**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** |
|-------|--------------------------------------------------------------------------------------------------------|

 

**Forthe quarterly period ended June 30, 2009**

 

**Or**

 
| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

 

**Commissionfile number   333-109686**

 

**RockwoodSpecialties Group, Inc.**

(Exact name ofRegistrant 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’stelephone number, including area code)

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days.  x  Yes  o  No

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files). o Yes  o  No

 

Indicate by check markwhether the Registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company. See definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of 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) |   |                              |

 

Indicate by check markwhether the Registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). o Yes  x No

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

 

The Registrant’s commonstock, par value $0.01 per share, is not publicly traded. As of August 10,2009, there were 382,000 outstanding shares of common stock of the Registrant,all of which is held by its parent company Rockwood Specialties 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 and six months ended  June 30, 2009 and 2008 |   |
|    | Condensed  Consolidated Balance Sheets as of June 30, 2009 and December 31,  2008                      |   |
|    | Condensed  Consolidated Statements of Cash Flows for the six months ended June 30,  2009 and 2008           |   |
|    | Condensed  Consolidated Statements of Equity for the six months ended June 30, 2009  and 2008               |   |
|    | 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  | Submission of  Matters to a Vote of Security Holders                                                             |   |
| 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** | ** ** | **Six months  ended** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                        | ** ** | **June 30,**       | ** ** | **June 30,**     | ** ** |
| ** **                                                        | ** ** | **2009**                | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net sales                                                         |       | $                       | 730.4      |                  | $          | 923.2 |   | $ | 1,390.4 |   | $ | 1,767.0 |   |
| Cost of products sold                                             |       | 527.2                   |       | 639.9                 |       | 1,005.1 |   | 1,211.2 |   |
| Gross profit                                                      |       | 203.2                   |       | 283.3                 |       | 385.3 |   | 555.8 |   |
| Selling, general and administrative expenses                      |       | 151.0                   |       | 175.8                 |       | 296.1 |   | 342.4 |   |
| Restructuring and other severance costs                           |       | 4.0                     |       | 1.5                   |       | 11.8 |   | 2.3 |   |
| Loss on sale of assets and other                                  |       | —                  |       | 0.8                   |       | 0.1 |   | 0.9 |   |
| Operating income                                                  |       | 48.2                    |       | 105.2                 |       | 77.3 |   | 210.2 |   |
| Other expenses, net:                                              |       |                    |       |                  |       |   |   |   |   |
| Interest expense (a)                                              |       | (28.9                   | )          | (9.7                  | )          | (78.6 | ) | (83.4 | ) |
| Interest income                                                   |       | 0.4                     |       | 1.4                   |       | 0.8 |   | 3.6 |   |
| Loss on early extinguishment of debt, net                         |       | (27.9                   | )          | —                |       | (25.7 | ) | — |   |
| Foreign exchange gain (loss), net                                 |       | 16.5                    |       | (0.8                  | )          | 10.9 |   | 14.3 |   |
| Other, net                                                        |       | 0.3                     |       | 0.1                   |       | 0.4 |   | 0.5 |   |
| Other expenses, net                                               |       | (39.6                   | )          | (9.0                  | )          | (92.2 | ) | (65.0 | ) |
| Income (loss) from continuing operations before  taxes            |       | 8.6                     |       | 96.2                  |       | (14.9 | ) | 145.2 |   |
| Income tax provision (benefit)                                    |       | 10.6                    |       | 20.6                  |       | (6.1 | ) | 40.3 |   |
| (Loss) income from continuing operations                          |       | (2.0                    | )          | 75.6                  |       | (8.8 | ) | 104.9 |   |
| Income from discontinued operations, net of tax                   |       | 1.1                     |       | 2.4                   |       | 3.4 |   | 1.4 |   |
| Net (loss) income                                                 |       | (0.9                    | )          | 78.0                  |       | (5.4 | ) | 106.3 |   |
| Net loss (income) attributable to noncontrolling  interest        |       | 2.6                     |       | —                |       | 5.6 |   | (0.6 | ) |
| Net income attributable to Rockwood Specialties  Group, Inc. |       | $                       | 1.7        |                  | $          | 78.0 |   | $ | 0.2 |   | $ | 105.7 |   |
|                                                              |       |                    |       |                  |       |   |   |   |   |
| Amounts attributable to Rockwood Specialities  Group, Inc.   |       |                    |       |                  |       |   |   |   |   |
| Income (loss) from continuing operations                          |       | $                       | 0.6        |                  | $          | 75.6 |   | $ | (3.2 | ) | $ | 104.3 |   |
| Income from discontinued operations                               |       | 1.1                     |       | 2.4                   |       | 3.4 |   | 1.4 |   |
| Net income                                                        |       | $                       | 1.7        |                  | $          | 78.0 |   | $ | 0.2 |   | $ | 105.7 |   |

 

----

| (a) Interest expense includes:         |   |   |   |   |   |   |   |   |   |
|---------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Interest expense on debt                    |   | $      | (38.9  | )      | $      | (41.3  | )      | $      | (76.6  | ) | $ | (81.9 | ) |
| Mark-to-market gains on interest rate swaps |   | 12.2   |   | 34.0   |   | 2.6    |   | 3.2    |   |
| Deferred financing costs                    |   | (2.2   | )      | (2.4   | )      | (4.6   | )      | (4.7   | )      |
| Total                                       |   | $      | (28.9  | )      | $      | (9.7   | )      | $      | (78.6  | ) | $ | (83.4 | ) |

 

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)**

 
| ** **                                                                                      | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                      | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| **ASSETS**                                                                                      |       |              |       |                  |       |
| Current assets:                                                                                 |       |              |       |                  |       |
| Cash and cash equivalents                                                                       |       | $                 | 197.7      |                  | $          | 468.7 |   |
| Accounts receivable, net                                                                        |       | 476.0             |       | 464.6                 |       |
| Inventories                                                                                     |       | 543.6             |       | 641.0                 |       |
| Deferred income taxes                                                                           |       | 26.8              |       | 22.2                  |       |
| Prepaid expenses and other current assets                                                       |       | 70.9              |       | 65.9                  |       |
| Total current assets                                                                            |       | 1,315.0           |       | 1,662.4               |       |
| Property, plant and equipment, net                                                              |       | 1,715.7           |       | 1,752.2               |       |
| Goodwill                                                                                        |       | 919.5             |       | 917.8                 |       |
| Other intangible assets, net                                                                    |       | 720.2             |       | 754.8                 |       |
| Deferred  debt issuance costs, net of accumulated amortization of $7.5 and $39.2,  respectively |       | 28.2              |       | 39.1                  |       |
| Deferred income taxes                                                                           |       | 22.6              |       | 11.6                  |       |
| Other assets                                                                                    |       | 37.3              |       | 39.5                  |       |
| Total assets                                                                                    |       | $                 | 4,758.5    |                  | $          | 5,177.4 |   |
| **LIABILITIES**                                                                                 |       |              |       |                  |       |
| Current liabilities:                                                                            |       |              |       |                  |       |
| Accounts payable                                                                                |       | $                 | 211.5      |                  | $          | 260.8 |   |
| Income taxes payable                                                                            |       | 1.1               |       | 4.1                   |       |
| Accrued compensation                                                                            |       | 61.4              |       | 92.6                  |       |
| Restructuring liability                                                                         |       | 11.9              |       | 18.9                  |       |
| Accrued expenses and other current liabilities                                                  |       | 212.5             |       | 215.5                 |       |
| Deferred income taxes                                                                           |       | 8.6               |       | 9.0                   |       |
| Long-term debt, current portion                                                                 |       | 58.9              |       | 90.9                  |       |
| Total current liabilities                                                                       |       | 565.9             |       | 691.8                 |       |
| Long-term debt                                                                                  |       | 2,450.8           |       | 2,720.3               |       |
| Pension and related liabilities                                                                 |       | 358.2             |       | 352.0                 |       |
| Deferred income taxes                                                                           |       | 84.9              |       | 97.7                  |       |
| Other liabilities                                                                               |       | 184.3             |       | 189.8                 |       |
| Total liabilities                                                                               |       | 3,644.1           |       | 4,051.6               |       |
| **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                                                          |       | 222.4             |       | 207.0                 |       |
| Accumulated deficit                                                                             |       | (440.4            | )          | (440.6                | )          |
| Total Rockwood Specialties Group, Inc.  stockholder’s equity                          |       | 826.0             |       | 810.4                 |       |
| Noncontrolling interest                                                                         |       | 288.4             |       | 315.4                 |       |
| Total equity                                                                                    |       | 1,114.4           |       | 1,125.8               |       |
| Total liabilities and equity                                                                    |       | $                 | 4,758.5    |                  | $          | 5,177.4 |   |

 

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)**

 
| ** **                                                                                              | ** ** | **Six months  ended** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                              | ** ** | **June 30,**     | ** ** |
| ** **                                                                                              | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                                              |       |                  |       |   |   |
| Net (loss) income                                                                                       |       | $                     | (5.4       | ) | $ | 106.3 |   |
| Adjustments to reconcile net (loss) income to net  cash provided by operating activities:               |       |                  |       |   |   |
| Income from discontinued operations, net of tax                                                         |       | (3.4                  | )          | (1.4 | ) |
| Depreciation and amortization                                                                           |       | 137.0                 |       | 125.0 |   |
| Deferred financing costs amortization                                                                   |       | 4.6                   |       | 4.7 |   |
| Loss on early extinguishment of debt, net (a)                                                           |       | 25.7                  |       | — |   |
| Foreign exchange gain, net                                                                              |       | (10.9                 | )          | (14.3 | ) |
| Fair value adjustment of derivatives                                                                    |       | (2.6                  | )          | (3.2 | ) |
| Bad debt provision                                                                                      |       | 0.4                   |       | 1.0 |   |
| Stock-based compensation                                                                                |       | 1.5                   |       | 4.1 |   |
| Deferred income taxes                                                                                   |       | (16.4                 | )          | 16.7 |   |
| Loss on sale of assets and other                                                                        |       | 0.1                   |       | 0.4 |   |
| Changes in assets and liabilities, net of the effect  of foreign currency translation and acquisitions: |       |                  |       |   |   |
| Accounts receivable                                                                                     |       | (6.5                  | )          | (90.0 | ) |
| Inventories                                                                                             |       | 100.4                 |       | (14.7 | ) |
| Prepaid expenses and other assets                                                                       |       | (3.2                  | )          | 7.8 |   |
| Accounts payable                                                                                        |       | (40.7                 | )          | (13.1 | ) |
| Income taxes payable                                                                                    |       | (3.6                  | )          | (0.1 | ) |
| Accrued expenses and other liabilities                                                                  |       | (46.4                 | )          | (8.8 | ) |
| Net cash provided by operating activities of  continuing operations                                     |       | 130.6                 |       | 120.4 |   |
| Net cash provided by operating activities of  discontinued operations                                   |       | —                |       | 3.3 |   |
| **Net cash provided by operating  activities**                                                          |       | 130.6                 |       | 123.7 |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                                              |       |                  |       |   |   |
| Acquisitions, including transaction fees paid, net  of cash acquired                                    |       | (0.3                  | )          | (11.4 | ) |
| Post closing purchase price consideration                                                               |       | —                |       | 29.1 |   |
| Capital expenditures, excluding capital leases                                                          |       | (81.2                 | )          | (104.2 | ) |
| Proceeds on sale of assets                                                                              |       | 6.8                   |       | 2.9 |   |
| Net cash used in investing activities of continuing  operations                                         |       | (74.7                 | )          | (83.6 | ) |
| Net cash used in investing activities of  discontinued operations                                       |       | (0.4                  | )          | (4.9 | ) |
| **Net cash used in investing  activities**                                                              |       | (75.1                 | )          | (88.5 | ) |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                                              |       |                  |       |   |   |
| Prepayment of 2014 Notes                                                                                |       | (146.8                | )          | — |   |
| Prepayment of senior secured debt                                                                       |       | (102.3                | )          | — |   |
| Repayment of senior secured debt                                                                        |       | (36.8                 | )          | (33.5 | ) |
| Payments on other long-term debt                                                                        |       | (5.4                  | )          | (5.6 | ) |
| Equity contribution                                                                                     |       | —                |       | 0.2 |   |
| Deferred financing costs                                                                                |       | (13.7                 | )          | (3.0 | ) |
| Fees related to early extinguishment of debt                                                            |       | (8.3                  | )          | — |   |
| Loan from Viance noncontrolling shareholder                                                             |       | 2.0                   |       | — |   |
| Contractual advance to Titanium Dioxide Pigments  noncontrolling shareholder                            |       | (1.3                  | )          | — |   |
| Distribution to noncontrolling shareholder                                                              |       | —                |       | (2.9 | ) |
| Net cash used in financing activities of continuing  operations                                         |       | (312.6                | )          | (44.8 | ) |
| Net cash used in financing activities of  discontinued operations                                       |       | —                |       | — |   |
| **Net cash used in financing  activities**                                                              |       | (312.6                | )          | (44.8 | ) |
| Effect of exchange rate changes on cash and cash  equivalents                                           |       | (13.9                 | )          | (0.2 | ) |
| Net decrease in cash and cash equivalents                                                               |       | (271.0                | )          | (9.8 | ) |
| Cash and cash equivalents of continuing operations,  beginning of period                                |       | 468.7                 |       | 346.9 |   |
| Cash and cash equivalents of continuing operations,  end of period                                      |       | $                     | 197.7      |   | $ | 337.1 |   |

