |
| Loss  on sale of assets                                                  |       | —      |       | 0.1              |       | —            |       | 0.1              |       |
| Operating  income                                                        |       | —      |       | 2.5              |       | 26.6              |       | 29.1             |       |
| Other  income (expenses), net:                                           |       |        |       |             |       |              |       |             |       |
| Intergroup  interest, net                                                |       | 25.6        |       | (11.4            | )          | (14.2             | )          | —           |       |
| Interest  expense, net                                                   |       | (36.0       | )          | (0.6             | )          | (12.7             | )          | (49.3            | )          |
| Intergroup  other, net                                                   |       | 155.2       |       | (150.9           | )          | (4.3              | )          | —           |       |
| Gain  (loss) on early extinguishment of debt                             |       | 3.5         |       | (0.1             | )          | (1.2              | )          | 2.2              |       |
| Foreign  exchange (loss) gain, net                                       |       | (7.6        | )          | (0.1             | )          | 2.1               |       | (5.6             | )          |
| Other,  net                                                              |       | (0.3        | )          | 0.3              |       | 0.1               |       | 0.1              |       |
| Other  income (expenses), net                                            |       | 140.4       |       | (162.8           | )          | (30.2             | )          | (52.6            | )          |
| Income  (loss) from continuing operations before taxes                   |       | 140.4       |       | (160.3           | )          | (3.6              | )          | (23.5            | )          |
| Income  tax (benefit) provision                                          |       | (7.9        | )          | 2.1              |       | (10.9             | )          | (16.7            | )          |
| Income  (loss) from continuing operations                                |       | 148.3       |       | (162.4           | )          | 7.3               |       | (6.8             | )          |
| Income  from discontinued operations, net of tax                         |       | 0.1         |       | 0.1              |       | 2.1               |       | 2.3              |       |
| Net  income (loss)                                                       |       | 148.4       |       | (162.3           | )          | 9.4               |       | (4.5             | )          |
| Net  loss attributable to the noncontrolling interest                    |       | —      |       | —           |       | 3.0               |       | 3.0              |       |
| Net  income (loss) attributable to Rockwood Specialties Group, Inc. |       | $           | 148.4      |             | $          | (162.3            | )          | $                | 12.4       |   | $ | (1.5 | ) |

 

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGBALANCE SHEET**

**MARCH 31,2010**

**(Dollarsin millions)**

 
| ** **                                                             | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                                             | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                                             |       |        |       |             |       |              |       |             |       |             |       |
| Current  assets:                                                       |       |        |       |             |       |              |       |             |       |             |       |
| Cash  and cash equivalents                                             |       | $           | 44.3       |             | $          | 5.8               |       | $                | 259.3      |             | $          | — |   | $ | 309.4 |   |
| Accounts  receivable, net                                              |       | —      |       | 98.8             |       | 397.3             |       | —           |       | 496.1            |       |
| Inventories                                                            |       | —      |       | 110.6            |       | 400.3             |       | —           |       | 510.9            |       |
| Deferred  income taxes                                                 |       | (4.0        | )          | 8.8              |       | 9.0               |       | —           |       | 13.8             |       |
| Prepaid  expenses and other current assets                             |       | 0.1         |       | 12.0             |       | 52.2              |       | —           |       | 64.3             |       |
| Total  current assets                                                  |       | 40.4        |       | 236.0            |       | 1,118.1           |       | —           |       | 1,394.5          |       |
| Property,  plant and equipment, net                                    |       | —      |       | 267.9            |       | 1,344.5           |       | —           |       | 1,612.4          |       |
| Investment  in subsidiary                                              |       | 1,045.8     |       | 91.0             |       | —            |       | (1,136.8         | )          | —           |       |
| Goodwill                                                               |       | —      |       | 17.1             |       | 869.6             |       | —           |       | 886.7            |       |
| Intergroup  receivable                                                 |       | 2,438.7     |       | 194.6            |       | 4,243.7           |       | (6,877.0         | )          | —           |       |
| Other  intangible assets, net                                          |       | —      |       | 91.0             |       | 565.4             |       | —           |       | 656.4            |       |
| Deferred  debt issuance costs, net                                     |       | 1.2         |       | 5.6              |       | 16.6              |       | —           |       | 23.4             |       |
| Deferred  income taxes                                                 |       | 6.8         |       | 0.9              |       | 15.5              |       | —           |       | 23.2             |       |
| Other  assets                                                          |       | —      |       | 1.1              |       | 36.5              |       | —           |       | 37.6             |       |
| Total  assets                                                          |       | $           | 3,532.9    |             | $          | 905.2             |       | $                | 8,209.9    |             | $          | (8,013.8 | ) | $ | 4,634.2 |   |
| **LIABILITIES**                                                        |       |        |       |             |       |              |       |             |       |             |       |
| Current  liabilities:                                                  |       |        |       |             |       |              |       |             |       |             |       |
| Accounts  payable                                                      |       | $           | —     |             | $          | 46.4              |       | $                | 169.1      |             | $          | — |   | $ | 215.5 |   |
| Income  taxes payable                                                  |       | —      |       | (0.3             | )          | 14.1              |       | —           |       | 13.8             |       |
| Accrued  compensation                                                  |       | —      |       | 24.0             |       | 65.3              |       | —           |       | 89.3             |       |
| Accrued  expenses and other current liabilities                        |       | 31.8        |       | 28.1             |       | 137.2             |       | —           |       | 197.1            |       |
| Deferred  income taxes                                                 |       | —      |       | —           |       | 2.4               |       | —           |       | 2.4              |       |
| Long-term  debt, current portion                                       |       | 15.6        |       | —           |       | 62.3              |       | —           |       | 77.9             |       |
| Total  current liabilities                                             |       | 47.4        |       | 98.2             |       | 450.4             |       | —           |       | 596.0            |       |
| Long-term  debt                                                        |       | 1,947.7     |       | —           |       | 405.1             |       | —           |       | 2,352.8          |       |
| Pension  and related liabilities                                       |       | —      |       | 26.5             |       | 363.1             |       | —           |       | 389.6            |       |
| Intergroup  payable                                                    |       | 78.9        |       | 1,220.5          |       | 5,577.6           |       | (6,877.0         | )          | —           |       |
| Deferred  income taxes                                                 |       | —      |       | 7.5              |       | 65.2              |       | —           |       | 72.7             |       |
| Other  liabilities                                                     |       | 35.4        |       | 24.1             |       | 76.9              |       | —           |       | 136.4            |       |
| Total  liabilities                                                     |       | 2,109.4     |       | 1,376.8          |       | 6,938.3           |       | (6,877.0         | )          | 3,547.5          |       |
| **EQUITY**                                                             |       |        |       |             |       |              |       |             |       |             |       |
| Rockwood  Specialties Group, Inc. stockholder’s equity:      |       |        |       |             |       |              |       |             |       |             |       |
| Common  stock                                                          |       | —      |       | 190.6            |       | 164.7             |       | (355.3           | )          | —           |       |
| Paid-in  capital                                                       |       | 1,044.0     |       | 185.0            |       | 596.5             |       | (781.5           | )          | 1,044.0          |       |
| Accumulated  other comprehensive income                                |       | 45.3        |       | 12.0             |       | 85.4              |       | —           |       | 142.7            |       |
| Retained  earnings (deficit)                                           |       | 334.2       |       | (859.2           | )          | 142.4             |       | —           |       | (382.6           | )          |
| Total  Rockwood Specialties Group, Inc. stockholder’s equity |       | 1,423.5     |       | (471.6           | )          | 989.0             |       | (1,136.8         | )          | 804.1            |       |
| Noncontrolling  interest                                               |       | —      |       | —           |       | 282.6             |       | —           |       | 282.6            |       |
| Total  equity                                                          |       | 1,423.5     |       | (471.6           | )          | 1,271.6           |       | (1,136.8         | )          | 1,086.7          |       |
| Total  liabilities and equity                                          |       | $           | 3,532.9    |             | $          | 905.2             |       | $                | 8,209.9    |             | $          | (8,013.8 | ) | $ | 4,634.2 |   |

 

26

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATING BALANCE SHEET**

**DECEMBER31, 2009**

**(Dollarsin millions)**

 
| ** **                                                             | ** ** | **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 |   |

 

27

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGSTATEMENT OF CASH FLOWS**

**THREEMONTHS ENDED MARCH 31, 2010**

**(Dollarsin millions)**

 
| ** **                                                                                               | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                               | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                                |       |        |       |             |       |              |       |             |       |
| Net  income (loss)                                                                                       |       | $           | 5.6        |             | $          | (5.5              | )          | $                | 36.6       |   | $ | 36.7 |   |
| Adjustments  to reconcile net income (loss) to net cash provided by (used in) operating  activities:     |       |        |       |             |       |              |       |             |       |
| Depreciation  and amortization                                                                           |       | —      |       | 13.0             |       | 53.9              |       | 66.9             |       |
| Deferred  financing costs amortization                                                                   |       | 0.1         |       | 0.3              |       | 1.2               |       | 1.6              |       |
| Foreign  exchange (gain) loss                                                                            |       | (1.4        | )          | 0.3              |       | 0.8               |       | (0.3             | )          |
| Fair  value adjustment of derivatives                                                                    |       | —      |       | —           |       | (2.1              | )          | (2.1             | )          |
| Bad  debt provision                                                                                      |       | —      |       | —           |       | (0.4              | )          | (0.4             | )          |
| Stock-based  compensation                                                                                |       | —      |       | 1.8              |       | 0.8               |       | 2.6              |       |
| Deferred  income taxes                                                                                   |       | —      |       | 1.7              |       | 3.6               |       | 5.3              |       |
| Restructuring  and other                                                                                 |       | —      |       | —           |       | 1.8               |       | 1.8              |       |
| Changes  in assets and liabilities, net of the effect of foreign currency translation  and acquisitions: |       |        |       |             |       |              |       |             |       |
| Accounts  receivable                                                                                     |       | —      |       | (22.5            | )          | (40.3             | )          | (62.8            | )          |
| Inventories                                                                                              |       | —      |       | (3.5             | )          | (9.3              | )          | (12.8            | )          |
| Prepaid  expenses and other assets                                                                       |       | —      |       | 8.0              |       | (9.9              | )          | (1.9             | )          |
| Accounts  payable                                                                                        |       | —      |       | 7.1              |       | (11.9             | )          | (4.8             | )          |
| Income  taxes payable                                                                                    |       | 0.2         |       | 0.3              |       | 2.8               |       | 3.3              |       |
| Accrued  expenses and other liabilities                                                                  |       | 9.4         |       | 4.3              |       | 22.1              |       | 35.8             |       |
| Intercompany  operating activities, net                                                                  |       | (1.9        | )          | (4.1             | )          | 6.0               |       | —           |       |
| **Net cash provided by operating activities**                                                            |       | 12.0        |       | 1.2              |       | 55.7              |       | 68.9             |       |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                                |       |        |       |             |       |              |       |             |       |
| Acquisitions,  including transaction fees paid, net of cash acquired                                     |       | —      |       | —           |       | (1.2              | )          | (1.2             | )          |
| Capital  expenditures, excluding capital leases                                                          |       | —      |       | (3.8             | )          | (31.4             | )          | (35.2            | )          |
| Proceeds  on sale of assets                                                                              |       | —      |       | —           |       | 0.1               |       | 0.1              |       |
| **Net cash used in investing activities**                                                                |       | —      |       | (3.8             | )          | (32.5             | )          | (36.3            | )          |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                                |       |        |       |             |       |              |       |             |       |
| Repayment  of Titanium Dioxide Pigments revolving credit facility                                        |       | —      |       | —           |       | (14.3             | )          | (14.3            | )          |
| Repayment  of senior secured debt                                                                        |       | (7.8        | )          | —           |       | (5.1              | )          | (12.9            | )          |
| Payments  on other long-term debt                                                                        |       | —      |       | —           |       | (1.1              | )          | (1.1             | )          |
| Deferred  financing costs                                                                                |       | (0.3        | )          | —           |       | —            |       | (0.3             | )          |
| Intercompany  financing related activity                                                                 |       | 20.7        |       | (31.6            | )          | 10.9              |       | —           |       |
| **Net cash provided by (used in) financing activities**                                                  |       | 12.6        |       | (31.6            | )          | (9.6              | )          | (28.6            | )          |
| Effect  of exchange rate changes on cash and cash equivalents                                            |       | (0.1        | )          | (0.3             | )          | 5.3               |       | 4.9              |       |
| Net  decrease in cash and cash equivalents                                                               |       | 24.5        |       | (34.5            | )          | 18.9              |       | 8.9              |       |
| Cash  and cash equivalents, beginning of period                                                          |       | 19.8        |       | 40.3             |       | 240.4             |       | 300.5            |       |
| Cash  and cash equivalents, end of period                                                                |       | $           | 44.3       |             | $          | 5.8               |       | $                | 259.3      |   | $ | 309.4 |   |