 

----

(a) Includes thewrite-off of deferred financing costs of $20.9 and lender fees related to theearly extinguishment of debt of $11.1, partially offset by a discount on theprepayment of the 2014 Notes of $6.3.

 
| Supplemental disclosures of cash flow information: |   |   |   |   |   |
|----------------------------------------------------|--------|--------|--------|--------|--------|
| Interest paid                                      |   | $      | 78.5   |   | $      | 82.8 |   |
| Income taxes paid, net of refunds                  |   | $      | 14.8   |   | $      | 23.6 |   |
| Non-cash investing activities:                     |   |   |   |   |   |
| Acquisition of capital equipment                   |   | $      | 12.3   |   | $      | 8.4 |   |
| Fees related to early extinguishment of debt       |   | $      | 3.7    |   | $      | — |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

5

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFEQUITY**

**(Dollarsin millions)**

**(Unaudited)**

** **
| ** **                                                                                       | ** ** | **2009**               | ** ** | **2008**           | ** ** |
|--------------------------------------------------------------------------------------------------|------------|------------------------|------------|--------------------|------------|
| ** **                                                                                       | ** ** | **Rockwood**           | ** ** | ** **         | ** ** | ** ** | ** ** | **Rockwood** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                       | ** ** | **Specialties**        | ** ** | ** **         | ** ** | ** ** | ** ** | **Specialties** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                       | ** ** | **Group, Inc.**   | ** ** | ** **         | ** ** | ** ** | ** ** | **Group, Inc.** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                       | ** ** | **Stockholder’s** | ** ** | **Noncontrolling** | ** ** | **Total** | ** ** | **Stockholder’s** | ** ** | **Noncontrolling** | ** ** | **Total** | ** ** |
| ** **                                                                                       | ** ** | **Equity**             | ** ** | **Interest**       | ** ** | **Equity** | ** ** | **Equity** | ** ** | **Interest** | ** ** | **Equity** | ** ** |
| Balance at January 1                                                                        |       | $                      | 810.4      |               | $          | 315.4 |   | $ | 1,125.8 |   | $ | 1,565.3 |   | $ | 175.3 |   | $ | 1,740.6 |   |
|                                                                                             |       |                   |       |               |       |   |   |   |   |   |   |   |   |
| Net income (loss)                                                                                |       | 0.2                    |       | (5.6               | )          | (5.4 | ) | 105.7 |   | 0.6 |   | 106.3 |   |
| Other comprehensive income (loss)                                                                |       | 15.4                   |       | (4.2               | )          | 11.2 |   | 87.6 |   | — |   | 87.6 |   |
| Comprehensive income (loss)                                                                      |       | 15.6                   |       | (9.8               | )          | 5.8 |   | 193.3 |   | 0.6 |   | 193.9 |   |
| Change in estimate of fair value of assets contributed  to the Titanium Dioxide Pigments venture |       | —                 |       | (16.5              | )          | (16.5 | ) | — |   | — |   | — |   |
| Distribution  to noncontrolling shareholder                                                      |       | —                 |       | —             |       | — |   | — |   | (2.9 | ) | (2.9 | ) |
| Equity contribution                                                                              |       | —                 |       | —             |       | — |   | 0.2 |   | — |   | 0.2 |   |
| Foreign currency translation                                                                     |       | —                 |       | (0.7               | )          | (0.7 | ) | — |   | — |   | — |   |
| Balance at June 30                                                                          |       | $                      | 826.0      |               | $          | 288.4 |   | $ | 1,114.4 |   | $ | 1,758.8 |   | $ | 173.0 |   | $ | 1,931.8 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

6

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**Notes To Condensed Consolidated Financial Statements(Unaudited)**

 

**1.  DESCRIPTION OF BUSINESS ANDSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:**

 

***BusinessDescription, Background***— Rockwood Specialties Group, Inc. andSubsidiaries 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.

 

Rockwood was formed in connection with an acquisition of certainassets, stock and businesses from Laporte plc (“Laporte”) on November 20,2000 (the “KKR Acquisition”) by affiliates of Kohlberg Kravis Roberts &Co. L.P. (“KKR”). The businesses acquired focus on specialty compounds,iron-oxide pigments, timber-treatment chemicals and clay-basedadditives. The Company is an indirect wholly-owned subsidiary of RockwoodHoldings, Inc. (“Holdings”). Effective November 2007, affiliates ofKKR control less than a majority of the voting power of the Holdings’outstanding common stock.

 

On July 31, 2004, the Company completed the acquisition of certainbusinesses of Dynamit Nobel from mg technologies ag, now known as GEA GroupAktiengesellschaft (“GEA Group”).  Theremaining businesses acquired are focused on highly specialized markets andconsist of: surface treatment and lithium chemicals; advanced ceramics andtitanium dioxide pigments.

 

***Basis ofPresentation***—Theaccompanying condensed financial statements of Rockwood are presented on aconsolidated basis. All significant intercompany accounts and transactions havebeen eliminated in consolidation. Certain prior-period amounts related toreporting the sale of the pool and spa chemicals business in October 2008as discontinued operations and the adoption of Statement of AccountingStandards (“SFAS”) No. 160,*Noncontrolling Interests in Consolidated Financial Statements, an amendment ofARB No. 51*,have been reclassified to conform to the current-year classification.

 

The interim financial statements included herein are unaudited. Theresults of operations for the interim periods are not necessarily indicative ofthe results of operations for the full year. The condensed consolidatedfinancial statements are presented based upon accounting principles generallyaccepted in the United States of America (“U.S. GAAP”), except that certaininformation and footnote disclosures, normally included in financial statementsprepared in accordance with U.S. GAAP, have been condensed or omitted. Theaccompanying condensed consolidated financial statements should be read inconjunction with the consolidated financial statements and the notes theretocontained in the Company’s 2008 Form 10-K. In the opinion ofmanagement, this information contains all adjustments necessary, consisting ofnormal and recurring accruals, for a fair presentation of the results for theperiods presented.

 

The Company’s noncontrolling interest (formerly minority interest)represents the total of the noncontrolling party’s interest in certaininvestments (principally the Viance, LLC timber treatment joint venture and theTitanium Dioxide Pigments venture) that are consolidated but less than 100%owned.

 

Unless otherwise noted, all balance sheet related items which aredenominated in euros are converted at the June 30, 2009 exchange rate of €1.00= $1.4033.

 

***Stock-BasedCompensation***—Holdings has previously granted awards under the 2008 Amended and RestatedStock Purchase and Option Plan of Rockwood Holdings, Inc. and Subsidiaries(the “Plan”). Under the Plan, Holdings granted stock options, restrictedstock and other stock-based awards to the Company’s employees and directors andallowed employees and directors to purchase shares of its common stock. Therewere 10,000,000 authorized shares available for grant under the Plan. However,Holdings will no longer issue equity awards under this Plan.  In April 2009,Holdings adopted the 2009 Stock Incentive Plan (the “New Plan”), which has11,000,000 authorized shares.  Effective January 1, 2006, the Companyadopted SFAS No. 123R,*Share-BasedPayment*, and related interpretations and began expensing thegrant-date fair value of stock options.

 

The aggregate compensation cost for stock options, restricted stockunits and Holdings’ Board of Director stock grants recorded under the Plancaused income from continuing operations before taxes to decrease by $0.7million and $2.2 million for the three months ended June 30, 2009 and2008, respectively and $1.5 million and $4.1 million for the six months ended June 30,2009 and 2008, respectively.  The total tax benefit recognized related tostock options was $0.1 million and $0.2 million for the three months ended June 30,2009 and 2008, respectively and $0.1 million and $0.4 million for the sixmonths ended June 30, 2009 and 2008, respectively.

 

In December 2008, Holdings approved an award of 606,256performance restricted stock units to management and key employees which willvest on December 31, 2011 as long as the employee continues to be employedby the Company on this date and upon the 

 

7

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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, 2009 through December 31,2009. However, in accordance with SFAS No. 123R, the Company did notrecognize any compensation cost in 2008 for this issuance because theperformance targets that form the basis for vesting of these restricted stockunits were not known as of December 31, 2008. These performance targetswere established on February 20, 2009, when such performance targets wereapproved by Holdings’ Compensation Committee, and as a result, the Companybegan recording compensation cost on a ratable basis over the vesting period.The grant date fair value of these restricted stock units was $7.59 per stockunit.

 

Holdings granted additional stock options and restricted stock units tocertain employees of Rockwood Corporate Headquarters and its business units.The restricted stock units contain a provision in which the units shallimmediately vest and become converted into the right to receive a cash paymenton the vesting date upon a change in control as defined in the equityagreement. As the provisions for redemption are outside the control of theCompany, the fair value of these units as of June 30, 2009 and December 31,2008 have been recorded as mezzanine equity (outside of permanent equity) inthe Condensed Consolidated Balance Sheets of Holdings.

 

***Recent AccountingPronouncements***- The following represents the impact of recently issued accountingpronouncements:

 

In December 2007, SFAS No. 141 (revised 2007),*Business Combinations* (“FAS 141R”) was issued,which replaces Financial Accounting Standards Board (“FASB”) Statement No. 141,*Business Combinations*. FAS 141R establishes principles andrequirements for how the acquirer recognizes and measures in its financialstatements the identifiable assets acquired, the liabilities assumed, anynoncontrolling interest in the acquiree and the goodwill acquired. Thisstatement also establishes disclosure requirements to enable users of financialstatements to evaluate the nature and financial effects of the businesscombination. This statement was adopted as of January 1, 2009 and iseffective for acquisitions completed on or after January 1, 2009.

 

In December 2007, SFAS No. 160,*Noncontrolling Interests in Consolidated Financial Statements, anamendment of ARB No. 51*,was issued. Per this statement, the accounting and reporting for minorityinterests was recharacterized as noncontrolling interests and classified as acomponent of equity (but separate from parent’s equity). This statement alsoestablishes reporting requirements that provide sufficient disclosures thatclearly identify and distinguish between the interests of the parent and theinterests of the noncontrolling owners. This statement was adopted as of January 1,2009 and primarily relates to the Company’s Viance, LLC joint venture andTitanium Dioxide Pigments venture.

 

In February 2008, the FASB issued FASB Staff Position (“FSP”)Financial Accounting Standard (“FAS”) FSP FAS 157-2,  *Effective Date of FASB Statement No. 157*. FSP FAS 157-2 delays the effective date of SFAS No. 157 from 2008 to 2009for all nonfinancial assets and nonfinancial liabilities, except those that arerecognized or disclosed at fair value in the financial statements on arecurring basis (at least annually). The Company applied the provisions ofFSP 157-2 on January 1, 2009 and this FSP did not have a material impacton its financial statements.

 

In March 2008, SFAS No. 161,*Disclosures about Derivative Instruments and Hedging Activities - an Amendmentof FASB Statement 133*,was issued. This statement changes the disclosure requirements for derivativeinstruments and hedging activities, including enhanced disclosures about (a) howand why an entity uses derivative instruments, (b) how derivativeinstruments and related hedged items are accounted for under SFAS No. 133,  *Accountingfor Derivative Instruments and Hedging Activities*, and itsrelated interpretations, and (c) how derivative instruments and relatedhedged items affect an entity’s financial position, financial performance, andcash flows.  The Company adopted SFAS No. 161 on January 1,2009. This standard did not have a material impact on the Company’s financialstatements.  See Note 5, “Derivatives,” for the disclosure requirements ofthis new standard.

 

In April 2008, the FASB issued FSP No. 142-3,*Determination of the Useful Life of IntangibleAssets*. This FSP amends the factors that should be considered indeveloping renewal or extension assumptions used to determine the useful lifeof a recognized intangible asset under FASB Statement No. 142,*Goodwill and Other Intangible Assets*. Theintent of this FSP is to improve the consistency between the useful life of arecognized intangible asset under Statement 142 and the period of expected cashflows used to measure the fair value of the asset under FASB Statement No. 141(revised 2007),*Business Combinations*,and other U.S. GAAP. This FSP is effective for recognized intangible assetsacquired after January 1, 2009 and did not have a material impact on theCompany’s financial statements.

 

In December 2008, the FASB issued FSP No. 132 (R) - 1,  *Employers’Disclosures about Postretirement Benefit Plan Assets*. ThisFSP amends FASB Statement No. 132 (revised 2003),*Employers’ Disclosures about Pensions and OtherPostretirement Benefits*,to provide guidance on an employer’s disclosures about plan assets of a definedbenefit pension or other postretirement plan.  This includes disclosingobjectives about how investment allocation decisions are made, the majorcategories of plan assets, the inputs and valuation techniques used to measurethe fair value of plan assets, the effect of fair value measurements usingsignificant unobservable inputs (Level 3) on changes in plan assets, andsignificant concentrations of risk within plan assets.  The disclosuresabout plan assets required by this FSP are effective for the Company for the2009 fiscal year end.

 

8

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In April 2009, the FASB issued FSP No. 141 (R) — 1,*Accounting for Assets Acquired and LiabilitiesAssumed in a Business Combination That Arise from Contingencies*. This FSP amends and clarifies FASBStatement No. 141 (revised 2007),Business Combinations, to address application issues raised bypreparers, auditors, and members of the legal profession on initial recognitionand measurement, subsequent measurement and accounting, and disclosure ofassets and liabilities arising from contingencies in a businesscombination.  This FSP was adopted as of January 1, 2009 and iseffective for acquisitions completed on or after January 1, 2009.

 

In April 2009, the FASB issued FSP No. 107-1 and APB 28-1,*Interim Disclosures about Fair Value of FinancialStatements*. This FSPamends FASB Statement No. 107,*Disclosures about Fair Value of Financial Instruments*, to require disclosures about fairvalue of financial instruments for interim reporting periods of publicly tradedcompanies as well as in annual financial statements.  This FSP also amendsAPB Opinion No. 28,*Interim FinancialReporting*, torequire disclosures in summarized financial information at interim reportingperiods.  This FSP is effective for the Company beginning with its Form 10-Qfor the period ended June 30, 2009 and relates to disclosures made aboutthe fair value of its debt instruments and cash and cash equivalents.

 

In April 2009, the FASB issued FSP No. 157-4,*Determining Fair Value When the Volume and Level ofActivity for the Asset or Liability Have Significantly Decreased andIdentifying Transactions That Are Not Orderly*. This FSP provides additional guidance for estimating fairvalue in accordance with FASB Statement No. 157,*Fair Value Measurements*, when the volume and level ofactivity for the asset or liability have significantly decreased.  ThisFSP also includes guidance on identifying circumstances that indicate atransaction is not orderly.  This FSP is effective for the Companybeginning with its Form 10-Q for the period ended June 30, 2009 anddid not have a material impact on its financial statements.

 

In May 2009, SFAS No. 165, *SubsequentEvents*, was issued.  ThisStatement establishes general standards of accounting for and disclosure ofevents that occur after the balance sheet date but before financial statementsare issued.  This Statement applies toboth interim and annual financial statements and is effective for the Companybeginning with its Form 10-Q for the period ended June 30, 2009.  The Company has performed an evaluation ofsubsequent events through August 13, 2009, which is the date thesefinancial statements were filed with the Securities and Exchange Commission (“SEC”).

 

In June 2009, SFAS No. 166, *Accountingfor Transfers and Servicing of Financial Assets,*was issued.  This Statement amends SFAS No. 140, *Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities,*and will require more informationabout transfers of financial assets, including securitization transactions, andwhere entities have continuing exposure to the risks related to transferredfinancial assets.  It also eliminates theconcept of a “qualifying special purpose entity,” changes the requirements forderecognizing financial assets and will require additional disclosures.  This Statement is effective for financialasset transfers occurring after January 1, 2010 for the Company.  The Company does not expect this statement tohave a material impact on its financial statements.

 

In June 2009, SFAS No. 167, *Amendmentsto FASB Interpretation No. 46 (R),*was issued.  This Statement amends FASB Interpretation 46(R), *Consolidation of Variable Interest Entities,*andrequires an enterprise to perform an analysis to determine whether theenterprise’s variable interest entity or interests give it a controllingfinancial interest in a variable interest entity. It also will requireadditional disclosures about involvement with variable interest entities andany significant changes in risk exposure due to that involvement.  This Statement is effective for the Companyas of January 1, 2010.  The Companyis currently evaluating the impact this statement will have on its financialstatements primarily relating to its Viance LLC joint venture and its TitaniumDioxide Pigments venture with Kemira.

 

In June 2009, SFAS No. 168, *The FASBAccounting Standards Codification and the Hierarchy of Generally AcceptedAccounting Principles, a replacement of FASB Statement No. 162,*wasissued.  This Statement establishes theFASB Accounting Standards Codification (“Codification”) as the source ofauthoritative accounting principles recognized by the FASB to be applied tonongovernmental entities in the preparation of financial statements inconformity with Generally Accepted Accounting Principles (“GAAP”).  Rules and interpretative releases of theSEC under authority of federal securities laws are also sources ofauthoritative GAAP.  The Codificationdoes not change current GAAP.  Instead,it introduces a new structure that reorganizes the thousands of U.S. GAAP pronouncementsinto roughly 90 accounting Topics.  TheCodification supersedes all accounting standards in existing FASB, EmergingIssues Task Force (“EITF”), American Institute of Certified Public Accountants(“AICPA”), and related standards.  ThisCodification is effective for the Company’s financial statements beginning withits Form 10-Q for the period ended September 30, 2009.

 

**2.  COMPREHENSIVE INCOME**

 

Comprehensive income includes net income and the other comprehensiveincome components which include unrealized gains and losses from foreigncurrency translation and from certain intercompany transactions that are of along-term investment nature, pension-related adjustments that are recordeddirectly into a separate section of equity in the balance sheets and netinvestment and 

 

9

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foreign exchange cash flow hedges. Foreign currency translation amountsare not adjusted for income taxes since they relate to indefinite lengthinvestments in non-U.S. subsidiaries and certain intercompany debt.

 

Comprehensive income (loss) is summarized as follows:

 
| ** **                                                                  | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                  | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| **($ in millions)**                                                    | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net (loss) income                                                           |       | $                      | (0.9       | )                    | $          | 78.0 |   | $ | (5.4 | ) | $ | 106.3 |   |
| Pension related adjustments, net of tax                                     |       | (0.2                   | )          | (0.1                 | )          | (0.1 | ) | 0.4 |   |
| Foreign currency translation                                                |       | 69.4                   |       | 2.7                  |       | 7.4 |   | 119.5 |   |
| Intercompany foreign currency loans                                         |       | 41.0                   |       | (1.3                 | )          | 3.4 |   | 61.5 |   |
| Net investment hedges, net of tax                                           |       | (48.7                  | )          | 3.0                  |       | 0.6 |   | (93.8 | ) |
| Foreign exchange contracts, net of tax                                      |       | 0.2                    |       | —               |       | (0.1 | ) | — |   |
| Comprehensive income                                                        |       | 60.8                   |       | 82.3                 |       | 5.8 |   | 193.9 |   |
| Comprehensive loss (income) attributable to noncontrolling interest         |       | 2.9                    |       | —               |       | 9.8 |   | (0.6 | ) |
| Comprehensive income attributable to Rockwood Specialties  Group, Inc. |       | $                      | 63.7       |                 | $          | 82.3 |   | $ | 15.6 |   | $ | 193.3 |   |

 

**3.  DISCONTINUED OPERATIONS:**

 

On October 10, 2008, the Company completed the sale of its pooland spa chemicals business and received net proceeds of $122.0 million incash.  The net gain on the pool and spa chemicals business sale recordedin the fourth quarter of 2008 was $40.5 million (net of $25.7 million oftaxes). In connection with SFAS No. 144,*Accounting for the Impairment or Disposal of Long-Lived Assets*,the Company’s financial statements have been reclassified to reflect thisbusiness as a discontinued operation for all periods presented.

 

For the three months ended June 30, 2009, income from discontinuedoperations, net of tax, was $1.1 million and was related to the reversal ofcertain reserves in connection with the sale of the Electronics business in December 2007.  For the six months ended June 30, 2009,income from discontinued operations, net of tax, was $3.4 million and wascomprised of income of $2.3 million due to the favorable resolution of a claimagainst the Company’s former Group Novasep business and the Electronicsbusiness reserve reversal of $1.1 million.   For the three and six months ended June 30,2008, income from discontinued operations, net of tax, of $2.4 million and $1.4million, respectively, related to operating the pool and spa chemicalsbusiness.

 

**4.  SEGMENT INFORMATION:**

 

Rockwood operates in five reportable segments according to the natureand economic characteristics of its products and services as well as the mannerin which the information is used internally by the Company’s key decisionmaker, who is the Company’s Chief Executive Officer. The five segments are: (1) SpecialtyChemicals, which consists of the surface treatment and fine chemicals businesslines; (2) Performance Additives, which consists of color pigments andservices, timber treatment chemicals and clay-based additives; (3) TitaniumDioxide Pigments; (4) Advanced Ceramics; and (5) Specialty Compounds.

 

Items that cannot be readily attributed to individual segments havebeen classified as “Corporate and other.” Corporate and other operating lossprimarily represents payroll, professional fees and other operating expenses ofcentralized functions such as treasury, tax, legal, internal audit andconsolidation accounting as well as the cost of operating the Company’s centraloffices (including some costs maintained based on legal or tax considerations).The primary components of Corporate and other loss, in addition to operatingloss, are interest expense on external debt (including the amortization ofdeferred financing costs), foreign exchange losses or gains, and mark-to-marketgains or losses on derivatives. Major components within the reconciliation ofincome before taxes (described more fully below) include systems/organizationestablishment expenses, interest expense on external debt, foreign exchangelosses or gains, and refinancing expenses related to external debt. Corporateand other identifiable assets primarily represent deferred financing costs thathave been capitalized in connection with corporate external debt financing,deferred income tax assets and cash balances maintained in accordance withcentralized cash management techniques. The Corporate and other classificationalso includes 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.

 

In September 2008, the Company completed the formation of itsTitanium Dioxide Pigments venture. The water treatment business, formerly partof the Titanium Dioxide Pigments segment, is being reported within theClay-based Additives business in the Performance Additives segment. As aresult, the Company’s financial statements have been reclassified to reflectthe water treatment business as part of the Performance Additives segment forthe periods presented.

 

10

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Summarized financial information for each of the reportable segments isprovided in the following table:

 
| ** **                                | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **    | ** ** | ** **           | ** ** |
|-------------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|---------------|------------|----------------------|------------|
| ** **                                | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | **Corporate** | ** ** | ** **           | ** ** |
| **($ in millions)**                  | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **and other** | ** ** | **Consolidated (a)** | ** ** |
| **Three months ended June 30, 2009** |       |          |       |            |       |         |       |         |       |          |       |          |       |                 |       |
| Net sales                                 |       | $             | 236.2      |            | $          | 180.1        |       | $            | 164.3      |          | $          | 97.1          |       | $                    | 51.6       |   | $ | 1.1 |   | $ | 730.4 |   |
| Total Adjusted EBITDA                     |       | 57.5          |       | 22.3            |       | 19.5         |       | 26.1         |       | 8.9           |       | (9.0          | )          | 125.3                |       |
| **Three months ended June 30, 2008** |       |          |       |            |       |         |       |         |       |          |       |          |       |                 |       |
| Net sales                                 |       | $             | 335.5      |            | $          | 242.3        |       | $            | 124.3      |          | $          | 145.3         |       | $                    | 73.2       |   | $ | 2.6 |   | $ | 923.2 |   |
| Total Adjusted EBITDA                     |       | 82.1          |       | 37.2            |       | 14.1         |       | 44.9         |       | 10.1          |       | (13.3         | )          | 175.1                |       |
| **Six months ended June 30, 2009**   |       |          |       |            |       |         |       |         |       |          |       |          |       |                 |       |
| Net sales                                 |       | $             | 461.5      |            | $          | 335.4        |       | $            | 303.3      |          | $          | 185.0         |       | $                    | 102.7      |   | $ | 2.5 |   | $ | 1,390.4 |   |
| Total Adjusted EBITDA                     |       | 107.8         |       | 42.9            |       | 41.0         |       | 43.9         |       | 16.7          |       | (17.8         | )          | 234.5                |       |
| **Six months ended June 30, 2008**   |       |          |       |            |       |         |       |         |       |          |       |          |       |                 |       |
| Net sales                                 |       | $             | 647.2      |            | $          | 453.6        |       | $            | 240.2      |          | $          | 278.5         |       | $                    | 142.2      |   | $ | 5.3 |   | $ | 1,767.0 |   |
| Total Adjusted EBITDA                     |       | 162.6         |       | 70.9            |       | 36.3         |       | 83.4         |       | 18.8          |       | (27.7         | )          | 344.3                |       |

 
| ** **                 | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **         | ** ** | ** **            | ** ** | ** **       | ** ** |
|----------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|--------------------|------------|-----------------------|------------|------------------|------------|
| ** **                 | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | **Corporate**      | ** ** | ** **            | ** ** | ** **       | ** ** |
|                       | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **and  other (b)** | ** ** | **Eliminations  (c)** | ** ** | **Consolidated** | ** ** |
| Identifiable assets as of: |       |          |       |            |       |         |       |         |       |          |       |               |       |                  |       |             |       |
| June 30, 2009         |       | $             | 2,032.0    |            | $          | 817.5        |       | $            | 921.1      |          | $          | 872.5              |       | $                     | 137.6      |             | $          | 259.0 |   | $ | (281.2 | ) | $ | 4,758.5 |   |
| December 31, 2008     |       | 2,030.9       |       | 829.8           |       | 990.0        |       | 879.9        |       | 130.2         |       | 541.5              |       | (224.9                | )          | 5,177.4          |       |
|                            |            |               |            |                 |            |              |            |              |            |               |            |                    |            |                       |            |                  |            |  |  |  |  |  |  |  |  |

 

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(a)                This amount does not include $3.2 million and $2.4million of Adjusted EBITDA for the three and six months ended June 30,2008, respectively, from the pool and spa chemicals business sold in October 2008.