 

28

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATING STATEMENT OF CASH FLOWS**

**THREEMONTHS ENDED MARCH 31, 2009**

**(Dollarsin millions)**

 
| ** **                                                                                                | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                                | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                                 |       |        |       |             |       |              |       |             |       |
| Net  income (loss)                                                                                        |       | $           | 148.4      |             | $          | (162.3            | )          | $                | 9.4        |   | $ | (4.5 | ) |
| Adjustments  to reconcile net income (loss) to net cash provided by (used in) operating  activities:      |       |        |       |             |       |              |       |             |       |
| Income  from discontinued operations, net of tax                                                          |       | (0.1        | )          | (0.1             | )          | (2.1              | )          | (2.3             | )          |
| Depreciation  and amortization                                                                            |       | —      |       | 13.8             |       | 54.3              |       | 68.1             |       |
| Deferred  financing costs amortization                                                                    |       | 0.1         |       | 0.2              |       | 2.1               |       | 2.4              |       |
| Gain  on early extinguishment of debt                                                                     |       | (3.5        | )          | 0.1              |       | 1.2               |       | (2.2             | )          |
| Foreign  exchange loss (gain)                                                                             |       | 7.6         |       | 0.1              |       | (2.1              | )          | 5.6              |       |
| Fair  value adjustment of derivatives                                                                     |       | 6.6         |       | —           |       | 3.0               |       | 9.6              |       |
| Bad  debt provision                                                                                       |       | —      |       | 0.4              |       | (0.4              | )          | —           |       |
| Stock-based  compensation                                                                                 |       | —      |       | 0.7              |       | 0.1               |       | 0.8              |       |
| Deferred  income taxes                                                                                    |       | (8.1        | )          | 2.1              |       | (16.5             | )          | (22.5            | )          |
| Loss  on sale of assets and other                                                                         |       | —      |       | 0.1              |       | —            |       | 0.1              |       |
| Changes  in assets and liabilities, net of the effect of foreign currency translation  and acquisitions:  |       |        |       |             |       |              |       |             |       |
| Accounts  receivable                                                                                      |       | —      |       | 2.1              |       | 20.1              |       | 22.2             |       |
| Inventories                                                                                               |       | —      |       | 3.8              |       | 11.9              |       | 15.7             |       |
| Prepaid  expenses and other assets                                                                        |       | 0.2         |       | 4.2              |       | 5.3               |       | 9.7              |       |
| Accounts  payable                                                                                         |       | —      |       | (2.4             | )          | (34.8             | )          | (37.2            | )          |
| Income  taxes payable                                                                                     |       | 0.8         |       | (0.4             | )          | (0.9              | )          | (0.5             | )          |
| Accrued  expenses and other liabilities                                                                   |       | 37.8        |       | (49.7            | )          | (8.6              | )          | (20.5            | )          |
| Intercompany  operating activities, net                                                                   |       | 214.2       |       | (170.5           | )          | (43.7             | )          | —           |       |
| **Net cash provided by (used in) operating activities**                                                   |       | 404.0       |       | (357.8           | )          | (1.7              | )          | 44.5             |       |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                                 |       |        |       |             |       |              |       |             |       |
| Acquisitions,  including transaction fees paid and payments for prior acquisitions, net of  cash acquired |       | —      |       | —           |       | (0.7              | )          | (0.7             | )          |
| Capital  expenditures, excluding capital leases                                                           |       | —      |       | (8.0             | )          | (36.3             | )          | (44.3            | )          |
| Contractual  advance to Titanium Dioxide Pigments venture noncontrolling shareholder                      |       | —      |       | —           |       | (1.3              | )          | (1.3             | )          |
| Proceeds  on sale of assets                                                                               |       | —      |       | 2.0              |       | 0.1               |       | 2.1              |       |
| Net  cash used in investing activities of continuing operations                                           |       | —      |       | (6.0             | )          | (38.2             | )          | (44.2            | )          |
| Net  cash used in investing activities of discontinued operations                                         |       | —      |       | (0.4             | )          | —            |       | (0.4             | )          |
| **Net cash used in investing activities**                                                                 |       | —      |       | (6.4             | )          | (38.2             | )          | (44.6            | )          |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                                 |       |        |       |             |       |              |       |             |       |
| Prepayment  of 2014 Notes                                                                                 |       | (11.9       | )          | —           |       | —            |       | (11.9            | )          |
| Prepayment  of senior secured credit debt                                                                 |       | (40.8       | )          | —           |       | (61.5             | )          | (102.3           | )          |
| Repayment  of senior secured credit debt                                                                  |       | (11.9       | )          | —           |       | (17.9             | )          | (29.8            | )          |
| Payments  on other long-term debt                                                                         |       | —      |       | —           |       | (2.6              | )          | (2.6             | )          |
| Loan  from Viance noncontrolling shareholder                                                              |       | —      |       | —           |       | 2.0               |       | 2.0              |       |
| Intercompany  financing related activity                                                                  |       | (462.6      | )          | 357.2            |       | 105.4             |       | —           |       |
| **Net cash (used in) provided by financing activities**                                                   |       | (527.2      | )          | 357.2            |       | 25.4              |       | (144.6           | )          |
| Effect  of exchange rate changes on cash and cash equivalents                                             |       | (0.2        | )          | (0.2             | )          | (1.8              | )          | (2.2             | )          |
| Net  decrease in cash and cash equivalents                                                                |       | (123.4      | )          | (7.2             | )          | (16.3             | )          | (146.9           | )          |
| 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                                        |       | $           | 149.3      |             | $          | 4.3               |       | $                | 168.2      |   | $ | 321.8 |   |

 

29

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**Item2.     Management’s Discussion and Analysis of FinancialCondition and Results of Operations.**

 

*Thefollowing discussion contains forward-looking statements that involve numerousrisks and uncertainties. Our actual results could differ materially from thosediscussed in the forward-looking statements as a result of these risks anduncertainties, including those set forth in “Forward-Looking Statements” at theend of this Management Discussion and Analysis section and the risk factorssection of the Company’s 2009 Form 10-K. You should read the followingdiscussion and analysis together with our condensed consolidated financialstatements and the notes to those statements that appear elsewhere in thisQuarterly Report. Amounts may not recalculate due to rounding differences.*

 

*Unlessotherwise noted, all balance sheet related items which are denominated in Eurosare converted at the March 31, 2010 exchange rate of €1.00 = $1.351.*

 

**General**

 

We are a globaldeveloper, manufacturer and marketer of technologically advanced, highvalue-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) PerformanceAdditives; (3) Titanium Dioxide Pigments; (4) Advanced Ceramics; and (5) SpecialtyCompounds.

 

Our net sales consist ofsales of our products, net of sales discounts, and product returns andallowances. In addition, net sales include shipping and handling costs billedto customers. Sales are primarily made on a purchase order basis.

 

Our cost of products soldconsists of variable and fixed components. Our variable costs are proportionalto volume and consist principally of raw materials, packaging and relatedsupplies, certain energy costs, and certain distribution costs includinginbound, outbound, and internal shipping and transfer costs. Our fixed costsare not significantly impacted by production volume and consist principally ofcertain fixed manufacturing costs and other distribution network costs,including warehousing. Fixed manufacturing costs comprise headcount-relatedcosts and overhead, including depreciation, periodic maintenance costs,purchasing and receiving costs, inspection costs and certain energy costs.

 

Our selling, general andadministrative expenses include research and development costs, sales andmarketing, divisional management expenses and corporate services including cashmanagement, legal, benefit plan administration and other administrative andprofessional services.

 

We are focused on growth,productivity, cost reduction, margin expansion, bolt-on acquisitions,divestment of non-core businesses and debt reduction. In connection with thisfocus, among other things:

 

·            In the first half of 2009, we repurchased a portion ofour Euro-denominated senior subordinated notes due in 2014, voluntarily prepaida portion of our senior secured term loans and amended our senior securedcredit agreement; and

 

·            We reduced overhead and eliminated duplicativepositions throughout the Company as part of our global cost controlinitiatives, and we remain focused on reducing costs, improving productivity,and conserving cash by controlling working capital and capital spending.

 

**FactorsWhich Affect Our Results of Operations**

 

**OurMarkets**

 

Because the businesses inour segments generally serve many unrelated end-use markets, we discuss theprincipal market conditions on a segment basis rather than a consolidatedbasis. The principal market conditions in our segments and regions inwhich we operate that impacted our results of operations during the periodspresented include the following:

 

***Specialty Chemicals***

 

·            Demand for Surface Treatment products in our SpecialtyChemicals segment generally follows the activity levels of metal processingmanufacturers, including the automotive supply, steel and aerospace industries.In 2009, results declined on lower volumes in most businesses, partially offsetby increased selling prices. In the first quarter of 2010, results were up fromhigher volumes in all markets. Sales growth is expected to continue throughoutthe remainder of 2010 primarily from higher volumes across most markets.

 

·            Demand for our lithium carbonate products in the FineChemicals business line of our Specialty Chemicals segment is 

 

30

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generally driven bydemand in industrial applications, the aluminum business, glass ceramics,cement and the general demand in China. Sales of lithium products specificallyused in life science applications depend on the trends in drug development andgrowth in pharmaceuticals markets as well as generic competition. In 2009,lower volumes in most applications, particularly in lithium and metal sulfideapplications, had a negative impact on results. In the first quarter of 2010,results were higher primarily from increased volumes of lithium products andmetal sulfide applications. Results in 2010 are expected to be negativelyimpacted by the highly competitive business environment, partially offset byhigher volumes in lithium applications.

 

***Performance Additives***

 

·            Generally, a trend towards the increased use ofcolored concrete products in the construction market has historically had apositive effect on our Color Pigments and Services business line. However,a general slowdown in the construction market has negatively impactedconstruction sales. North American and European volumes were lower in2009, and this has not improved through the first quarter of 2010. Highervolumes of coatings application products had a favorable impact on results inthe first quarter of 2010.