 

(b)               The decrease is primarily related to lower cashbalances as a result of debt payments in the first half of 2009.  This amount includes $47.5 million and $50.7million of assets from legacy businesses at June 30, 2009 and December 31,2008, respectively. These businesses were formerly owned primarily by DynamitNobel.

 

(c)                Amounts contained in the “Eliminations” columnrepresent the individual subsidiaries’ retained interest in their cumulativenet cash balance (deposits less withdrawals) included in the corporatecentralized cash system and within the identifiable assets of the respectivesegment. These amounts are eliminated as the corporate centralized cash systemis included in the Corporate and other segment’s identifiable assets.

 

Geographic information regarding net sales based on seller’s locationand long-lived assets are described in Note 3, “Segment Information,” in theCompany’s 2008 Form 10-K.

 

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

 

11

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The following table presents a reconciliation of income (loss) fromcontinuing operations before taxes to Adjusted EBITDA on a segment GAAP basis:

 
| ** **                                             | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **    | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|---------------|------------|------------------|------------|
| ** **                                             | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | **Corporate** | ** ** | ** **       | ** ** |
| **($ in millions)**                               | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **and other** | ** ** | **Consolidated** | ** ** |
| **Three months ended June 30, 2009**              |       |          |       |            |       |         |       |         |       |          |       |          |       |             |       |
| Income (loss)  from continuing operations before taxes |       | $             | 13.1       |            | $          | (5.2         | )          | $            | (4.3       | )             | $          | (2.7          | )          | $                | 3.2        |   | $ | 4.5 |   | $ | 8.6 |   |
| Interest expense (a)                                   |       | 15.6          |       | 7.2             |       | 4.9          |       | 8.3          |       | 2.3           |       | (9.4          | )          | 28.9             |       |
| Interest income                                        |       | (0.5          | )          | 0.1             |       | (0.1         | )          | (0.1         | )          | —        |       | 0.2           |       | (0.4             | )          |
| Depreciation and amortization                          |       | 17.8          |       | 15.4            |       | 18.8         |       | 12.8         |       | 2.6           |       | 1.5           |       | 68.9             |       |
| Restructuring and other severance costs                |       | 0.5           |       | 1.7             |       | (0.1         | )          | 1.7          |       | 0.1           |       | 0.1           |       | 4.0              |       |
| Systems/organization establishment expenses            |       | 0.1           |       | 0.6             |       | 0.3          |       | 0.1          |       | —        |       | (0.1          | )          | 1.0              |       |
| Loss on early extinguishment of debt, net              |       | 10.1          |       | 2.2             |       | —       |       | 6.6          |       | 0.7           |       | 8.3           |       | 27.9             |       |
| Foreign exchange (gain) loss, net                      |       | (1.3          | )          | 0.1             |       | —       |       | (0.6         | )          | —        |       | (14.7         | )          | (16.5            | )          |
| Other                                                  |       | 2.1           |       | 0.2             |       | —       |       | —       |       | —        |       | 0.6           |       | 2.9              |       |
| Total Adjusted EBITDA                                  |       | $             | 57.5       |            | $          | 22.3         |       | $            | 19.5       |          | $          | 26.1          |       | $                | 8.9        |   | $ | (9.0 | ) | $ | 125.3 |   |
| **Three months ended June 30, 2008**              |       |          |       |            |       |         |       |         |       |          |       |          |       |             |       |
| Income (loss)  from continuing operations before taxes |       | $             | 51.5       |            | $          | 10.0         |       | $            | (8.4       | )             | $          | 24.1          |       | $                | 4.7        |   | $ | 14.3 |   | $ | 96.2 |   |
| Interest expense (a)                                   |       | 13.6          |       | 7.5             |       | 8.9          |       | 9.2          |       | 2.3           |       | (31.8         | )          | 9.7              |       |
| Interest income                                        |       | (1.2          | )          | 0.1             |       | —       |       | (0.1         | )          | (0.1          | )          | (0.1          | )          | (1.4             | )          |
| Depreciation and amortization                          |       | 17.1          |       | 17.0            |       | 12.8         |       | 11.9         |       | 2.8           |       | 1.9           |       | 63.5             |       |
| Restructuring and other severance costs                |       | 0.2           |       | 1.0             |       | —       |       | 0.3          |       | —        |       | —        |       | 1.5              |       |
| Systems/organization establishment expenses            |       | 0.5           |       | 1.5             |       | —       |       | 0.1          |       | 0.1           |       | —        |       | 2.2              |       |
| Acquisition and disposals costs                        |       | —        |       | —          |       | —       |       | —       |       | 0.3           |       | 0.4           |       | 0.7              |       |
| Inventory write-up charges                             |       | 0.1           |       | —          |       | —       |       | —       |       | —        |       | —        |       | 0.1              |       |
| Loss on sale of assets and other                       |       | —        |       | —          |       | 0.8          |       | —       |       | —        |       | —        |       | 0.8              |       |
| Foreign exchange loss (gain), net                      |       | 0.3           |       | (0.2            | )          | —       |       | (0.6         | )          | —        |       | 1.3           |       | 0.8              |       |
| Other                                                  |       | —        |       | 0.3             |       | —       |       | —       |       | —        |       | 0.7           |       | 1.0              |       |
| Total Adjusted EBITDA (b)                              |       | $             | 82.1       |            | $          | 37.2         |       | $            | 14.1       |          | $          | 44.9          |       | $                | 10.1       |   | $ | (13.3 | ) | $ | 175.1 |   |
| **Six months ended June 30, 2009**                |       |          |       |            |       |         |       |         |       |          |       |          |       |             |       |
| Income (loss)  from continuing operations before taxes |       | $             | 26.3       |            | $          | (10.6        | )          | $            | (11.7      | )             | $          | (9.5          | )          | $                | 6.0        |   | $ | (15.4 | ) | $ | (14.9 | ) |
| Interest expense (a)                                   |       | 30.6          |       | 14.3            |       | 14.9         |       | 16.3         |       | 4.6           |       | (2.1          | )          | 78.6             |       |
| Interest income                                        |       | (0.7          | )          | 0.2             |       | (0.3         | )          | (0.1         | )          | —        |       | 0.1           |       | (0.8             | )          |
| Depreciation and amortization                          |       | 36.6          |       | 30.5            |       | 36.7         |       | 24.7         |       | 5.3           |       | 3.2           |       | 137.0            |       |
| Restructuring and other severance costs                |       | 2.1           |       | 4.6             |       | —       |       | 4.8          |       | 0.1           |       | 0.2           |       | 11.8             |       |
| Systems/organization establishment expenses            |       | 0.4           |       | 1.1             |       | 1.4          |       | 0.2          |       | —        |       | —        |       | 3.1              |       |
| Loss on early extinguishment of debt, net              |       | 10.5          |       | 2.2             |       | —       |       | 6.9          |       | 0.7           |       | 5.4           |       | 25.7             |       |
| Loss on sale of assets and other                       |       | 0.1           |       | —          |       | —       |       | —       |       | —        |       | —        |       | 0.1              |       |
| Foreign exchange (gain) loss, net                      |       | (0.6          | )          | 0.1             |       | —       |       | 0.6          |       | —        |       | (11.0         | )          | (10.9            | )          |
| Other                                                  |       | 2.5           |       | 0.5             |       | —       |       | —       |       | —        |       | 1.8           |       | 4.8              |       |
| Total Adjusted EBITDA                                  |       | $             | 107.8      |            | $          | 42.9         |       | $            | 41.0       |          | $          | 43.9          |       | $                | 16.7       |   | $ | (17.8 | ) | $ | 234.5 |   |
| **Six months ended June 30, 2008**                |       |          |       |            |       |         |       |         |       |          |       |          |       |             |       |
| Income (loss)  from continuing operations before taxes |       | $             | 104.2      |            | $          | 18.0         |       | $            | (7.4       | )             | $          | 42.2          |       | $                | 8.3        |   | $ | (20.1 | ) | $ | 145.2 |   |
| Interest expense (a)                                   |       | 26.4          |       | 14.9            |       | 17.9         |       | 17.9         |       | 4.6           |       | 1.7           |       | 83.4             |       |
| Interest income                                        |       | (1.9          | )          | 0.1             |       | —       |       | (0.2         | )          | (0.3          | )          | (1.3          | )          | (3.6             | )          |
| Depreciation and amortization                          |       | 33.2          |       | 33.9            |       | 25.0         |       | 23.8         |       | 5.7           |       | 3.4           |       | 125.0            |       |
| Restructuring and other severance costs                |       | 0.2           |       | 1.6             |       | —       |       | 0.5          |       | —        |       | —        |       | 2.3              |       |
| Systems/organization establishment expenses            |       | 0.8           |       | 2.2             |       | —       |       | 0.2          |       | 0.2           |       | —        |       | 3.4              |       |
| Acquisition and disposals costs                        |       | —        |       | —          |       | —       |       | —       |       | 0.3           |       | 0.4           |       | 0.7              |       |
| Inventory write-up charges                             |       | 0.5           |       | —          |       | —       |       | —       |       | —        |       | —        |       | 0.5              |       |
| Loss on sale of assets and other                       |       | —        |       | —          |       | 0.8          |       | 0.1          |       | —        |       | —        |       | 0.9              |       |
| Foreign exchange gain, net                             |       | (0.3          | )          | (0.2            | )          | —       |       | (1.1         | )          | —        |       | (12.7         | )          | (14.3            | )          |
| Other                                                  |       | (0.5          | )          | 0.4             |       | —       |       | —       |       | —        |       | 0.9           |       | 0.8              |       |
| Total Adjusted EBITDA (b)                              |       | $             | 162.6      |            | $          | 70.9         |       | $            | 36.3       |          | $          | 83.4          |       | $                | 18.8       |   | $ | (27.7 | ) | $ | 344.3 |   |

 

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(a)                Includes gains of $12.2 million and $34.0 million forthe three months ended June 30, 2009 and 2008, respectively, and gains of$2.6 million and $3.2 million for the six months ended June 30, 2009 and2008, respectively, representing the movement in the mark-to-market valuationof the Company’s interest rate and cross-currency hedging instruments.

 

(b)               This amount does not include $3.2 million and $2.4million of Adjusted EBITDA for the three and six months ended June 30,2008, respectively, from the pool and spa chemicals business sold in October 2008.

 

The summary of segment information above includes “Adjusted EBITDA,” afinancial measure used by the Company’s chief decision 

 

12

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maker and senior management to evaluate the operating performance ofeach segment.

 

*Items excluded from Adjusted EBITDA*

 

Certain items are added to or subtracted from income (loss) fromcontinuing operations before taxes to derive Adjusted EBITDA, as defined below.These items include the following:

 

·                  *Restructuring and other severancecosts*: Restructuring and other severance costs of $4.0 million and $1.5 million wererecorded in the three months ended June 30, 2009 and 2008, respectively,and $11.8 million and $2.3 million were recorded in the six months ended June 30,2009 and 2008, respectively, for miscellaneous restructuring activities,including headcount reductions and facility closures (see Note 14, “Restructuringand Other Severance Costs,” for further details).

 

·                  *Systems/organization establishmentexpenses*: For the three and six months ended June 30, 2009, expenses of $1.0 millionand $3.1 million, respectively, were recorded related to the integration ofbusinesses acquired, primarily related to the completion of the TitaniumDioxide Pigments venture on September 1, 2008 and the acquisition of theElementis plc business in the Performance Additives segment in August 2007. Forthe three and six months ended June 30, 2008, expenses of $2.2 million and$3.4 million, respectively, were recorded related to the integration ofbusinesses acquired, primarily related to the acquisition of the Elementis plcbusiness in the Performance Additives segment.

 

·                  *Inventory write-up charges*:  Under SFAS No. 141,*Business Combinations*, all inventoriesacquired in an acquisition must be revalued to “fair value.” In connection withacquisitions, the Company allocates a portion of the total purchase price toinventory to reflect manufacturing profit in inventory at the date of theacquisitions. This resulted in a reduction of gross profit of $0.1 millionand $0.5 million for the three and six months ended June 30, 2008,respectively, in the Specialty Chemicals segment as the inventory was sold inthe normal course of business.

 

·                  *Loss on early extinguishment ofdebt, net*: In the second quarter of 2009, the Company recorded a loss on earlyextinguishment of debt, net of $27.9 million primarily in connection with theamendment of the Company’s senior secured credit facility. This included thewrite-off of deferred financing costs of $19.5 million and lender fees of $11.1million.  This was partially offset by adiscount of $2.7 million related to the repurchase at a discount of $137.7million in aggregate principal amount of the 2014 Notes.  For the six months ended June 30, 2009,the Company recorded a loss on early extinguishment of debt, net of $25.7million related to write-off of deferred financing costs of $20.9 million andlender fees related to the early extinguishment of debt of $11.1 million,partially offset by a discount of $6.3 million related to the repurchase of$153.2 million in aggregate principal amount of the 2014 Notes.

 

·                  *Foreign exchange (gain) loss, net*:  For the three and six monthsended June 30, 2009, the Company recorded foreign exchange gains of $16.5million and $10.9 million, respectively, primarily due to the impact of thestronger pound sterling as of June 30, 2009 versus March 31, 2009 andDecember 31, 2008, respectively, in connection with non-operatingEuro-denominated transactions.  For the six months ended June 30,2008, gains of $14.3 million were recorded due to the impact of the strongereuro as of June 30, 2008 versus December 31, 2007, related tonon-operating Euro-denominated transactions.

 

·                  *Loss on sale of assets and other*. The Company recorded a charge of $0.8 million in the second quarter of2008 related to the liquidation of a joint venture in the Titanium DioxidePigments segment.

 

·                  *Other*:  For the three and six months ended June 30,2009, the Company recorded expenses of $2.9 million and $4.8 million,respectively, primarily related to an increase in reserves covering legacyobligations assumed in connection with the KKR acquisition in 2000 and theacquisition of the Dynamit Nobel businesses in 2004.

 

**5.  DERIVATIVES:**

 

The Company is exposed to market risk from changes in interest ratesand foreign currency exchange rates. The Company manages its exposure to thesemarket risks through regular operating and financing activities and through theuse of derivatives. When used, derivatives are employed as risk managementtools and not for trading purposes.

 

**Interest Rate Risk**

 

The Company had $1,866.9 million ($1,510.7 million of which is subjectto a Libor or Euribor floor of 2.00%) and $2,007.9 million of variable ratedebt outstanding as of June 30, 2009 and December 31, 2008,respectively. Any borrowings under the senior secured revolving credit facilityand the Titanium Dioxide Pigments venture revolving credit facility will alsobe at a variable rate (with the senior secured revolving credit facilitysubject to a Libor or Euribor floor of 2.00%). Historically, the Company hasentered into 

 

13

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interest rate swaps to manage its exposure to changes in interest ratesrelated to variable-rate debt. As of June 30, 2009, these contracts covernotional amounts of $610.0 million (at interest rates ranging from 4.864% to5.038%) and €493.0 million (at interest rates ranging from 2.995% to 4.416%).These derivative contracts effectively convert a majority of the senior securedcredit obligations and the obligations under the Titanium Dioxide Pigments termloan facility to fixed rate obligations. These swaps will mature between November 2009and July 2012. The Company has elected not to apply hedge accounting forthese interest rate swaps and has recorded the mark-to-market of thesederivatives as a component of interest expense in the Condensed ConsolidatedStatements of Operations.

 

During 2003, the Company entered into a cross-currency interest rateswap with a notional amount of $20.3 million that effectively converted $20.3million U.S. dollar borrowings into euro-based obligations at an effectiveinterest rate of Euribor plus 4.00%. As of June 30, 2009, the notionalamounts of this cross-currency interest rate hedge were $19.2 million and €16.9million. This contract has a final maturity date of July 2010. The Companyhas elected not to apply hedge accounting for this cross-currency interest rateswap and has recorded the mark-to-market of this derivative as a component ofinterest expense in the Condensed Consolidated Statements of Operations.

 

**Foreign Currency Risk**

 

In December 2008, the Company entered into foreign currencyforward contracts to manage its exposure to fluctuations in currency rates oncertain forecasted sales denominated in a currency other than the functionalcurrency of the legal entity. The instruments were designated as foreignexchange cash flow hedges and are effective at generating offsetting changes inthe fair value or cash flows of the hedged item or transaction. As of June 30,2009, the Company had notional amounts outstanding for these foreign currencyforward contracts of $6.0 million. It is expected that cumulative losses of$0.2 million as of June 30, 2009 will be reclassified into earnings withinthe next six months. There was no gain or loss reclassified from accumulatedother comprehensive income into earnings as a result of the discontinuance ofcash flow hedges due to the probability of the original forecasted transactionnot occurring. As of June 30, 2009, the maximum length of time overwhich the Company has hedged its exposure to movements in foreign exchangerates for forecasted transactions is six months.

 

In March 2009, the Company entered into foreign currency forwardcontracts to manage its exposure to fluctuations in currency rates onforecasted sales denominated in a currency other than the functional currencyof the legal entity. As of June 30, 2009, the Company had notionalamounts outstanding for these foreign currency forward contracts of $2.5million. The Company has elected not to apply hedge accounting for theseforeign currency forward contracts.

 

In connection with the offering of the 2014 Notes, the Company enteredinto a cross-currency interest rate swap with a five-year term expiring in November 2009and a notional amount of €155.6 million that effectively converts the U.S.dollar fixed rate debt in respect of the 2014 dollar-denominated notes soldinto euro fixed rate debt.  The Company designated this contract as ahedge of the foreign currency exposure of its net investment in itsEuro-denominated operations. There was no ineffective portion of the netinvestment hedge as of June 30, 2009. In addition, the Company hasdesignated the remaining portion of its Euro-denominated debt that is recordedon its U.S. books as a net investment hedge of its Euro-denominated investments(euro debt of €515.8 million at June 30, 2009; $723.8 million). As aresult, any foreign currency gains and losses resulting from theEuro-denominated debt discussed above is accounted for as a component ofaccumulated other comprehensive income for as long as the hedge remainseffective. There was no ineffective portion of the net investment hedge as of June 30,2009.

 

14

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The following table provides the fair value and balance sheet locationof the Company’s derivative instruments as of June 30, 2009 and December 31,2008:

 
| ** **                                                                          | ** ** | ** **                                      | ** ** | **Asset Derivatives**  | ** ** | **Liability Derivatives**       | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------|------------|---------------------------------|------------|
| ** **                                                                          | ** ** | ** **                                      | ** ** | **Fair Value as of**   | ** ** | **Fair Value as of**            | ** ** |
| **(in millions)**                                                                   | ** ** | **Balance Sheet Location**                      | ** ** | **June 30, 2009** | ** ** | **December 31, 2008** | ** ** | **June 30, 2009** | ** ** | **December 31, 2008** | ** ** |
| **Derivatives  designated as hedging****instruments under SFAS  No. 133:**     |       |                                            |       |                   |       |                            |       |   |   |   |   |
| Foreign exchange contracts                                                          |       | Prepaid expenses  and other current assets      |       | $                      | 0.6        |                            | $          | 1.1 |   | $ | — |   | $ | — |   |
| Cross-currency  interest rate swaps - net investment hedge                          |       | Accrued expenses  and other current liabilities |       | —                 |       | —                          |       | 18.4 |   | 16.4 |   |
| Total  derivatives designated as hedging instruments under SFAS No.133              |       |                                            |       | $                      | 0.6        |                            | $          | 1.1 |   | $ | 18.4 |   | $ | 16.4 |   |
|                                                                                |       |                                            |       |                   |       |                            |       |   |   |   |   |
| **Derivatives  not designated as hedging****instruments under  SFAS No. 133:** |       |                                            |       |                   |       |                            |       |   |   |   |   |
| Foreign exchange contracts                                                          |       | Prepaid expenses  and other current assets      |       | $                      | 0.1        |                            | $          | — |   | $ | — |   | $ | — |   |
| Interest rate swaps                                                                 |       | Accrued expenses  and other current liabilities |       | —                 |       | —                          |       | 9.3 |   | 6.5 |   |
|                                                                                |       | Other liabilities                               |       | —                 |       | —                          |       | 59.7 |   | 58.9 |   |
| Cross-currency interest rate swaps                                                  |       | Accrued expenses  and other current liabilities |       | —                 |       | —                          |       | 0.1 |   | 0.1 |   |
|                                                                                |       | Other liabilities                               |       | —                 |       | —                          |       | 4.6 |   | 4.7 |   |
| Total  derivatives not designated as hedging instruments under SFAS No. 133    |       |                                            |       | $                      | 0.1        |                            | $          | — |   | $ | 73.7 |   | $ | 70.2 |   |
| **Total derivatives**                                                               |       |                                            |       | $                      | 0.7        |                            | $          | 1.1 |   | $ | 92.1 |   | $ | 86.6 |   |

 

The following table provides the gains and losses reported in “OtherComprehensive Income” (“OCI”) within Equity for the three and six months ended June 30,2009 and 2008:

 
| ** **                                                            | ** ** | **Amount of Gain or (Loss) Recognized in OCI on  Derivatives** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **and Other Financial Instruments (Effective Portion)**        | ** ** |
| ** **                                                            | ** ** | **Three months ended**                                         | ** ** | **Six months ended** | ** ** |
| ** **                                                            | ** ** | **June 30,**                                              | ** ** | **June 30,** | ** ** |
| **(in millions)**                                                     | ** ** | **2009**                                                       | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Derivatives in SFAS No. 133**                                  |       |                                                           |       |   |   |   |   |   |   |
| **Cash Flow Hedging Relationships:**                                  |       |                                                           |       |   |   |   |   |   |   |
| Foreign exchange contracts                                            |       | $                                                              | 0.3        |   | $ | — |   | $ | (0.2 | ) | $ | — |   |
|                                                                  |       |                                                           |       |   |   |   |   |   |   |
| **Derivatives and Other Financial Instruments in SFAS  No. 133** |       |                                                           |       |   |   |   |   |   |   |
| **Net Investment Hedging Relationships:**                             |       |                                                           |       |   |   |   |   |   |   |
| Cross-currency interest rate swaps - net investment hedge             |       | $                                                              | (12.2      | ) | $ | 0.8 |   | $ | (2.1 | ) | $ | (15.9 | ) |
| Euro-denominated debt                                                 |       | (43.3                                                          | )          | 2.2 |   | 4.1 |   | (77.9 | ) |
|                                                                  |       | $                                                              | (55.5      | ) | $ | 3.0 |   | $ | 2.0 |   | $ | (93.8 | ) |

 

In the six months ended June 30, 2009 and 2008, no gains or losseswere reclassified from accumulated other comprehensive income into income.

 

15

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The following table provides the gains and losses reported in theCondensed Consolidated Statements of Operations for the three and six months endedJune 30, 2009 and 2008:

 
| ** **                                                                     | ** ** | **Amount of Gain or (Loss) Recognized in Income on  Derivatives** | ** ** | ** **           | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                     | ** ** | **Three months ended**                                            | ** ** | **Six months ended** | ** ** | **Location of Gain or (Loss)** | ** ** |
| ** **                                                                     | ** ** | **June 30,**                                                 | ** ** | **June 30,**    | ** ** | **Recognized in Income on** | ** ** |
| **(in millions)**                                                              | ** ** | **2009**                                                          | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** | **Derivatives** | ** ** |
| **Derivatives  Not Designated as Hedging Instruments under SFAS No. 133** | ** ** | ** **                                                        | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest rate contracts                                                        |       | $                                                                 | 12.8       |                 | $          | 33.8 |   | $ | 2.0 |   | $ | 5.0 |   | Interest expense |   |
| Cross-currency interest rate swaps                                             |       | (0.6                                                              | )          | 0.2                  |       | 0.6 |   | (1.8 | ) | Interest expense |   |
|                                                                           |       | $                                                                 | 12.2       |                 | $          | 34.0 |   | $ | 2.6 |   | $ | 3.2 |   |   |   |

 

**6.  FAIR VALUE MEASUREMENTS:**

 

On January 1, 2008, the Company adopted SFAS No. 157,*Fair Value Measurements*, for financialassets and liabilities, as well as for any other assets and liabilities thatare carried at fair value on a recurring basis in the financial statements. TheFASB had deferred the implementation of SFAS No. 157 by one year fornon-financial assets and liabilities, which the Company adopted on January 1,2009. Under SFAS No. 159,*The FairValue Option for Financial Assets and Financial Liabilities**— Including anAmendment of FASB Statement No. 115*, entities are permitted to choose to measure many financialinstruments and certain other items at fair value. The Company has electednot to measure any additional instruments at fair value under SFAS No. 159.