 

·            Demand for our wood protection products, in particularalkaline copper quaternary, or ACQ, is generally driven by both repair andremodeling, as well as new construction. The market position of ACQ wasnegatively impacted in 2009 by a general slowdown in the construction market,some customer shifts to substitute products and the use of wood substitutes. Inthe first quarter of 2010, volumes of ACQ products increased. However, acontinued slowdown in the construction industry could have a negative impact onour results in 2010.

 

·            In the Clay-based Additives business, net salesdecreased in 2009 as lower volumes in most applications were partially offsetby increased selling prices. In the first quarter of 2010, higher volumes inmost markets had a favorable impact on results. We expect sales growththroughout the remainder of 2010 primarily from higher volumes in most marketsegments.

 

***Titanium Dioxide Pigments***

 

·            Demand for our titanium dioxide products in anatasegrade is driven mainly by demand in the synthetic fiber industry, while demandfor titanium dioxide products in rutile grade and our functional additives isdriven by demand in the coatings, printing inks, construction, cosmetics,pharmaceutical, food, paper and plastics industries. Market conditions,including pricing pressure and current industry overcapacity, have negativelyimpacted this segment. Sales decreased in 2009 as lower volumes of fiberanatase applications were partially offset by increased sellingprices. Sales of titanium dioxide products in rutile grade applicationswere up in 2009 due to higher volumes as a result of the venture with Kemirathat was completed on September 1, 2008, and higher sellingprices. In the first quarter of 2010, higher volumes of both rutile andanatase applications had a favorable impact on results. Our functionaladditives sales were down in 2009 as lower volumes were partially offset byhigher selling prices. In the first quarter of 2010, higher volumes 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 ceramic medical devices is mainly tiedto the aging population in Europe and the United States.  Sales of ourmedical device applications increased in 2009 and the first quarter of 2010 onhigher volumes. We expect this growth to continue to increase throughout theremainder of 2010.

 

·            Sales of ceramic products for use in cutting toolapplications were lower in 2009. Sales of mechanical systems andapplications, electronic applications and multi-functional applications werealso down in 2009 from lower volumes, particularly related to the economicdownturn in the automotive industry. Sales of cutting tools, mechanical systemsand applications, electronic applications and multi-functional applicationswere up in the first quarter 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 in the Specialty Compoundssegment is wire and cable compounds. Sales within this product line aredependent upon the telecommunications market and related sectors, specificallydemand for high-end voice and data communication wire and cable, for which ourSpecialty Compounds segment is a significant provider of sheathing materials.Non-halogen products for wire and cable data communication, military and otherapplications have expanded business in North America for those applications andcreated opportunities in Europe. However, as a result of a generaldownturn in the wire and cable market, volumes of wire and cable products weredown in 2009. In the first quarter of 2010, higher volumes of wire andcable products had a favorable impact on results. For the remainder of 2010, weexpect sales of wire and cable products to increase.

 

31

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·            Most of the other end-use markets for which SpecialtyCompounds’ products are used generally track growth of gross domestic product,but many are also application specific, such as automotive. We are focusingmore of our efforts towards increasing high margin specialty products, inparticular, thermoplastic elastomers, and less of our efforts in automotive andfootwear. Our net sales in consumer/industrial thermoplastic elastomers werelower in 2009. Net sales of regulated packaging were lower in2009. In the first quarter of 2010, sales of consumer/industrialthermoplastic elastomers and regulated packaging increased on higher volumes.We expect sales for these applications to increase throughout the remainder of2010.

 

·            Raw material prices for polyvinyl chloride (“PVC”)resin and plasticizers, key raw materials used in the production of mostproducts, were down in 2009, but were higher in the first quarter of 2010.These raw material prices are expected to be higher throughout the remainder of2010.

 

**GlobalExposure**

 

We operate ageographically diverse business. Of our 2009 net sales, 52% were shipments toEurope, 27% to North America (predominantly the United States) and 21% to therest of the world. For a geographic description of the origin of our net salesand location of our long-lived assets, see Note 3, “Segment Information” in our2009 Form 10-K

 

We estimate that we soldto customers in more than 60 countries during this period. Currently, we serveour diverse and extensive customer base with 88 manufacturing facilities in 25countries. Consequently, we are exposed to global economic and politicalchanges, particularly currency fluctuations that could impact our profitabilityand demand for our products.

 

Our sales and productioncosts are mainly denominated in U.S. dollars or Euros. Our results ofoperations and financial condition have been historically impacted by thefluctuation of the Euro against our reporting currency, the U.S. dollar. Forthe three months ended March 31, 2010, the average exchange rate of theEuro against the U.S. dollar was higher compared to the same period in 2009. Asa result, our net sales, gross profit and operating income were positivelyimpacted. Historically, however, our operating margins have not beensignificantly impacted by currency fluctuations because, in general, sales andcosts of products sold are generated or incurred in the same currency, subjectto certain exceptions.

 

**RawMaterials**

 

Raw materials constitutedapproximately 47% of our 2009 cost of products sold. We have a broad rawmaterial base, with the cost of no single raw material representing more than3% of our cost of products sold in 2009.  In 2009 and the first quarter of2010, lower raw material costs in a number of our businesses had a favorableimpact on our results of operations. However, the significant price fluctuationsour raw materials have experienced in the past during periods of high demandhave had an adverse impact on our results of operations. We cannot accuratelypredict the impact of any future price increases for raw materials or any rawmaterial shortages on our business as a whole or in specific geographicregions. In addition, we may not be able to pass on raw material priceincreases to our customers. See details of our ten most significant rawmaterials (in terms of dollars) in Item 1, “Business — Raw Materials” in our2009 Form 10-K.

 

**EnergyCosts**

 

In 2009, energy purchasesrepresented approximately 8% of our cost of products sold. However, withincertain business lines, such as our Titanium Dioxide Pigments segment and theColor Pigments and Services and Clay-based Additives businesses of ourPerformance Additives segment, energy costs are more significant. The cost ofproducts sold for certain of our businesses, including Color Pigments andServices and Clay-based Additives, increases when the price of natural gas inNorth America rises. However, energy costs in 2009 and in the first quarter of2010 were lower in a number of our businesses, particularly in North America.Natural gas prices in North America and Europe declined in 2009 and in thefirst quarter of 2010.

 

**IncomeTaxes**

 

We recorded an income taxprovision of $17.5 million in the first quarter of 2010 on income fromcontinuing operations before taxes of $54.2 million. The income tax provisionin the first quarter of 2010 was favorably impacted by lower domestic taxlosses for which we receive no tax benefit due to a valuation allowance andbeneficial foreign rate differentials.

 

In the first quarter of2010, the worldwide valuation allowance decreased by $2.0 million. This wasprimarily due to a decrease of $3.4 million due to domestic gains in othercomprehensive income, partially offset by an increase of $1.1 million relatedto net operating losses and $0.3 million related to other deferred tax assets.Of the $2.0 million decrease in the valuation allowance for the first quarterof 2010, $1.4 million impacted the tax provision.

 

32

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**SpecialCharges and Credits**

 

During the periodspresented, we incurred certain special charges that included systems/organizationestablishment expenses, restructuring and other severance costs and foreignexchange gains and losses. See “Items excluded from Adjusted EBITDA” section inNote 4, “Segment Information,” for a discussion of special charges and creditsrecorded in the three months ended March 31, 2010 and 2009.

 

**SpecialNote Regarding Non-GAAP Financial Measures**

 

A non-GAAP financialmeasure is generally defined by the SEC as one that purports to measurehistorical or future financial performance, financial position or cash flowsbut excludes or includes amounts that would not be so adjusted in the mostcomparable U.S. GAAP measure. From time to time in this management’s discussionand analysis, we disclose non-GAAP financial measures, primarily AdjustedEBITDA, as defined below.

 

**Definitionof Adjusted EBITDA**

 

The presentation ofconsolidated Adjusted EBITDA contained in this report is calculated using thedefinition set forth in the senior secured credit agreement as a basis andreflects management’s interpretations thereof. Adjusted EBITDA, which isreferred to under the senior secured credit agreement as “Consolidated EBITDA,”is defined in the senior secured credit agreement as consolidated earnings(which, as defined in the senior secured credit agreement, equals income (loss)before the deduction of income taxes of Rockwood Specialties Group, Inc.and the Restricted Subsidiaries (as such term is defined in the senior securedcredit agreement), excluding extraordinary items) plus:

 

·            interest expense;

·            depreciation expense;

·            amortization expense, including amortization ofdeferred financing fees;

·            extraordinary losses and non-recurring charges;

·            non-cash charges;

·            losses on asset sales;

·            restructuring charges or reserves (includingseverance, relocation costs and one-time compensation charges and costsrelating to the closure of facilities);

·            expenses paid by us or any of our subsidiaries inconnection with the Dynamit Nobel Acquisition, the senior secured creditagreement, the granting of liens under the security documents (as such term isdefined in the senior secured credit agreement), the indenture governing the2014 Notes and the offering of the 2014 Notes and any other relatedtransactions;

·            any expenses or charges incurred in connection withany issuance of debt or equity securities;

·            any fees and expenses related to permittedacquisitions;

·            any deduction for noncontrolling interest expense; and

·            items arising in connection with CCA litigationrelated to our Timber Treatment Chemicals business of our Performance Additivessegment;

 

less:

 

·            extraordinary gains and non-recurring gains;

·            non-cash gains; and

·            gains on asset sales,

 

in all cases, subject tocertain exclusions.

 

For presentation purposeswithin this report, we use the computation set forth in our senior securedcredit agreement as a basis which reflects management’s interpretationsthereof. Management has determined that stock-based compensation costs, whichare non-cash charges, will not be an adjustment in calculating Adjusted EBITDAas these costs will be an ongoing recurring cost to the Company. These costsare recorded in selling, general and administrative expenses in the condensedconsolidated statements of operations. Specifically, the calculation ofAdjusted EBITDA according to the indenture underlying our 2014 Notes and thefacility agreement governing our Titanium Dioxide Pigments venture excludescertain adjustments prescribed within our senior secured credit agreement.Given that borrowings under our senior secured credit agreement are secured bymost of our assets and given that the calculation does not materially differfrom the calculation of Adjusted EBITDA for performance measurement purposes,we believe this is the most appropriate computation of Adjusted EBITDA topresent.

 

33

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**Management’sUses**

 

We use Adjusted EBITDA ona consolidated basis to assess our operating performance. We believe thisfinancial measure on a consolidated basis is helpful in highlighting trends inour overall business because the items excluded in calculating Adjusted EBITDAhave been deemed by management to have little or no bearing on our day-to-dayoperating performance. It is also the most significant criterion in ourcalculation of performance-based cash bonuses and our determination of whethercertain performance-based stock options and restricted stock units vest, all ofwhich are substantially tied to Adjusted EBITDA targets.

 

We also use AdjustedEBITDA on a consolidated basis as a liquidity measure. We believe thisfinancial measure on a consolidated basis is important in analyzing ourliquidity because our senior secured credit agreement and indenture governingthe 2014 Notes contain financial covenants that are determined based onAdjusted EBITDA. These covenants are material terms of these agreements,because they govern substantially all of our long-term debt, which in turnrepresents a substantial portion of our capitalization. Non-compliance withthese 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 noteholders acceleratingthe maturity of the 2014 Notes. In addition, if we cannot satisfy thesefinancial covenants in the indenture governing the 2014 Notes, we cannot engagein certain activities, such as incurring additional indebtedness or makingcertain payments. Consequently, Adjusted EBITDA is critical to our assessmentof our liquidity.