 

As of June 30, 2009, the only assets and liabilities that theCompany currently measures at fair value on a recurring basis are derivativesand marketable securities. The Company’s financial assets and liabilities aremeasured using inputs from the three levels of the fair value hierarchy. Thethree levels are as follows:

 
| Level 1 — | Inputs are unadjusted quoted market prices in active  markets for identical assets or liabilities that the Company has the ability  to access at the measurement date.                                                                                                                                                                                                                                                                 |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| Level 2 — | Inputs are directly or indirectly observable, which  include quoted prices for similar assets and liabilities in active markets,  quoted prices for identical or similar assets or liabilities in markets that  are not active, inputs other than quoted prices that are observable for the  asset or liability and inputs that are derived principally from or  corroborated by observable market data by correlation or other means. |
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| Level 3 — | Inputs are unobservable inputs that are used to  measure fair value to the extent observable inputs are not  available. The Company does not have any financial assets or liabilities  that are classified as Level 3 inputs as of June 30, 2009 or  December 31, 2008.                                                                                                                                                 |

 

16

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In accordance with the fair value hierarchy, the following tableprovides the fair value of the Company’s financial assets and liabilities thatare required to be measured at fair value as of June 30, 2009 and December 31,2008:

 
| ** **                                                     | ** ** | **As of**              | ** ** | **Fair Value Measurements** | ** ** |
|----------------------------------------------------------------|------------|------------------------|------------|-----------------------------|------------|
| **(in millions)**                                              | ** ** | **June 30, 2009** | ** ** | **Level 1**                 | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Assets                                                         | ** ** | ** **             | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Marketable securities (a)                                      |       | $                      | 105.4      |                        | $          | 105.4 |   | $ | — |   | $ | — |   |
| Foreign exchange contracts (b)                                 |       | 0.7                    |       | —                      |       | 0.7 |   | — |   |
| Total assets at fair value                                     |       | $                      | 106.1      |                        | $          | 105.4 |   | $ | 0.7 |   | $ | — |   |
|                                                           |       |                   |       |                        |       |   |   |   |   |
| Liabilities                                                    | ** ** | ** **             | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest rate swaps (b)                                        |       | $                      | 69.0       |                        | $          | — |   | $ | 69.0 |   | $ | — |   |
| Cross-currency interest rate swaps (b)                         |       | 4.7                    |       | —                      |       | 4.7 |   | — |   |
| Cross-currency  interest rate swaps - net investment hedge (b) |       | 18.4                   |       | —                      |       | 18.4 |   | — |   |
| Total liabilities at fair value                                |       | $                      | 92.1       |                        | $          | — |   | $ | 92.1 |   | $ | — |   |

 
| ** **                                                     | ** ** | **As of**                  | ** ** | **Fair Value Measurements** | ** ** |
|----------------------------------------------------------------|------------|----------------------------|------------|-----------------------------|------------|
| **(in millions)**                                              | ** ** | **December 31, 2008** | ** ** | **Level 1**                 | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Assets                                                         | ** ** | ** **                 | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Marketable securities (a)                                      |       | $                          | 395.8      |                        | $          | 395.8 |   | $ | — |   | $ | — |   |
| Foreign exchange contracts (b)                                 |       | 1.1                        |       | —                      |       | 1.1 |   | — |   |
| Total assets at fair value                                     |       | $                          | 396.9      |                        | $          | 395.8 |   | $ | 1.1 |   | $ | — |   |
|                                                           |       |                       |       |                        |       |   |   |   |   |
| Liabilities                                                    | ** ** | ** **                 | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest rate swaps (b)                                        |       | $                          | 65.4       |                        | $          | — |   | $ | 65.4 |   | $ | — |   |
| Cross-currency interest rate swaps (b)                         |       | 4.8                        |       | —                      |       | 4.8 |   | — |   |
| Cross-currency  interest rate swaps - net investment hedge (b) |       | 16.4                       |       | —                      |       | 16.4 |   | — |   |
| Total liabilities at fair value                                |       | $                          | 86.6       |                        | $          | — |   | $ | 86.6 |   | $ | — |   |

 

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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 the Company’sderivative instruments.

 

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

 

***Counter-party risk -***The Company manages counter-party risk byentering into derivative contracts with only major financial institutions ofinvestment grade quality and by limiting the amount of exposure to eachfinancial institution. The Company has considered credit adjustments in itsdetermination of the fair value of its derivative assets and liabilities as of June 30,2009 and December 31, 2008 based on market participant assumptions. Inaddition, based on the credit evaluation of each institution comprising its derivativeassets as of June 30, 2009 and December 31, 2008, the Companybelieves the carrying values of these assets as of June 30, 2009 and December 31,2008 to be fully realizable.

 

***Debt*****-**TheCompany estimates that its debt under the senior secured credit facility andTitanium Dioxide Pigments venture facility agreement, based on current interestrates and terms, approximates fair value. Based on quoted market prices at June 30, 2009, the Companyestimates the fair value of its 2014 Notes approximated $511.7 million.  As of June 30, 2009, the aggregateprincipal carrying amount of the 2014 Notes was $551.0 million.

 

***Cash and Cash Equivalents -***All highly liquid instruments and money market fundswith an original maturity of three months or less are considered to be cashequivalents.  The carrying amountapproximates fair value because of the short maturities of these instruments.

 

17

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**7.  ACQUISITIONS:**

 

Pursuant to the Company’s business strategy of achieving profitablegrowth through selective acquisitions, the Company has acquired severalbusinesses in recent years. In accordance with SFAS No. 142,*Goodwill and Other Intangible Assets*, anygoodwill resulting from acquisitions is tested for impairment at leastannually.

 

On August 11, 2008, the Company completed the acquisition ofHolliday Pigments, the leading global manufacturer of technical gradeultramarine blue and manganese violet pigments, from Yule Catto & Co.plc for a purchase price of approximately €46.0 million ($68.6 million using anAugust 11, 2008 exchange rate of $1.4909). Holliday Pigments manufacturesinorganic ultramarine pigments for a wide range of applications, includingplastics, cosmetics, coatings and inks. Holliday Pigments was incorporated intothe Color Pigments and Services business, which is part of the PerformanceAdditives segment. The allocation of the purchase price to the identifiableassets acquired is preliminary and is subject to change, with expectedcompletion during 2009.

 

On September 1, 2008, the Company completed the formation of aventure with 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 consolidated this venture and has reportedKemira’s interest as noncontrolling interest in the condensed consolidatedfinancial statements. The Company owns 61% of the venture with Kemira owningthe remaining portion.  The venture’s acquisition of the shares of theRockwood and Kemira entities was facilitated by the borrowings under a termloan of €250.0 million on September 3, 2008 ($362.5 million using a September 3,2008 exchange rate of 1.4498). The venture made a payment of €97.5 million($141.4 million using a September 3, 2008 exchange rate) to the venture’snoncontrolling shareholder. In addition, the venture obtained a €30.0 million($42.1 million) revolving credit facility to finance its operations and theventure has assumed debt of €24.0 million ($33.7 million) from Kemira, primarilydue to a defined benefit pension plan. The Company estimates that the potentialexposure range for assumed environmental liabilities is from $13.6 million to$25.3 million. At June 30, 2009, $13.6 million of related reserves wererecorded. The allocation of purchase price to the identifiable assets acquiredis preliminary and is subject to change, with expected completion during 2009.

 

On September 4, 2008, the Company completed the acquisition ofNalco Holdings, Inc.’s (“Nalco”) Finishing Technologies business for apurchase price of approximately $75.0 million. Nalco’s Finishing Technologiesbusiness provides chemicals and services for pre-treating of metal and is partof the Surface Treatment business within the Specialty Chemicals segment.  The allocation of the purchase price to theidentifiable assets acquired is preliminary and is subject to change, withexpected completion during 2009.

 

In addition to the acquisitions described above, the Company hadcompleted other smaller acquisitions in 2008. Depending on the timing andcomplexity involved, the purchase price allocation to the net assets acquiredfor certain acquisitions completed within the last year was preliminary as of June 30,2009.

 

The above acquisitions were not material on an individual basis, or inthe aggregate.

 

**8.  INVENTORIES:**

 

Inventories are comprised of the following:

 
| ** **               | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-------------------|------------|-----------------------|------------|
| **($ in millions)** | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| Raw materials            |       | $                 | 162.7      |                  | $          | 203.8 |   |
| Work-in-process          |       | 69.7              |       | 74.2                  |       |
| Finished goods           |       | 303.9             |       | 355.3                 |       |
| Packaging materials      |       | 7.3               |       | 7.7                   |       |
| Total                    |       | $                 | 543.6      |                  | $          | 641.0 |   |

 

18

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**9.  GOODWILL:**

 

Below are goodwill balances and activity by segment:

 
| ** **                      | ** ** | **Specialty** | ** ** | **Advanced** | ** ** | ** ** | ** ** |
|---------------------------------|------------|---------------|------------|--------------|------------|------------|------------|
| **($ in millions)**        | ** ** | **Chemicals** | ** ** | **Ceramics** | ** ** | **Total**  | ** ** |
| Balance, December 31, 2008 |       | $             | 648.0      |         | $          | 269.8      |       | $ | 917.8 |   |
| Acquisitions                    |       | (1.5          | )          | 0.5          |       | (1.0       | )          |
| Foreign exchange                |       | 2.1           |       | 0.6          |       | 2.7        |       |
| Balance, June 30, 2009     |       | $             | 648.6      |         | $          | 270.9      |       | $ | 919.5 |   |

 

**10.  OTHER INTANGIBLE ASSETS:**

 

Other intangible assets, net consist of:

 
| ** **                              | ** ** | **As of June 30, 2009** | ** ** | **As of December 31, 2008** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                              | ** ** | **Gross**                    | ** ** | ** **                  | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                              | ** ** | **Carrying**                 | ** ** | **Accumulated**             | ** ** | ** ** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| **($ in millions)**                | ** ** | **Amount**                   | ** ** | **Amortization**            | ** ** | **Net** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Patents and other intellectual property |       | $                            | 415.9      |                        | $          | (156.8 | ) | $ | 259.1 |   | $ | 411.9 |   | $ | (142.0 | ) | $ | 269.9 |   |
| Trade names and trademarks              |       | 143.1                        |       | (30.7                       | )          | 112.4 |   | 141.5 |   | (27.1 | ) | 114.4 |   |
| Customer relationships                  |       | 373.7                        |       | (96.4                       | )          | 277.3 |   | 372.2 |   | (79.1 | ) | 293.1 |   |
| Supply agreements                       |       | 58.2                         |       | (9.3                        | )          | 48.9 |   | 57.3 |   | (6.3 | ) | 51.0 |   |
| Other                                   |       | 61.6                         |       | (39.1                       | )          | 22.5 |   | 61.7 |   | (35.3 | ) | 26.4 |   |
| Total                                   |       | $                            | 1,052.5    |                        | $          | (332.3 | ) | $ | 720.2 |   | $ | 1,044.6 |   | $ | (289.8 | ) | $ | 754.8 |   |

 

Amortization of other intangible assets was $20.0 million and $19.8million for the three months ended June 30, 2009 and 2008, respectively,and $39.5 million and $38.5 million for the six months ended June 30, 2009and 2008, respectively.

 

Estimated amortization expense for each of the five succeeding fiscalyears is as follows:

 
| **($ in millions)** | ** ** | **Amortization** | ** ** |
|--------------------------|------------|------------------|------------|
| **Year ended**           | ** ** | **Expense**      | ** ** |
| 2009                     |       | $                | 79.9       |   |
| 2010                     |       | 78.3             |       |
| 2011                     |       | 75.2             |       |
| 2012                     |       | 71.3             |       |
| 2013                     |       | 68.4             |       |
|                          |            |                  |            |  |

 

19

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**11.  LONG-TERM DEBT**

 

Long-term debt and loans payable are summarized as follows:

 
| ** **                                                                                | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **($ and € in millions)**                                                       | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| Senior secured credit facilities:                                                         |       |              |       |                  |       |
| Tranche A-1 term loans (€4.6 and €22.8, respectively)                           |       | $                 | 6.4        |                  | $          | 31.9 |   |
| Tranche A-2 term loans (€39.8 and €99.4, respectively)                          |       | 55.9              |       | 138.9                 |       |
| Tranche E term loans                                                                      |       | 140.1             |       | 1,104.9               |       |
| Tranche G term loans (€65.4 and €265.2, respectively)                           |       | 91.8              |       | 370.5                 |       |
| Tranche H term loans                                                                      |       | 942.0             |       | —                |       |
| Tranche I term loans (€195.6 as of June 30, 2009)                               |       | 274.5             |       | —                |       |
| 2014 Notes (€250.1 and $200.0 and €364.0 and $200.0, respectively)              |       | 551.0             |       | 708.5                 |       |
| Titanium Dioxide Pigments venture term loans (€245.0 and €250.0,  respectively) |       | 343.8             |       | 349.3                 |       |
| Capitalized lease obligations (€33.0 and €34.3, respectively)                   |       | 46.3              |       | 47.9                  |       |
| Other loans                                                                               |       | 57.9              |       | 59.3                  |       |
|                                                                                      |       | 2,509.7           |       | 2,811.2               |       |
| Less current maturities                                                                   |       | (58.9             | )          | (90.9                 | )          |
|                                                                                      |       | $                 | 2,450.8    |                  | $          | 2,720.3 |   |

 

In the first half of 2009, the Company voluntarily repurchased at adiscount €113.9 million in aggregate principal amount ($153.2 million based onthe exchange rates in effect on the dates of repurchase) of itsEuro-denominated senior subordinated notes due in 2014, and voluntarily prepaid€63.2 million ($85.1 million based on the exchange rate in effect on the dateof payment) and $17.2 million of its senior secured term loans.

 

On June 15, 2009, the Company entered into the amended andrestated credit agreement (“Restated Credit Agreement”), which amends andrestates in its entirety the Company’s senior secured credit agreement.  The Restated Credit Agreement extends thematurity of certain term loans by providing for (i) approximately $942.0million of new tranche H term loans with a maturity date of May 15, 2014,the aggregate amount of which is deemed to convert a like amount of outstandingprincipal of existing tranche E term loans (that had a maturity date of July 30,2012) under the existing credit agreement and (ii) approximately €195.6million ($274.5 million) of new tranche I term loans with a maturity date of May 15,2014, the aggregate amount of which is deemed to convert a like amount ofoutstanding principal of existing tranche G term loans (that had a maturitydate of July 30, 2012) under the existing credit agreement. In the thirdquarter of 2009, the Company extended the maturity of $180 million ofavailability under the revolving credit facility from 2010 to 2012 bearinginterest at the Company’s option of either (i) Libor (subject to Liborfloor of 2.00%) plus 4.50% or (ii) ABR plus 3.25%.  There were no outstanding borrowings underthis revolving credit facility as of June 30, 2009.

 

The Restated Credit Agreement also provides for a Libor (Euribor forEuro-denominated tranches) floor of 2.00% applicable to all senior securedcredit facilities 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 June 30, 2009, the interest rates for TranchesE, G, H and I were reduced by 0.25% as the designated credit ratings wereachieved.

 

In addition, the Restated Credit Agreement replaces the consolidatedtotal debt to consolidated Adjusted EBITDA ratio covenant with a senior secureddebt to consolidated Adjusted EBITDA ratio covenant such that the Company maynot permit its senior secured debt ratio to exceed 4.40 to 1.00 on the last dayof any fiscal quarter through and including March 31, 2010, 4.25 to 1.00on the last day of any fiscal quarter thereafter through and including September 30,2010, and 4.00 to 1.00 on the last day of any fiscal quarter thereafter.  The Restated Credit Agreement also resets theasset sales basket, increases the available amount basket that applies tocertain investment, debt and capital expenditure negative covenants and certainother baskets.

 

**12.  INCOME TAXES:**

 

The effective tax rate for the six months ended June 30, 2009 and2008 was 40.9% and 27.8%, respectively. The difference between the effectiverate and the U.S. statutory rate of 35.0% in the six months ended June 30,2009 primarily relates to a nonrecurring tax benefit related to foreigncurrency changes, partially offset by the domestic valuation allowance. Thedifference between the effective tax rate and the U.S. statutory rate of 35.0%for the six months ended June 30, 2008 is primarily a function offavorable foreign rate differentials and the impact of the valuation allowanceon domestic earnings.

 

20

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In the six months ended June 30, 2009, the Company increased itsworldwide valuation allowances by $16.0 million. The increase in the valuationallowance was due to domestic and foreign losses, reduced by a decrease inother comprehensive income. The change in the valuation allowance for the sixmonths ended June 30, 2009 increased the tax provision by $17.3 million.The following table reflects the activity in the valuation allowance forworldwide net operating losses and other deferred income tax assets:

 
| ** **                                              | ** ** | **Valuation** | ** ** |
|---------------------------------------------------------|------------|---------------|------------|
| **($ in millions)**                                | ** ** | **Allowance** | ** ** |
| Balance as of December 31, 2008                    |       | $             | 84.9       |   |
| Increase as reflected in income tax expense             |       | 17.3          |       |
| Decrease as reflected in other comprehensive income (a) |       | (0.9          | )          |
| Decrease in other                                       |       | (0.4          | )          |
| Balance as of June 30, 2009                        |       | $             | 100.9      |   |

 

----

(a)                Primarily related to temporary differences of hedges,as well as mark-to-market of the Company’s Euro-denominated debt.

 

In the six months ended June 30, 2009, based on the Company’spolicy and review of available information, including the Company’ssteady-state analysis, it was determined that there was not sufficient positiveevidence of future taxable income to release the U.S. Federal valuationallowance that has been recorded. During the six months ended June 30,2009, the Company’s net U.S. Federal deferred tax assets and liabilities weremaintained at a zero level, other than a noncurrent deferred tax liabilityrelating to goodwill with an indefinite reversal period and a noncurrentdeferred tax asset relating to a Federal AMT Credit. It is the Company’s policythat the valuation allowance is reversed in the year management determines itis more likely than not that the deferred tax assets will be realized.

 

In the second quarter of 2008, the Company determined that it wasnecessary to establish a valuation allowance for certain state deferred taxassets. This resulted in a $0.4 million increase in the tax provision relatedto the beginning of period deferred tax balance.

 

Unrecognized tax benefits at June 30, 2009 were $27.4 million.This includes $27.0 million of tax benefits that, if recognized, would affectthe effective tax rate, and $0.4 million of tax benefits that, if recognized,would result in an adjustment to other tax accounts.

 

The Company recognizes interest and penalties related to unrecognizedtax benefits in its income tax provision. The Company had accrued $7.1 millionfor interest and penalties at December 31, 2008. During the six monthsended June 30, 2009, the accrual for interest and penalties was increasedby $0.8 million to $7.9 million.

 

During the next twelve months, it is reasonably possible thatresolution of uncertain tax liabilities could result in a benefit of up to $8.6million or a cost of up to $15.2 million. Audit outcomes and the timing ofaudit settlements are subject to significant uncertainty.

 

The Company is subject to taxation in the U.S., various states, andforeign jurisdictions. The Company’s tax filings in major jurisdictions areopen to investigation by tax authorities; in the U.S. from 2000, in the U.K.from 2006, and in Germany from 2000.

 

**13.  EMPLOYEE BENEFIT PLANS:**

 

The following table represents the net periodic benefit costs andrelated components in accordance with SFAS No. 158,*Employers’ Accounting for Defined Benefit Pensionand Other Postretirement Plans, an amendment of FASB Statements No. 87,88, 106 and 132 (R)*:

 
| ** **                            | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|---------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                            | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| **($ in millions)**              | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Service cost                          |       | $                      | 2.2        |                 | $          | 1.9 |   | $ | 4.2 |   | $ | 3.7 |   |
| Interest cost                         |       | 8.8                    |       | 7.3                  |       | 17.2 |   | 14.3 |   |
| Expected return  on assets            |       | (3.8                   | )          | (2.8                 | )          | (7.4 | ) | (5.5 | ) |
| Net amortization  of actuarial losses |       | 0.2                    |       | (0.1                 | )          | 0.4 |   | (0.1 | ) |
| Net periodic  pension cost            |       | 7.4                    |       | 6.3                  |       | 14.4 |   | 12.4 |   |
| Settlement/curtailment                |       | (0.2                   | )          | —               |       | (0.2 | ) | — |   |
| Total pension  cost                   |       | $                      | 7.2        |                 | $          | 6.3 |   | $ | 14.2 |   | $ | 12.4 |   |
|                                       |            |                        |            |                      |            |  |  |  |  |  |  |  |  |  |

 

21

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**14.  RESTRUCTURING AND OTHERSEVERANCE COSTS:**

 

The Company records restructuring liabilities that represent chargesincurred in connection with consolidations and cessations of certain of itsoperations, including operations from acquisitions, as well as headcountreduction programs. These charges consist primarily of severance and facilityclosure costs, in some cases including asset write-offs and impairments.Severance charges are based on various factors including the employee’s lengthof service, contract provisions, salary levels and local governmentallegislation. At the time a related charge is recorded, the Company calculatesits best estimate based upon detailed analysis. Although significant changesare not expected, actual costs may differ from these estimates.

 

During the three and six months ended June 30, 2009, the Companyexpensed $1.2 million and $2.6 million, respectively, of restructuringcharges.  In addition, “restructuring andother severance costs” in the Condensed Consolidated Statements of Operationsfor the three and six months ended June 30, 2009 and 2008 included otherseverance-related costs of $2.8 million and $9.2 million, respectively, relatedto headcount reductions undertaken throughout the Company.

 

For the six months ended June 30, 2009, the Company expensed $2.6million of restructuring charges.  In theColor Pigments and Services business within the Performance Additives segment,$0.2 million of asset write-offs were recorded in the six months ended June 30,2009 related to a 2009 restructuring plan. In the Performance Additives segment, the Company recorded $1.2 millionprimarily related to a restructuring plan implemented in March 2008 in theColor Pigments and Services business in connection with the integration of thebusinesses acquired from Elementis plc, which included the reorganization andrelocation of the North American Finance and IT services, and the closure ofthree manufacturing facilities in 2008. This included $0.6 million ofseverance costs and $0.6 million of facility closure costs. In theSpecialty Chemicals segment, $1.0 million was recorded in the six months ended June 30,2009 primarily for headcount reduction and facility closure costs as part ofrestructuring plans in 2008 and 2007. Headcount reduction and facility closure costs of $0.2 million wererecorded in the six months ended June 30, 2009 at Corporate related to a2007 restructuring plan.

 

During the three and six months ended June 30, 2008, the Companyexpensed $1.5 million and $2.3 million, respectively, of restructuring charges.In the Performance Additives segment, the Company implemented a restructuringplan in its Color Pigments and Services business in connection with the integrationof the business acquired from Elementis plc. For the six months ended June 30,2008, the Company recorded $1.6 million of severance costs related to thisrestructuring plan. In the Advanced Ceramics and Specialty Chemicals segments,$0.5 million and $0.2 million, respectively, were recorded in the six monthsended June 30, 2008 for miscellaneous headcount reductions.

 

In 2007, the Company recorded restructuring charges for miscellaneousrestructuring items, including miscellaneous headcount reductions, facilityclosure and severance costs.

 

In 2006, the Company recorded restructuring charges for miscellaneousrestructuring items, including miscellaneous headcount reductions and theclosure of an administrative office in the Specialty Chemicals segment. In theCorporate and other segment, charges were recorded primarily related to therestructuring of the wafer reclaim business. This included severance andrelated costs for employees in connection with the closure of two wafer reclaimfacilities. The Company closed a wafer reclaim facility in the U.K. in January 2006and one of the facilities in the U.S. in March 2006. In addition, chargeswere recorded in the Performance Additives and Advanced Ceramics segmentsprimarily for miscellaneous headcount reductions.

 

Selected information for the 2008 restructuring actions follows:

 
| **($ in millions)**                  | ** ** | ** **    | ** ** | **Facility** | ** ** | ** **     | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|---------------|------------|--------------|------------|----------------|------------|------------|------------|
| **2008**                                  | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Relocation** | ** ** | **Total**  | ** ** |
| Liability balance, December 31, 2008 |       | $             | 13.2       |         | $          | 0.1            |       | $          | 0.2        |   | $ | 13.5 |   |
| Restructuring charge in 2009              |       | 0.9           |       | 0.4          |       | —         |       | 1.3        |       |
| Utilized                                  |       | (7.4          | )          | (0.4         | )          | (0.1           | )          | (7.9       | )          |
| Foreign exchange and other                |       | 0.2           |       | —       |       | 0.1            |       | 0.3        |       |
| Liability balance, June 30, 2009     |       | $             | 6.9        |         | $          | 0.1            |       | $          | 0.2        |   | $ | 7.2 |   |
|                                           |            |               |            |              |            |                |            |            |            |  |  |  |  |  |

 

These actions are expected to be completed during 2009.