 

We also use AdjustedEBITDA on a segment basis as the primary measure used by our chief operatingdecision maker, our Chief Executive Officer, to evaluate the ongoingperformance of our business segments and reporting units. On a segment basis,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**

 

Adjusted EBITDA haslimitations as an analytical tool, and should not be viewed in isolation and isnot a substitute for U.S. GAAP measures of earnings and cash flows. Materiallimitations associated with making the adjustments to our earnings and cashflows to calculate Adjusted EBITDA, and using this non-GAAP financial measureas compared to the most directly comparable U.S. GAAP financial measures,include:

 

·            the cash portion of interest expense, net, income taxprovision (benefit), and restructuring as well as non-recurring charges relatedto securities issuance, acquisition activities, and systems/organizationestablishment, generally represent charges (gains) which may significantlyaffect funds available to use in our operating, investing and financingactivities;

 

·            non-operating foreign exchange gains (losses),although not immediately affecting cash used in investing activities, mayaffect the amount of funds needed to service our debt if those currency impactsremain in place as we meet our future principal repayment obligations; and

 

·            depreciation, amortization, non-cash (gains) chargesand impairment charges, though not directly affecting our current cashposition, represent the wear and tear and/or reduction in value of the plant,equipment and intangible assets which permit us to manufacture and/or marketour products; these items may be indicative of future needs for capitalexpenditures, for development or acquisition of intangible assets or relevanttrends causing asset value changes.

 

An investor or potentialinvestor may find any one or all of these items important in evaluating ourperformance, results of operations, financial position and liquidity.Management compensates for the limitations of using non-GAAP financial measuresby using them only to supplement our U.S. GAAP results to provide a morecomplete understanding of the factors and trends affecting our business.Adjusted EBITDA is not an alternative to net income (loss) or income (loss)from continuing operations before taxes or operating income or cash flows fromoperating activities as calculated and presented in accordance with U.S. GAAP.You should not rely on Adjusted EBITDA as a substitute for any such U.S. GAAPfinancial measures. We strongly urge you to review the reconciliations ofAdjusted EBITDA to U.S. GAAP financial measures and other financialinformation, in each case included elsewhere in this Quarterly Report and inour 2009 Form 10-K. We also strongly urge you not to rely on any singlefinancial measure to evaluate our business. Our measure of Adjusted EBITDA maynot be comparable to those of other companies.

 

34

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**Resultsof Operations**

 

**ActualResults of Operations**

 

The following tablepresents the major components of our operations on an actual basis and AdjustedEBITDA (the reconciliation to net (loss) income is set forth in—Reconciliationof Net (Loss) Income Attributable to Rockwood Specialties Group, Inc. toAdjusted EBITDA for the three months ended March 31, 2010 and 2009),including as a percentage of net sales, for the periods presented. See Note 4, “SegmentInformation,” for segment information and a reconciliation to income (loss)from continuing operations before taxes to Adjusted EBITDA on a segment basis.

 

35

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| ** **                                                               | ** ** | **Three months ended** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                               | ** ** | **March 31,**     | ** ** |
| **($ in millions)**                                                 | ** ** | **2010**               | ** ** | **2009** | ** ** |
| **Statement of operations data:**                                        |       |                   |       |   |   |
| **Net sales:**                                                           |       |                   |       |   |   |
| Specialty  Chemicals                                                     |       | $                      | 289.6      |   | $ | 225.3 |   |
| Performance  Additives                                                   |       | 177.2                  |       | 155.3 |   |
| Titanium  Dioxide Pigments                                               |       | 181.1                  |       | 139.0 |   |
| Advanced  Ceramics                                                       |       | 124.7                  |       | 87.9 |   |
| Specialty  Compounds                                                     |       | 59.8                   |       | 51.1 |   |
| Corporate  and other                                                     |       | 1.5                    |       | 1.4 |   |
| Total  net sales                                                         |       | 833.9                  |       | 660.0 |   |
|                                                                     |       |                   |       |   |   |
| Gross  profit                                                            |       | 266.7                  |       | 182.1 |   |
|                                                                     |       | 32.0                   | %          | 27.6 | % |
| Selling,  general and administrative expenses                            |       | 169.3                  |       | 145.1 |   |
|                                                                     |       | 20.3                   | %          | 22.0 | % |
| Restructuring  and other severance costs                                 |       | 2.2                    |       | 7.8 |   |
| Loss  on sale of assets and other                                        |       | —                 |       | 0.1 |   |
| **Operating income (loss):**                                             |       |                   |       |   |   |
| Specialty  Chemicals                                                     |       | 55.1                   |       | 29.2 |   |
|                                                                     |       | 19.0                   | %          | 13.0 | % |
| Performance  Additives                                                   |       | 12.3                   |       | 1.8 |   |
|                                                                     |       | 6.9                    | %          | 1.2 | % |
| Titanium  Dioxide Pigments                                               |       | 12.8                   |       | 2.4 |   |
|                                                                     |       | 7.1                    | %          | 1.7 | % |
| Advanced  Ceramics                                                       |       | 24.3                   |       | 2.6 |   |
|                                                                     |       | 19.5                   | %          | 3.0 | % |
| Specialty  Compounds                                                     |       | 7.0                    |       | 5.1 |   |
|                                                                     |       | 11.7                   | %          | 10.0 | % |
| Corporate  and other                                                     |       | (16.3                  | )          | (12.0 | ) |
| Total  operating income                                                  |       | 95.2                   |       | 29.1 |   |
| **Other expenses, net:**                                                 |       |                   |       |   |   |
| Interest  expense, net                                                   |       | (41.8                  | )          | (49.3 | ) |
| Gain  on early extinguishment of debt                                    |       | —                 |       | 2.2 |   |
| Foreign  exchange gain (loss), net                                       |       | 0.3                    |       | (5.6 | ) |
| Other,  net                                                              |       | 0.5                    |       | 0.1 |   |
| Other  expenses, net                                                     |       | (41.0                  | )          | (52.6 | ) |
| Income  (loss) from continuing operations before taxes                   |       | 54.2                   |       | (23.5 | ) |
| Income  tax provision (benefit)                                          |       | 17.5                   |       | (16.7 | ) |
| Income  (loss) from continuing operations                                |       | 36.7                   |       | (6.8 | ) |
| Income  from discontinued operations, net of tax                         |       | —                 |       | 2.3 |   |
| Net  income (loss)                                                       |       | 36.7                   |       | (4.5 | ) |
| Net  loss attributable to noncontrolling interest                        |       | 0.2                    |       | 3.0 |   |
| Net  income (loss) attributable to Rockwood Specialties Group, Inc. |       | $                      | 36.9       |   | $ | (1.5 | ) |
| **Adjusted EBITDA:**                                                     |       |                   |       |   |   |
| Specialty  Chemicals                                                     |       | $                      | 73.8       |   | $ | 50.3 |   |
|                                                                     |       | 25.5                   | %          | 22.3 | % |
| Performance  Additives                                                   |       | 29.5                   |       | 20.6 |   |
|                                                                     |       | 16.6                   | %          | 13.3 | % |
| Titanium  Dioxide Pigments                                               |       | 30.7                   |       | 21.5 |   |
|                                                                     |       | 17.0                   | %          | 15.5 | % |
| Advanced  Ceramics                                                       |       | 37.0                   |       | 17.8 |   |
|                                                                     |       | 29.7                   | %          | 20.3 | % |
| Specialty  Compounds                                                     |       | 9.1                    |       | 7.8 |   |
|                                                                     |       | 15.2                   | %          | 15.3 | % |
| Corporate  and other                                                     |       | (15.1                  | )          | (8.8 | ) |
| Total  Adjusted EBITDA                                                   |       | $                      | 165.0      |   | $ | 109.2 |   |

 

36

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Thefollowing table presents the changes in the major components of our operationson a historical basis in dollars and percentages:

 
| ** **                                                               | ** ** | **Change: Three months ended March 31, 2010 versus  2009** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                               | ** ** | ** **                                                      | ** ** | ** ** | ** ** | **Constant** | ** ** | **Constant** | ** ** |
| ** **                                                               | ** ** | ** **                                                      | ** ** | **%** | ** ** | **Currency** | ** ** | **Currency** | ** ** |
| **($ in millions)**                                                 | ** ** | **Total**                                                       | ** ** | **Change** | ** ** | **Effect (a)** | ** ** | **Basis** | ** ** |
| **Statement of operations data:**                                        |       |                                                            |       |   |   |   |   |   |   |
| **Net sales:**                                                           |       |                                                            |       |   |   |   |   |   |   |
| Specialty  Chemicals                                                     |       | $                                                               | 64.3       |   | 28.5 | % | $ | 17.3 |   | $ | 47.0 |   |
| Performance  Additives                                                   |       | 21.9                                                            |       | 14.1 |   | 5.3 |   | 16.6 |   |
| Titanium  Dioxide Pigments                                               |       | 42.1                                                            |       | 30.3 |   | 10.2 |   | 31.9 |   |
| Advanced  Ceramics                                                       |       | 36.8                                                            |       | 41.9 |   | 6.6 |   | 30.2 |   |
| Specialty  Compounds                                                     |       | 8.7                                                             |       | 17.0 |   | 2.3 |   | 6.4 |   |
| Corporate  and other                                                     |       | 0.1                                                             |       | 7.1 |   | 0.1 |   | — |   |
| Total  net sales                                                         |       | 173.9                                                           |       | 26.3 |   | 41.8 |   | 132.1 |   |
|                                                                     |       |                                                            |       |   |   |   |   |   |   |
| Gross  profit                                                            |       | 84.6                                                            |       | 46.5 |   | 13.9 |   | 70.7 |   |
|                                                                     |       |                                                            |       |   |   |   |   |   |   |
| Selling,  general and administrative expenses                            |       | 24.2                                                            |       | 16.7 |   | 8.6 |   | 15.6 |   |
| Restructuring  and other severance costs                                 |       | (5.6                                                            | )          |   |   |   |   | (5.6 | ) |
| Loss  on sale of assets and other                                        |       | (0.1                                                            | )          |   |   |   |   | (0.1 | ) |
| Total  operating expenses                                                |       | 18.5                                                            |       | 12.1 |   | 8.6 |   | 9.9 |   |
| **Operating income (loss):**                                             |       |                                                            |       |   |   |   |   |   |   |
| Specialty  Chemicals                                                     |       | 25.9                                                            |       | 88.7 |   | 2.7 |   | 23.2 |   |
| Performance  Additives                                                   |       | 10.5                                                            |       | 583.3 |   | 0.5 |   | 10.0 |   |
| Titanium  Dioxide Pigments                                               |       | 10.4                                                            |       | 433.3 |   | 0.7 |   | 9.7 |   |
| Advanced  Ceramics                                                       |       | 21.7                                                            |       | 834.6 |   | 1.4 |   | 20.3 |   |
| Specialty  Compounds                                                     |       | 1.9                                                             |       | 37.3 |   | 0.2 |   | 1.7 |   |
| Corporate  and other                                                     |       | (4.3                                                            | )          | (35.8 | ) | (0.2 | ) | (4.1 | ) |
| Total                                                                    |       | 66.1                                                            |       | 227.1 |   | 5.3 |   | 60.8 |   |
| **Other expenses, net:**                                                 |       |                                                            |       |   |   |   |   |   |   |
| Interest  expense, net                                                   |       | 7.5                                                             |       | (15.2 | ) | (1.0 | ) | 8.5 |   |
| Gain  on early extinguishment of debt                                    |       | (2.2                                                            | )          |   |   |   |   |   |   |
| Foreign  exchange gain (loss), net                                       |       | 5.9                                                             |       |   |   |   |   |   |   |
| Other,  net                                                              |       | 0.4                                                             |       |   |   |   |   |   |   |
| Other  expenses, net                                                     |       | 11.6                                                            |       |   |   |   |   |   |   |
| **Income (loss) from continuing operations before taxes**                |       |                                                            |       |   |   |   |   |   |   |
| Specialty  Chemicals                                                     |       | 26.6                                                            |       |   |   |   |   |   |   |
| Performance  Additives                                                   |       | 10.0                                                            |       |   |   |   |   |   |   |
| Titanium  Dioxide Pigments                                               |       | 15.6                                                            |       |   |   |   |   |   |   |
| Advanced  Ceramics                                                       |       | 23.5                                                            |       |   |   |   |   |   |   |
| Specialty  Compounds                                                     |       | 1.7                                                             |       |   |   |   |   |   |   |
| Corporate  and other                                                     |       | 0.3                                                             |       |   |   |   |   |   |   |
| Total                                                                    |       | 77.7                                                            |       |   |   |   |   |   |   |
| Income  tax provision (benefit)                                          |       | 34.2                                                            |       |   |   |   |   |   |   |
| Income  (loss) from continuing operations                                |       | 43.5                                                            |       |   |   |   |   |   |   |
| Income  from discontinued operations, net of tax                         |       | (2.3                                                            | )          |   |   |   |   |   |   |
| Net  income (loss)                                                       |       | 41.2                                                            |       |   |   |   |   |   |   |
| Net  loss attributable to noncontrolling interest                        |       | (2.8                                                            | )          |   |   |   |   |   |   |
| Net  income (loss) attributable to Rockwood Specialties Group, Inc. |       | $                                                               | 38.4       |   |   |   |   |   |   |   |
| **Adjusted EBITDA:**                                                     |       |                                                            |       |   |   |   |   |   |   |
| Specialty  Chemicals                                                     |       | $                                                               | 23.5       |   | 46.7 | % | $ | 3.6 |   | $ | 19.9 |   |
| Performance  Additives                                                   |       | 8.9                                                             |       | 43.2 |   | 0.8 |   | 8.1 |   |
| Titanium  Dioxide Pigments                                               |       | 9.2                                                             |       | 42.8 |   | 1.7 |   | 7.5 |   |
| Advanced  Ceramics                                                       |       | 19.2                                                            |       | 107.9 |   | 2.2 |   | 17.0 |   |
| Specialty  Compounds                                                     |       | 1.3                                                             |       | 16.7 |   | 0.3 |   | 1.0 |   |
| Corporate  and other                                                     |       | (6.3                                                            | )          | (71.6 | ) | (0.2 | ) | (6.1 | ) |
| Total  Adjusted EBITDA                                                   |       | $                                                               | 55.8       |   | 51.1 | % | $ | 8.4 |   | $ | 47.4 |   |

 

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(a)                The constant currency effect is the translation impactcalculated based on the change in the applicable rate, primarily the Euro, tothe U.S. dollar exchange rate for the applicable period.

 

37

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***Three months ended March 31, 2010 compared to threemonths ended March 31, 2009***

 

**Overview**

 

Net sales increased$173.9 million in the first quarter of 2010 compared with the same period inthe prior year primarily due to higher volumes and the positive impact ofcurrency changes of $41.8 million, partially offset by decreased sellingprices. See further discussion by segment below.

 

Operating income andAdjusted EBITDA increased in the first quarter of 2010 compared with the sameperiod in the prior year primarily due to higher sales volumes, lower rawmaterial costs and the positive impact of currency changes. This was partiallyoffset by lower selling prices and higher incentive-compensation related costs.

 

Net income fromcontinuing operations increased $43.5 million compared with the same period inthe prior year primarily due to the reasons noted above, lower interestexpense, net recorded in the first quarter of 2010 due to a decrease inmark-to-market losses on our interest rate hedging instruments and decreasedforeign exchange losses on financing activities. This was partially offset by again of $2.2 million recorded in the first quarter of 2009 related to therepurchase of a portion of the 2014 Notes and the repayment of a portion of thesenior secured term loans.

 

Income from discontinuedoperations, net of tax was $2.3 million in the first quarter of 2009 and wasprimarily due to the favorable resolution of a claim against the former GroupeNovasep business.

 

Net loss attributable tononcontrolling interest of $0.2 million and $3.0 million was recorded in thefirst quarter of 2010 and 2009, respectively. The change from the prior yearprimarily relates to higher volumes in the Titanium Dioxide Pigments venture inthe first quarter of 2010.

 

Net income attributableto Rockwood Specialties Group, Inc. increased $38.4 million in the firstquarter of 2010 compared with the same period in the prior year due to thereasons noted above.

 

**Netsales**

 

*SpecialtyChemicals*.  Netsales increased $64.3 million over the prior year primarily due to highervolumes and the positive impact of currency changes of $17.3 million. Inthe Fine Chemicals business, higher volumes of lithium products and metalsulfide applications were partially offset by lower selling prices of potashand lithium carbonate. Net sales in the Surface Treatment business were higheron increased volumes in all markets, particularly in automotive and coil/coldforming applications.

 

*PerformanceAdditives*.  Netsales increased $21.9 million over the prior year primarily due to highervolumes of oilfield and coatings and inks applications in our Clay-basedAdditives business and higher volumes primarily related to coatingsapplications in our Color Pigments and Services business. The positive impact ofcurrency changes of $5.3 million also had a favorable impact on net sales.

 

*TitaniumDioxide Pigments*.  Netsales increased $42.1 million over the prior year primarily from higher volumesin most applications, as well as the positive impact of currency changes of$10.2 million.

 

*AdvancedCeramics*.  Netsales increased $36.8 million over the prior year primarily from higher volumesin all applications, particularly medical, electronics and mechanical systems,and the positive impact of currency changes of $6.6 million.

 

*SpecialtyCompounds*.  Netsales increased $8.7 million over the prior year primarily due to highervolumes in most applications, particularly in wire and cable andconsumer/industrial applications, and the positive impact of currency changes of$2.3 million.

 

**Grossprofit**

 

Gross profit increased$84.6 million over the prior year primarily due to the volume increases notedabove, lower raw material costs in most businesses and the positive impact ofcurrency changes of $13.9 million. Gross profit as a percentage of netsales were 32.0% and 27.6% in the first quarter of 2010 and 2009, respectively.

 

**Selling,general and administrative expenses**

 

Selling, general andadministrative expenses, (“SG&A”) increased $24.2 million over the prioryear primarily due to the impact of the higher volumes noted above, higherincentive compensation-related costs and the impact of currency changes of $8.6million. In addition, SG&A expenses in the first quarter of 2009 includethe reversal of discretionary profit-sharing plan accruals of $2.6 million 

 

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and the reversal ofcertain long-term incentive compensation program accruals of $1.3 million forwhich related targets were no longer expected to be achieved. However,SG&A expenses as a percentage of net sales decreased to 20.3% in the firstquarter of 2010 from 22.0% in the first quarter of 2009.

 

**Restructuringand other severance costs**

 

We recorded $2.2 millionand $7.8 million of restructuring and other severance costs in the firstquarter of 2010 and 2009, respectively, for miscellaneous restructuringactivities, including headcount reductions, asset write-offs and facilityclosures. See Note 13, “Restructuring and Other Severance Costs,” forfurther details.

 

**Operatingincome**

 

*SpecialtyChemicals*.  Operatingincome increased $25.9 million over the prior year primarily due to the highervolumes discussed above, lower raw material costs in our Surface Treatmentbusiness, particularly for phosphoric acid, the positive impact of currencychanges of $2.7 million and lower restructuring and other severance costs of$1.5 million. This increase was partially offset by lower selling prices,particularly for potash and lithium carbonate in our Fine Chemicals business.

 

*PerformanceAdditives*. Operatingincome increased $10.5 million over the prior year primarily due to the highervolumes noted above and lower restructuring and other severance costs of $0.9million. This increase was partially offset by higher raw material costs,primarily for quarternary amine (“quat”) in our Clay-based Additives business.

 

*TitaniumDioxide Pigments*.  Operatingincome increased $10.4 million over the prior year primarily due to the highervolumes noted above and lower systems/organization establishment expensesrelated to the formation of the venture completed in September 2008 of$0.9 million. In addition, operating income in the first quarter of 2009included the termination of a long-term incentive plan of $2.6 million and thereceipt of a vendor rebate related to prior years of $1.7 million.

 

*AdvancedCeramics*.  Operatingincome increased $21.7 million over the prior year primarily due to the highervolumes noted, productivity improvements, decreased restructuring and otherseverance costs of $3.1 million and the positive impact of currency changes of$1.4 million. This increase was partially offset by lower selling prices.

 

*SpecialtyCompounds*.  Operatingincome increased $1.9 million over the prior year primarily due to the highervolumes noted above and lower depreciation and amortization costs of $0.6million.

 

*Corporateand other*.  Operatingloss increased $4.3 million primarily due to higher incentivecompensation-related costs. Corporate compensation-related costs in the firstquarter of 2009 include the reversal of certain long-term incentivecompensation accruals of $1.3 million related to performance targets that wereno longer expected to be achieved.

 

**Otherincome (expenses)**

 

*Interestexpense, net*.  Interestexpense, net decreased $7.5 million in the first quarter of 2010 compared tothe same period in the prior year. The first quarter of 2010 and 2009 includednon-cash gains (losses) of $2.1 million and $(9.6) million, respectively,representing the movement in the mark-to-market valuation of our interest ratehedging instruments. Excluding the impact of these gains and losses, interestexpense, net increased $4.2 million primarily due to higher interest ratesrelated to the amendment of our senior secured credit facility in June 2009,partially offset by the termination of interest rate swaps in November 2009and debt repayments.

 

*Gain onearly extinguishment of debt*. In the first quarter of 2009, we recorded again of $2.2 million related to the repurchase of €12.2 million ($15.5 millionbased on the exchange rate in effect on the date of repurchase) of our seniorsubordinated notes due in 2014, and the voluntary prepayments of €63.2 million($85.1 million based on the exchange rate in effect on the date of payment) and$17.2 million of our senior secured term loans.

 

*Foreignexchange, net*. Inthe first quarter of 2009, foreign exchange losses of $5.6 million wereprimarily due to the impact of the weaker Euro as of March 31, 2009 versusDecember 31, 2008, in connection with non-operating Euro-denominatedtransactions.

 

*Other, net.*In the first quarter of 2010, the Companyrecorded income of $0.5 million related to the reversal of a reserve coveringlegacy obligations assumed in connection with the acquisition of the DynamitNobel businesses in 2004.

 

**Provisionfor income taxes**

 

We recorded an income taxprovision of $17.5 million in the first quarter of 2010 on income fromcontinuing operations before taxes of $54.2 million. The income tax provisionin the first quarter of 2010 was favorably impacted by lower domestic lossesfor which we 

 

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receive no tax benefitdue to a valuation allowance and beneficial foreign rate differentials.

 

We recorded an income taxbenefit of $16.7 million in the first quarter of 2009 on a loss from continuingoperations before taxes of $23.5 million. The income tax benefit in the firstquarter of 2009 was positively impacted by a $10.1 million nonrecurring benefitrelated to foreign currency changes, as well as $8.2 million in domestic taxbenefits allocated from other comprehensive income.

 

**Income(loss) from continuing operations**

 

Income from continuingoperations for the first quarter of 2010 was $36.7 million as compared to aloss from continuing operations of $6.8 million for the first quarter of 2009for the reasons described above.

 

**Incomefrom discontinued operations, net of tax**

 

Income from discontinuedoperations, net of tax was $2.3 million in the first quarter of 2009 and wasprimarily due to the favorable resolution of a claim against the Company’sformer Group Novasep business.

 

**Net lossattributable to noncontrolling interest**

 

Net loss attributable tononcontrolling interest of $0.2 million and $3.0 million was recorded in thefirst quarter of 2010 and 2009, respectively. The change from the prior yearprimarily relates to higher volumes in the Titanium Dioxide Pigments venture inthe first quarter of 2010.

 

**Netincome (loss) attributable to Rockwood Specialties Group, Inc.**

 

Net income attributableto Rockwood Specialties Group, Inc. for the first quarter of 2010 was$36.9 million as compared to a net loss attributable to Rockwood SpecialtiesGroup, Inc. of $1.5 million for the same period in the prior year for thereasons described above.

 

**AdjustedEBITDA**

 

*SpecialtyChemicals*.  AdjustedEBITDA increased $23.5 million over the prior year primarily due to the highervolumes discussed above, lower raw material costs in our Surface Treatmentbusiness, particularly for phosphoric acid and the positive impact of currencychanges of $3.6 million. This increase was partially offset by lowerselling prices, particularly for potash and lithium carbonate in our FineChemicals business.

 

*PerformanceAdditives*. AdjustedEBITDA increased $8.9 million over the prior year primarily due to the highervolumes noted above. This increase was partially offset by higher raw materialcosts, primarily for quat in our Clay-based Additives business.

 

*TitaniumDioxide Pigments*.  AdjustedEBITDA increased $9.2 million over the prior year primarily due to the highervolumes noted above and the positive impact of currency changes of $1.7million. In addition, Adjusted EBITDA in the first quarter of 2009 included thetermination of a long-term incentive plan of $2.6 million and the receipt of avendor rebate related to prior years of $1.7 million.

 

*AdvancedCeramics*.  AdjustedEBITDA increased $19.2 million over the prior year primarily due to the highervolumes noted above, productivity improvements and the positive impact ofcurrency changes of $2.2 million. This increase was partially offset by lowerselling prices.

 

*SpecialtyCompounds*.  AdjustedEBITDA increased $1.3 million over the prior year primarily due to the highervolumes noted above.

 

*Corporateand other*.  AdjustedEBITDA loss increased $6.3 million primarily due to higher incentivecompensation-related costs. Corporate compensation-related costs in the firstquarter of 2009 include the reversal of certain long-term incentivecompensation accruals of $1.3 million related to performance targets that wereno longer expected to be achieved.

 

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***Reconciliation of Net Income (Loss) Attributable to RockwoodSpecialties Group, Inc. to Adjusted EBITDA***

 

Because we view AdjustedEBITDA on both a consolidated basis and segment basis as an operatingperformance measure, we use net income as the most comparable U.S. GAAP measureon a consolidated basis. The following table, which sets forth the applicablecomponents of Adjusted EBITDA, presents a reconciliation of net income (loss)attributable to Rockwood Specialties Group, Inc. to Adjusted EBITDA on aconsolidated basis:

 
| ** **                                                               | ** ** | **Three months ended** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                               | ** ** | **March 31,**     | ** ** |
| **($ in millions)**                                                 | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Net  income (loss) attributable to Rockwood Specialties Group, Inc. |       | $                      | 36.9       |   | $ | (1.5 | ) |
| Net  loss attributable to noncontrolling interest                        |       | (0.2                   | )          | (3.0 | ) |
| Net  income (loss)                                                       |       | 36.7                   |       | (4.5 | ) |
| Income  tax provision (benefit)                                          |       | 17.5                   |       | (16.7 | ) |
| Income  from discontinued operations, net of tax                         |       | —                 |       | (2.3 | ) |
| Income  (loss) from continuing operations before taxes                   |       | 54.2                   |       | (23.5 | ) |
| Interest  expense, net (a)                                               |       | 41.8                   |       | 49.3 |   |
| Depreciation  and amortization                                           |       | 66.9                   |       | 68.1 |   |
| Restructuring  and other severance costs                                 |       | 2.2                    |       | 7.8 |   |
| Systems/organization  establishment expenses                             |       | 0.9                    |       | 2.1 |   |
| Acquisition  and disposal costs                                          |       | 0.2                    |       | — |   |
| Gain  on early extinguishment of debt                                    |       | —                 |       | (2.2 | ) |
| Loss  on sale of assets and other                                        |       | —                 |       | 0.1 |   |
| Foreign  exchange (gain) loss, net                                       |       | (0.3                   | )          | 5.6 |   |
| Other                                                                    |       | (0.9                   | )          | 1.9 |   |
| Total  Adjusted EBITDA                                                   |       | $                      | 165.0      |   | $ | 109.2 |   |

 

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(a)               Includes (gains)/losses of $(2.1) million and $9.6million for the three months ended March 31, 2010 and 2009, respectively,representing the movement in the mark-to-market valuation of the Company’sinterest rate and cross-currency hedging instruments.

 

**Liquidityand Capital Resources**

 

**CashFlows**

 

*OperatingActivities*.  Netcash provided by operating activities was $68.9 million and $44.5 million forthe three months ended March 31, 2010 and 2009, respectively. Net cashfrom operating activities increased primarily due to higher net income,partially offset by the higher use of operating cash from working capitalchanges and higher cash interest expense.

 

*InvestingActivities*.  Netcash used in investing activities decreased to $36.3 million for the threemonths ended March 31, 2010 from $44.6 million for the three months ended March 31,2009 primarily due to lower capital expenditures.

 

*FinancingActivities*.  Netcash used in financing activities was $28.6 million and $144.6 million for thethree months ended March 31, 2010 and 2009, respectively, and includedscheduled payments for long-term debt and revolver payments. For the threemonths ended March 31, 2009, we used $102.3 million to prepay our seniorsecured term loans and $11.9 million of cash to prepay, at a discount, $15.5million in aggregate principal amount of our Euro-denominated seniorsubordinated notes due in 2014.

 

**Liquidity**

 

Our primary source ofliquidity has been and will continue to be cash generated from the operationsof our subsidiaries. Our primary liquidity requirements are working capital,debt service, capital expenditures and acquisitions. Our debt servicerequirements in future years are significant and are substantially higher thanhistorical amounts. We believe that based on current conditions in ourindustry and markets, our cash reserves, cash flows from operations andborrowings available under our revolving credit facility will be adequatesources of liquidity. However, an economic downturn or recession may havea material adverse impact on our results of operations, cash flows fromoperations and our liquidity. See Item 1, “Business,” and Item 1A, “RiskFactors” in our 2009 Form 10-K.

 

In addition, ourliquidity may be negatively impacted due to funding obligations related tocertain pension plans. We have several pension plans located in Germany,Finland, the United Kingdom and the United States, which were adverselyimpacted by market 

 

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conditions in late 2008and early 2009. Although recent investment performance of assets in pensionplans covering our employees in these countries has reduced the amount of anyimmediate funding obligations and we have entered into long-term fundingarrangements for pension plans located in Germany and the U.K., we may have tomake a significant payment via a one-time payment and/or long-term fundingarrangement for the Finnish Plan. However, our funding obligations could changesignificantly based on the investment performance of the pension plan assetsand changes in actuarial assumptions for local statutory funding valuations.Any deterioration of the capital markets or returns available in such marketsmay materially and adversely impact our pension plan assets and increase our fundingobligations for one or more of these plans and adversely impact our liquidity.We cannot predict the impact of this or any further market disruption on ourpension funding obligations.

 

In August 2009, theU.S. Department of Energy awarded $28.4 million in Recovery and ReinvestmentAct funds, subject to certain terms and conditions, to our Fine Chemicalsbusiness within our Specialty Chemicals segment. We expect to use thefunds to expand and upgrade the production of lithium compounds used in lithiumion batteries for hybrid and electric vehicles at our Silver Peak, Nevada andKings Mountain, North Carolina facilities. In addition to the funds fromthis grant, we are required to invest an additional $34.2 million in theproject over the next three years. In April 2010, the Fine Chemicalsbusiness finalized the terms of this grant with the U.S. Department of Energy.In addition, in September 2009, the German Federal Ministry for theEnvironment, Nature Conservation and Nuclear Safety awarded €5.7 million to ourFine Chemicals business to set up a pilot plant for the recycling of lithiumion batteries, subject to customary terms and conditions. Including the fundsfrom this grant, we expect to invest an additional €8.8 million in the project overthe next three years.

 

As of March 31,2010, we had actual total indebtedness of $2,430.7 million. Our $250.0 millionrevolving credit facility under our senior secured credit facility provided foradditional borrowings of up to $224.2 million as of March 31, 2010. Therewere no outstanding borrowings under this revolving credit facility as of March 31,2010, although we had outstanding letters of credit of $25.8 million thatreduced our availability under the senior secured credit facility. In July 2010,the availability under the revolving credit facility will be reduced to $180.0million. The €30.0 million ($40.5 million) revolving credit facility underthe Titanium Dioxide Pigments venture facility provided for additionalborrowings of up to €20.0 million ($27.0 million) as of March 31, 2010after an outstanding bank guarantee of €10.0 million ($13.5 million) reducedavailability under this facility.

 

As of March 31,2010, we had cash and cash equivalents of $309.4 million primarily derived fromcash from operations. We may use available cash to reduce our term debt orrepurchase additional 2014 Notes at any time, subject to certain limitationscontained in our senior secured credit facility.

 

*Seniorsecured credit facilities. *As of March 31, 2010, the senior secured creditfacilities, as amended, consisted of:

 

·            tranche A-1 term loans in an aggregate principalamount of €3.8 million ($5.1 million) and tranche A-2 term loans in anaggregate principal amount of €32.8 million ($44.4 million), each maturing on July 30,2011 and bearing interest at a Euribor floor of 2.00% plus 3.00% (Euribor isthe Euro inter-bank offered rate);

 

·            tranche E term loans in an aggregate principal amountof $138.7 million, maturing on July 30, 2012 and bearing interest at aLibor floor of 2.00% plus 2.50% (Libor is the London inter-bank offered rate);

 

·            tranche G term loans in an aggregate principal amountof €64.8 million ($87.5 million) maturing on July 30, 2012 and bearinginterest at a Euribor floor of 2.00% plus 2.75%;

 

·            tranche H term loan in an aggregate principal amountof $932.5 million maturing on May 15, 2014 and bearing interest at a Liborfloor of 2.00% plus 4.00%;

 

·            tranche I term loan in an aggregate principal amountof €193.7 million ($261.7 million) maturing on May 15, 2014 and bearinginterest at a Euribor floor of 2.00% plus 4.25%; and

 

·            a revolving credit facility in an aggregate principalamount of $250.0 million, of which $70.0 million matures on July 30,2010 bearing interest at the Company’s option of either (i) Libor(subject to Libor floor of 2.00%) plus 3.00% or (ii) ABR plus 1.75%, andof which $180.0 million matures on July 30, 2012 bearing interest at theCompany’s option of either (i) Libor (subject to Libor floor of 2.00%)plus 4.50% or (ii) ABR plus 3.25%.

 

ABR is the alternate baserate, which is the greater of (a) Credit Suisse’s Prime Rate, (b) theFederal Funds Effective Rate plus 0.50% or (c) the Eurodollar Rate for aone-month interest period plus 1.00%. Tranche A-1 and A-2 term loans arepayable in January and July of each year at escalating percentages ofthe amended principal amount. Tranches E, G, H and I are payable in January andJuly of each year at amounts equal to 0.50% of the amended principalamount as of March 31, 2010, with the remainder due at the final maturitydate.

 

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The Company’s borrowingsand the borrowings of our wholly-owned subsidiary Rockwood Specialties Limitedunder the senior secured credit facilities are guaranteed and secured bycertain assets and pledges of capital stock.

 

The senior secured creditagreement, as amended, provides for a Libor (Euribor for Euro-denominatedtranches) floor of 2.00% subject to pricing based on Libor or Euribor with thefollowing applicable margins above Libor or Euribor: applicable margins forTranches A-1 and A-2 of 3.00%; Tranche E of 2.75%; Tranche G of 3.00%; TrancheH of 4.25%; and Tranche I of 4.50%, in each case per annum, each with a 0.25%reduction for achieving a designated credit rating, with the exception ofTranches A-1 and A-2. As of March 31, 2010, the Company continued toqualify for the 0.25% interest rate reduction as the designated credit ratingswere achieved.

 

The Company may electinterest periods of one, two, three or six months (or in the case of revolvingcredit loans, nine or twelve months, to the extent available from all lendersunder the revolving credit facility) for LIBOR borrowings. Interest is payablequarterly in the case of ABR loans and at the end of each interest period and,in any event, at least every three months, in the case of LIBOR borrowings. Thesenior secured credit facilities require payment of customary commitment,letter of credit and other fees.

 

The senior secured creditagreement also contains the following financial covenants that are determinedbased on our Adjusted EBITDA (including certain adjustments for acquisitionsand related synergies), which reflects management’s interpretations thereof:

 

·            a leverage ratio: for the twelve-month period ended March 31,2010, net senior secured debt (senior secured debt plus capital leaseobligations, minus cash up to a maximum of $100.0 million) to Adjusted EBITDAmust be less than 4.40 to 1; for such period, our ratio equaled 3.07 to 1; and

 

·            an interest coverage ratio: for the twelve-monthperiod ended March 31, 2010, Adjusted EBITDA to cash interest expense(interest expense, net excluding deferred debt issuance cost amortization andthe movements in the mark-to market value of our interest rate andcross-currency interest rate derivatives) must be at least 2.00 to 1; for suchperiod, our ratio equaled 3.32 to 1.

 

The senior secured creditagreement, as amended, replaced the total debt to consolidated Adjusted EBITDAratio covenant with a senior secured debt to consolidated Adjusted EBITDA ratiocovenant such that the Company may not permit its senior secured debt ratio toexceed 4.40 to 1.00 on the last day of any fiscal quarter through and includingMarch 31, 2010, 4.25 to 1.00 on the last day of any fiscal quarterthereafter through and including September 30, 2010, and 4.00 to 1.00 onthe last day of any fiscal quarter thereafter. The senior secured creditagreement, as amended, also reset the asset sales basket, increased theavailable amount basket that applies to certain investment, debt and capitalexpenditure negative covenants and certain other baskets.

 

These covenants arematerial terms of the senior secured credit agreement. Non-compliance with thesecovenants or other covenants could result in a default under the senior securedcredit agreement and the lenders could elect to declare all amounts borrowedimmediately due and payable. Any such acceleration would also result in adefault under the indenture governing the 2014 Notes, which could lead to thenote holders electing to declare the principal, premium, if any, and accruedand unpaid interest on the then outstanding notes immediately due andpayable. The senior secured credit agreement contains a cross defaultprovision for indebtedness in excess of $30.0 million; therefore, a defaultunder the indenture governing the 2014 Notes, the Titanium Dioxide Pigmentsterm loans or other indebtedness may cause the lenders to declare the principaland accrued and unpaid interest on the then outstanding senior secured creditfacilities immediately due and payable.

 

In addition to thefinancial covenants described above, the Company’s senior secured creditfacilities contain various affirmative and restrictive covenants. Therestrictive covenants limit our ability to, among other things, incurindebtedness and other liabilities; create liens; merge or consolidate; disposeof assets; make investments; pay dividends and make payments to shareholders;make payments on certain indebtedness or to amend documents related to certainindebtedness and to enter into sale-leaseback transactions. In connection withthe senior secured credit agreement, as amended in June 2009, some of thebaskets relating to the above restrictions were reset.

 

See Item 7, Management’sDiscussion and Analysis of Financial Condition and Results of Operations—“Definitionsof Adjusted EBITDA,” for a discussion of the definition of Adjusted EBITDA usedin calculating our financial covenants.

 

We were in compliancewith the above covenants as of March 31, 2010.

 

*2014Notes.*  Asof March 31, 2010, the 2014 Notes have an aggregate principal amount of €250.1million ($337.9 million) in the case of the Euro notes and $200.0 million inthe 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 and November 15and accrues at the rate of 7.625% in the case of the Euro notes and 7.500% inthe case of the U.S. Dollar notes. Certain of our domestic subsidiariesguarantee the 2014 Notes on a senior subordinated unsecured basis (see Note 15,“Consolidating Financial Information,” for further details). In the firsthalf of 2009, we repurchased at a discount €113.9 million ($153.2 million) inaggregate principal amount of our 2014 Notes. We may use available cash torepurchase 

 

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additional 2014 Notes atany time.

 

The 2014 Notes containvarious affirmative and restrictive covenants. The restrictive covenants limitour ability, and the ability of our restricted subsidiaries, to, among otherthings, incur or guarantee additional indebtedness (as described below), paydividends or make other equity distributions or repurchase capital stock, makeinvestments or other restricted payments, create liens, transfer or sellassets, restrict dividends or other payments to us, engage in transactions withaffiliates, and merge or consolidate with other companies or sell substantiallyall of our assets.

 

The indenture governingthe 2014 Notes prohibits us from incurring additional debt, subject to certainpermitted incurrences, unless the fixed charge coverage ratio, which is theratio of Adjusted EBITDA (as defined therein excluding certain adjustmentspermitted under the senior secured credit agreement) to fixed charges (asdefined therein), for the most recently ended four fiscal quarters is at least2.00 to 1. In addition, the indenture prohibits us from making restricted payments(such as dividends or other equity distributions, repurchases of capital stockor restricted investments), subject to certain permitted payments, unless,among other things, the fixed charge coverage ratio for the most recently endedfour fiscal quarters is at least 2.00 to 1. For the four-fiscal quarter periodended March 31, 2010, the fixed charge coverage ratio equaled 3.32 to 1.This covenant is a material term of the indenture governing the 2014 Notes.

 

Because the indenturegoverning the 2014 Notes defines an event of default to include, among otherthings, a default under any other debt obligation in excess of $35.0 millionthat could cause the acceleration of such obligation, any acceleration underthe senior secured credit agreement or other debt agreement would also resultin a default under the indenture governing these notes, which could lead to thenote holders electing to declare the principal, premium, if any, and accruedand unpaid interest on the then outstanding notes immediately due and payable.

 

*TitaniumDioxide Pigments venture term loans, revolving credit facility and assumeddebt.*  Asof March 31, 2010, the Titanium Dioxide Pigments venture had €240.0million ($324.2 million) outstanding under the term loans of its facility agreement.The facility also provides for a revolving credit facility of €30.0 million($40.5 million) of which €20.0 million ($27.0 million) was outstanding as of March 31,2010 after an outstanding bank guarantee of €10.0 million ($13.5 million)related to a defined benefit pension obligation reduced its availability underthis facility. Both the term loan and revolving credit facility mature in June 2013.

 

As of March 31,2010, the interest rate on the term loan and revolving credit facility isEuribor (or Libor if the currency is in USD) plus 2.50%, subject to a step downdetermined by reference to a leverage ratio test. The term loan is payable ininstallments over a five-year period from the date of the facility agreement,with payments commencing twelve months from such date and the remainder due atthe final maturity date. The term loan and revolving credit facility may berepaid in advance without penalty.

 

In addition, the TitaniumDioxide Pigments venture has other debt of €24.1 million ($32.6 million),primarily due to a defined benefit plan, at interest rates ranging from 3.65%to 5.00%.

 

The facility agreementcontains affirmative and restrictive covenants, subject to certain thresholdsand exceptions. The restrictive covenants limit the venture’s ability toundertake certain actions, including but not limited to acquiring or disposingof assets, creating liens on assets, entering into a merger or corporaterestructuring, and incurring additional indebtedness. These covenants arecalculated in accordance with International Financial Reporting Standards andare 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 periodended March 31, 2010, net debt to EBITDA, subject to certain adjustments(which is substantially similar to the definition of Adjusted EBITDA in oursenior secured credit agreement) must be less than 3.50 to 1; for such period,our ratio equaled 3.09 to 1;

 

·            An interest coverage ratio: for the twelve-monthperiod ended March 31, 2010, EBITDA, subject to certain adjustments,(which is substantially similar to the definition of Adjusted EBITDA in oursenior secured credit agreement) to cash interest expense (net of interestincome), must be greater than 3.50 to 1; for such period, our ratio equaled5.00 to 1; and

 

·            Cash flow coverage ratio: for the twelve-month periodended March 31, 2010, cash generated for financing activities (EBITDA,subject to certain adjustments, less working capital changes, capitalexpenditures and interest) to debt service (interest expense and amortizationof debt) must be greater than 1.10; for such period, our ratio equaled 1.91 to1.

 

We were in compliancewith the above covenants as of March 31, 2010.

 

The loans are secured bythe assets of the venture. In the event that either Kemira’s or Rockwood’sownership interest changes, any lender may cancel its commitment and demandrepayment of its respective portion of the loans, including accrued and unpaidinterest. The facility agreement contains customary events of default,subject to remedy periods, thresholds and exceptions. Upon the 

 

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occurrence of an event ofdefault under the facility agreement, the lenders can terminate the commitmentsand declare all amounts, including accrued and unpaid interest, to be due andpayable.

 

Given our use of AdjustedEBITDA (see “Special Note Regarding Non-GAAP Financial Measures” for thedefinition of Adjusted EBITDA and management’s uses of Adjusted EBITDA) as aliquidity measure, the following table presents a reconciliation of net cashprovided by operating activities from continuing operations to Adjusted EBITDA:

 
| ** **                                                                                                             | ** ** | **Three months ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                             | ** ** | **March 31,**     | ** ** |
| **($ in millions)**                                                                                               | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Net  cash provided by operating activities from continuing operations                                                  |       | $                      | 68.9       |   | $ | 44.5 |   |
| Changes  in assets and liabilities, net of the effect of foreign currency translation  and acquisitions                |       | 38.8                   |       | 9.7 |   |
| Current  portion of income tax provision                                                                               |       | 12.2                   |       | 5.8 |   |
| Interest  expense, net, excluding amortization of deferred financing costs and  unrealized losses/gains on derivatives |       | 42.3                   |       | 37.3 |   |
| Restructuring  and other severance costs                                                                               |       | 2.2                    |       | 7.8 |   |
| Systems/organization  establishment expenses                                                                           |       | 0.9                    |       | 2.1 |   |
| Acquisition  and disposal costs                                                                                        |       | 0.2                    |       | — |   |
| Bad  debt provision                                                                                                    |       | 0.4                    |       | — |   |
| Loss  on sale of assets and other                                                                                      |       | —                 |       | 0.1 |   |
| Other                                                                                                                  |       | (0.9                   | )          | 1.9 |   |
| Total  Adjusted EBITDA                                                                                                 |       | $                      | 165.0      |   | $ | 109.2 |   |

 

***Contractual Obligations***

 

The Company is obligatedto make future payments under various contracts such as debt agreements(including scheduled cash interest payments), operating lease agreements, andunconditional purchase obligations. A discussion of these contractualobligations is included in the Company’s 2009 Form 10-K. There havenot been significant changes to these contractual obligations as of March 31,2010.

 

***Capital Expenditures***

 

Rockwood’s capitalexpenditures for the three months ended March 31, 2010 consisted primarilyof replacements of worn, obsolete or damaged equipment as well as investmentsin new equipment. For the three months ended March 31, 2010 and 2009, ourcapital expenditures, excluding capital leases, were $35.2 million and $44.3million, respectively. Capital expenditures for each of our reporting segmentsare provided in the following table:

 
| **($ in millions)**                | ** ** | **Specialty  Chemicals** | ** ** | **Performance  Additives** | ** ** | **Titanium  Dioxide  Pigments** | ** ** | **Advanced  Ceramics** | ** ** | **Specialty  Compounds** | ** ** | **Corporate and  other** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------|------------|--------------------------|------------|----------------------------|------------|---------------------------------|------------|------------------------|------------|--------------------------|------------|--------------------------|------------|------------------|------------|
| Three  months ended March 31, 2010 |       | $                        | 8.7        |                       | $          | 4.8                             |       | $                      | 13.6       |                     | $          | 6.0                      |       | $                | 1.9        |   | $ | 0.2 |   | $ | 35.2 |   |
| Three  months ended March 31, 2009 |       | 16.3                     |       | 7.0                        |       | 10.5                            |       | 7.8                    |       | 2.4                      |       | 0.3                      |       | 44.3             |       |
|                                         |            |                          |            |                            |            |                                 |            |                        |            |                          |            |                          |            |                  |            |  |  |  |  |  |  |  |

 

We may incur future costsfor capital improvements and general compliance under SHE laws. For the yearended December 31, 2009, our capital expenditures for SHE matters totaled$17.9 million, excluding costs to maintain and repair pollution controlequipment. For 2010, we estimate capital expenditures for compliance with SHElaws to be at similar levels; however, because capital expenditures for thesematters are subject to changes in and new SHE laws, we cannot provide assurancethat our recent expenditures will be indicative of future amounts required tocomply with these laws, including the EU’s REACH legislation. See Note 14, “Commitmentsand Contingencies,” “Regulatory Developments” for a discussion of REACH.

 

***Foreign currency related transactions***

 

As of March 31,2010, $1,145.0 million of the debt outstanding is denominated in Euros.

 

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**RecentAccounting Standards**

 

See Note 1, “Descriptionof Business and Summary of Significant Accounting Policies,” for a discussionof recent accounting standards.

 

**Off-BalanceSheet Arrangements**

 

In the normal course ofbusiness, the Company incurs obligations which include guarantees related tocontract completion, regulatory compliance and product performance. Undercertain circumstances, these obligations are supported through the issuance ofletters of credit and other bank guarantees. As of March 31, 2010, theCompany had approximately $30.4 million of letters of credit and other bankguarantees, of which $29.9 million will expire in 2009 through 2014. Theremaining guarantees have no specified expiration date. This amount includesoutstanding letters of credit of $25.8 million that reduced our availabilityunder our senior secured credit facility. In the opinion of management, suchobligations will not significantly affect the Company’s financial position,results of operations or cash flows as the Company anticipates fulfilling itsperformance obligations.

 

**Commitmentsand Contingencies**

 

See Note 14, “Commitmentsand Contingencies,” for a discussion of the Company’s Commitments andContingencies.

 

**CriticalAccounting Policies and Estimates**

 

Our discussion andanalysis of our financial condition and results of operations are based uponour condensed consolidated financial statements, which have been prepared inaccordance with U.S. GAAP. The preparation of these financial statementsrequires us to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and the related disclosure ofcontingent assets and liabilities. These estimates include assessing, amongother things:

 

·                  the fair values of assets acquired and liabilitiesassumed in business combinations;

 

·                  the use and recoverability of inventory;

 

·                  the valuation of deferred tax assets;

 

·                  the amount of unrecognized tax benefits;

 

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

 

·                  the useful lives of tangible and intangible assets.

 

We evaluate our estimateson an ongoing basis, based on historical experience and various otherassumptions that we believe to be reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying valuesof assets and liabilities that are not readily apparent from other sources.Actual results may differ from these estimates under different assumptions orconditions.

 

The significant accountingpolicies of the Company are described in Note 1, “Description of Businessand Summary of Significant Accounting Policies,” to our unaudited condensedconsolidated financial statements and the critical accounting policies andestimates are described in the “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” section in the Company’s 2009 Form 10-K.There have been no significant changes to these critical accounting policiesand estimates as of March 31, 2010.

 

One of our criticalaccounting policies relates to the impairment of goodwill, property, plant andequipment and other intangible assets. The recoverability of goodwill isreviewed on an annual basis during the fourth quarter. Additionally, therecoverability of goodwill, property, plant and equipment and other intangibleassets is reviewed when events or changes in circumstances occur indicatingthat the carrying value of the assets may not be recoverable. For instance, weare monitoring the recoverability of certain intangible assets in our TimberTreatment Chemicals business unit within our Performance Additives segment andwill review such assets if events or circumstances occur to indicate thecarrying value of such assets may not be recoverable.

 

**Forward-LookingStatements**

 

This document containsforward-looking statements. Forward-looking statements within the context ofthe Private Securities Litigation Reform Act of 1995 are not statements ofhistorical fact and may involve a number of risks and uncertainties. 

 

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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 economic conditions in NorthAmerica and Europe and in other locations in which we currently do business;

·                  competitive pricing or product development activitiesaffecting demand for our products;

·                  fluctuations in interest rates, exchange rates andcurrency values;

·                  availability and pricing of raw materials;

·                  fluctuations in energy prices;

·                  changes in the end-use markets in which our productsare sold;

·                  our ability to access capital markets;

·                  technological changes affecting production of ourmaterials;

·                  governmental and environmental regulations and changesin those regulations;

·                  hazards associated with chemicals manufacturing;

·                  our high level of indebtedness;

·                  risks associated with negotiating, consummating andintegrating acquisitions;

·                  risks associated with competition and the introductionof new competing products, especially in the Asia-Pacific region; and

·                  risks associated with international sales andoperations.

 

You should keep in mindthat any forward-looking statements made by us in this document or elsewherespeak only as of the date on which we make them. New risks and uncertaintiescome up from time to time, and it is impossible for us to predict these eventsor how they may affect us. We disclaim any obligation to update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise.

 

**Item3.  Quantitative and Qualitative Disclosures About Market Risk.**

 

We are exposed to marketrisk from changes in interest rates, foreign currency exchange rates andcommodity prices. We manage our exposure to these market risks through regularoperating and financing activities and through the use of derivatives. Whenused, derivatives are employed as risk management tools and not for tradingpurposes. A discussion and analysis of the Company’s market risk isincluded in the Company’s 2009 Form 10-K. There have been no significantchanges to these market risks as of March 31, 2010.

 

**Item4T.  Controls and Procedures**

 

Our management, with theparticipation of our Chief Executive Officer and Chief Financial Officer,evaluated the effectiveness of the design and operation of our disclosurecontrols and procedures as of March 31, 2010 and concluded that ourdisclosure controls and procedures are effective. In connection with thisevaluation, our management did not identify any change in our internal controlover financial reporting that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting during thefirst quarter of 2010.

 

**PART II— OTHER INFORMATION**

 

**Item1.  Legal Proceedings.**

 

We are involved in legalproceedings from time to time in the ordinary course of our business, includingwith respect to product liability, intellectual property and environmentalmatters. In addition, we may be required to make indemnity payments inconnection with certain product liability and environmental claims. See Item 1,“Business,” and Item 1A, “Risk Factors,” “Environmental Indemnities—We maybe subject to environmental indemnity claims relating to properties we havedivested”; “Product Liability— Due to the nature of our business and products,we may be liable for damages arising out of product liability claims”; and “ProductLiability—Due to the nature of our business and products, we may be liable fordamages arising out of certain indemnity claims” in our 2009 Form 10-K.

 

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**Advertising Matter**

 

In September 2009,the U.S. District Court, Northern District of Georgia, issued a preliminaryinjunction prohibiting 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 US Court of Appeals, Eleventh Circuit has scheduled oralarguments for May 20, 2010.

 

We do not believe thatany individual, legal proceeding, government action or arbitration is likely tohave a material adverse effect on our business, results of operations, cashflows or financial condition. We cannot predict the outcome of any legalproceeding or the potential for future legal proceedings. See Note 14, “Commitmentsand Contingencies,” in this Form 10-Q and Item 3, Legal Proceedings in our2009 Form 10-K.

 

**Item1A. Risk Factors.**

 

A discussion of theCompany’s risk factors is included in the Company’s Form 10-K for the yearended December 31, 2009. There have been no material changes to these riskfactors.

 

**Item2.  Unregistered Sales of Equity Securities and Use of Proceeds.**

 

None.

 

**Item3.  Defaults upon Senior Securities.**

 

None.

 

**Item4.  (Removed and Reserved).**

 

**Item5.  Other Information.**

 

None.

 

**Item6.  Exhibits**

 

See the Exhibit Indeximmediately following the signature page to this report. Such Exhibit Indexis hereby incorporated by reference.

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|   | ROCKWOOD SPECIALTIES  GROUP, INC. |
|--------|----------------------------------------|
|   |                                   |
|   |                                   |
|   | By:                                    | /s/ SEIFI GHASEMI |
|   |                                   | Seifi Ghasemi |
|   |                                   | Chairman and Chief  Executive Officer |
|   |                                   | Date: May 12, 2010 |
|   |                                   |
|   |                                   |
|   | ROCKWOOD SPECIALTIES  GROUP, INC. |
|   |                                   |
|   |                                   |
|   | By:                                    | /s/ ROBERT J. ZATTA |
|   |                                   | Robert J. Zatta |
|   |                                   | Senior Vice President  and Chief Financial Officer |
|   |                                   | Date: May 12, 2010 |

 

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**Exhibit Index**

 
| **Exhibit No.** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                              |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **           | ** ** | ** **                                                                                                                                                                                                                                                                                                                        |
| 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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*       Filed herewith.

 

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