 

22

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Selected information forthe 2007 restructuring actions follows:

 
| **($ in  millions)**                 | ** ** | ** **    | ** ** | **Facility** | ** ** | ** **     | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|---------------|------------|--------------|------------|----------------|------------|------------|------------|
| **2007**                                  | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Relocation** | ** ** | **Total**  | ** ** |
| Liability balance, December 31, 2008 |       | $             | 1.3        |         | $          | 1.5            |       | $          | 0.2        |   | $ | 3.0 |   |
| Restructuring charge in 2009              |       | 0.7           |       | 0.3          |       | —         |       | 1.0        |       |
| Utilized                                  |       | (0.9          | )          | (0.8         | )          | (0.1           | )          | (1.8       | )          |
| Foreign exchange and other                |       | —        |       | (0.1         | )          | 0.2            |       | 0.1        |       |
| Liability balance, June 30, 2009     |       | $             | 1.1        |         | $          | 0.9            |       | $          | 0.3        |   | $ | 2.3 |   |

 

These actions areexpected to be completed during 2009.

 

Selected information forthe 2006 restructuring actions follows:

 
| **($ in  millions)**                 | ** ** | ** **    | ** ** | **Facility** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|---------------|------------|--------------|------------|------------|------------|
| **2006**                                  | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Total**  | ** ** |
| Liability balance, December 31, 2008 |       | $             | 0.1        |         | $          | 2.3        |       | $ | 2.4 |   |
| Restructuring charge in 2009              |       | —        |       | 0.1          |       | 0.1        |       |
| Utilized                                  |       | (0.1          | )          | (0.3         | )          | (0.4       | )          |
| Foreign exchange and other                |       | —        |       | 0.3          |       | 0.3        |       |
| Liability balance, June 30, 2009     |       | $             | —     |         | $          | 2.4        |       | $ | 2.4 |   |

 

The facility closurecosts from the 2006 restructuring actions primarily relate to the restructuringof the wafer reclaim business and the closure of two wafer reclaimfacilities. The facility closure costs are expected to be completed whenthe lease expires in 2018.

 

Restructuring reserves bysegment are as follows:

 
| ** **                | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------|------------|-------------------|------------|-----------------------|------------|
| **($ in  millions)** | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| Specialty Chemicals       |       | $                 | 5.8        |                  | $          | 8.1 |   |
| Performance Additives     |       | 1.5               |       | 2.3                   |       |
| Titanium Dioxide Pigments |       | 1.1               |       | 1.4                   |       |
| Advanced Ceramics         |       | 0.8               |       | 4.5                   |       |
| Specialty Compounds       |       | 0.3               |       | 0.5                   |       |
| Corporate and other       |       | 2.4               |       | 2.1                   |       |
|                      |       | $                 | 11.9       |                  | $          | 18.9 |   |

 

**15. 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 in accordancewith SFAS No. 5,  *Accounting for Contingencies*, if itis probable 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.

 

**HospiraMatter**

 

In April 2005,Hospira Incorporated filed suit in Mecklenburg County, North Carolina SuperiorCourt against one of the Company’s wholly-owned subsidiaries in its SpecialtyCompounds segment alleging claims for negligence, negligent misrepresentation,estoppel, fraud, third party beneficiary breach of contract and unfair tradepractices as a result of the subsidiary providing PVC compound to its customer.Hospira is seeking damages of approximately $16.0 million for costs allegedly relatedto its recall and destruction of intravenous administration kits thatincorporated components made with this compound, and further seeks trebledamages of approximately $48.0 million, plus attorneys’ fees and interest,under the North Carolina unfair trade practice statute. The Court dismissedHospira’s negligence and estoppel claims, but initially denied the subsidiary’smotion to dismiss the other claims.

 

23

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Following discovery, theCompany’s subsidiary filed a motion for summary judgment to dismiss theremaining claims and, on November 9, 2007, the trial court granted theCompany’s motion for summary judgment and dismissed all of the plaintiff’sclaims. The plaintiff appealed this decision and, in early 2009, the appellatecourt affirmed on all counts with the exception of the negligence claim, whichit reversed and remanded to the trial court. The Company’s subsidiary filed apetition with the North Carolina Supreme Court for review of the appellatecourt’s ruling.  The Company will continue to vigorously defend thismatter.  While the Company believes its subsidiary has meritoriousdefenses against Hospira’s claims and does not believe that resolution of thismatter will have a material adverse effect on its business or financialcondition, the Company cannot predict the ultimate outcome of this litigationand resolution of this claim may have a material adverse effect on its resultsof operations or cash flows in any quarterly or annual reporting period.

 

**AdvertisingMatter**

 

On March 3, 2009,Osmose, Inc. (“OI”) filed an action against Viance LLC (“Viance”), thejoint venture in the Timber Treatment Chemicals business, Rockwood Holdings, Inc.,and certain individuals, in the U.S. District Court, Northern District ofGeorgia, claiming that recent advertisements by Viance comparing its ACQproduct and OI’s MCQ product were false and misleading in violation of theLanham Act, constituted unfair competition, violated the Georgia DeceptiveTrade Practices Act, were defamatory and that Viance tortiously interfered withOI’s business relationships. OI is seeking damages related to their attorney’sfees and costs and punitive damages. OI also sought a temporary restrainingorder (“TRO”) and a preliminary injunction prohibiting Viance from continuingto make certain claims in advertisements related to their MCQ product.  OnMarch 20, 2009, the district court granted Osmose’s motion for a TRO andset a preliminary injunction hearing for May 19, 2009. Viance raisedcertain counterclaims related to OI’s advertisements and both parties’ claimswere heard at a recent hearing. The parties are awaiting the court’sruling. The Company will continue to vigorously defend this matter.  Whilethe Company believes the defendants have meritorious defenses against OI’sclaims and does not believe that resolution of this matter will have a materialadverse effect on its business or financial condition, the Company cannotpredict the ultimate outcome of this litigation, and the resolution of thismatter may have a material adverse effect on its results of operations or cashflows in any quarterly or annual reporting period.

 

**CeramicHips**

 

In the first quarter of2009, a customer of the Company’s Advanced Ceramics segment initiated a globalvoluntary recall of a specific model of ceramic ballheads manufactured byAdvanced Ceramics, and in July 2009, another customer initiated a recallof certain ceramic components.  The first recall was initiated afterreceiving reports of ceramic fractures and it relates only to the specificcustomers’ designs and no other product of this segment.  The subsidiaryis cooperating with its customers in investigating these matters. Although the Company does not believe these recalls will have a materialadverse effect on its business or financial condition, the Company cannotpredict the ultimate outcome of these matters, and the resolution of thesematters may have a material adverse effect on its results of operations or cashflows in any quarterly or annual reporting period.

 

**EC HeatStabilizers Investigation**

 

The European Commission (“EC”)is investigating 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.  In June 2009, the EC held a hearing onthis matter.  The Company expects adecision by the EC in late 2009.  TheCompany will vigorously defend this matter.  While the Company believesits subsidiary has meritorious defenses against these claims and does notbelieve that resolution of this matter will have a material adverse effect onits business or financial condition, the Company cannot predict the ultimateoutcome of this proceeding and resolution of this matter may have a materialadverse effect on its results of operations or cash flows in any quarterly orannual 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 this businesshas been named as a defendant in several lawsuits relating to alleged negligentmanufacturing of those products. Pursuant to the sale and purchase agreementwith respect to the divested “glass” business, this subsidiary may be requiredto pay indemnity claims related to these lawsuits. Although the Company expectsits subsidiary to have coverage under its product liability insurance policiesshould damages ultimately be awarded or agreed to, in such an event, itsinsurance may not cover such claims and, if not, its subsidiary may not havesufficient cash flow to pay these claims. Although the Company does not believethat resolution of these matters will have a material adverse effect on itsbusiness or financial condition, the Company cannot predict the ultimateoutcome of these claims, and the resolution of one or more of these claims mayhave a material adverse effect on its results of operations or cash flows inany quarterly or annual reporting period.

 

24

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**OtherMatters**

 

Although the Companyexpects to continue to pay legal fees in connection with the above matters andother legal actions related to chromated copper arsenate and other productliability matters, based on currently available facts, the Company does notbelieve that these actions will have a material adverse effect on the financialcondition, results of operations or liquidity of the Company.

 

Reserves in connectionwith product liability matters do not individually exceed $3.0 million and inthe aggregate $8.2 million as of June 30, 2009. 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 inthe future revise its estimates based on new information becoming available.Further, the Company cannot predict the outcome of any litigation or thepotential for future litigation.

 

***Indemnity Matters***— The Company may be indemnified by third parties inconnection with certain matters related to acquired businesses.   Although the Company has no reason to believethat the financial condition of those parties who may have indemnificationobligations to the Company is other than sound, in the event the Company seeksindemnity under any of these agreements or through other means, there can be noassurance that any party who may have obligations to indemnify the Company willadhere to their obligations and the Company may have to resort to legal actionto enforce its rights under the indemnities. 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.

 

***Safety, Healthand 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 newenvironmental laws, could result in materially increased capital, operating andcompliance costs.

 

**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.

 

**SHE Capital Expenditures**

 

The Company may incurfuture costs for capital improvements and general compliance under SHE laws.For the year ended December 31, 2008, the capital expenditures for SHEmatters totaled $28.1 million, excluding costs to maintain and repair pollutioncontrol equipment. For 2009, 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

 

25

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provide assurance thatits recent expenditures will be indicative of future amounts required to complywith these laws.

 

**Regulatory Developments**

 

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 December 31, 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 all ofthe Company’s products. The Company estimates it has approximately 350 productsthat 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.

 

In addition, the Companyis subject to the Homeland Security Agency’s regulations, which addresschemical plant safety, the Kyoto Protocol, which relates to the emission ofgreenhouse gases and the European Union Integrated Pollution Prevention andControl Directive, which relates to environmental permitting programs forindividual facilities.  The Company does not believe, based upon currentlyavailable information, that these regulations will have a material adverseimpact on its results of operations, financial position or liquidity.

 

**Remediation Liabilities**

 

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.

 

26

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The following tableprovides a list of the Company’s present and former facilities withenvironmental contamination for which the Company has reserved for at June 30,2009:

 
| **Country**     | ** ** | **Location**                     | ** ** | **(a)** | ** ** | **(b)** | ** ** | **(c)** | ** ** | **(d)** | ** ** | **(e)** |
|-----------------|------------|----------------------------------|------------|---------|------------|---------|------------|---------|------------|---------|------------|---------|
| Brazil          |       | Diadema                          |       |    |       |    |       | X       |       |    |       |    |
| China           |       | Shenzhen                         |       |    |       |    |       | X       |       |    |       |    |
| Finland         |       | Kipsikorpi                       |       |    |       |    |       |    |       | X       |       |    |
|            |       | Pori                             |       |    |       |    |       |    |       | X       |       |    |
| France          |       | Sens                             |       |    |       |    |       | X       |       |    |       |    |
| Germany         |       | Duisburg                         |       | X       |       |    |       |    |       | X       |       |    |
|            |       | Hainhausen                       |       | X       |       |    |       |    |       |    |       |    |
|            |       | Ibbenbueren                      |       |    |       |    |       |    |       | 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       |
|            |       | New  Johnsonville, TN            |       |    |       | X       |       | X       |       |    |       |    |
|            |       | Romulus, MI                      |       |    |       |    |       | 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.

 

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 $6.2 million at June 30, 2009. In addition, in late 2008,the German authorities have ordered the Company to investigate and, dependingon the results, potentially remediate a portion of a former site in Liebenau,Germany. The Company is currently in the process of gathering additionalinformation regarding the site and cannot predict the potential scope of anysuch remediation.

 

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

 

27

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and its predecessordisposed wastes could expose the Company to cleanup obligations and otherdamages in the future.

 

***Government Enforcement Proceedings and Civil Litigation***

 

During the course of theCompany’s business, the Company may receive notices of violation, enforcementand other complaints from regulatory agencies alleging non-compliance withapplicable SHE laws. During 2008, the Company’s Timber Treatment Chemicalssubsidiary was cited by the U.S. EPA for failure to report hazardous material productionquantities under the Toxic Substances Control Act - 2005 Inventory UpdateRule.  The business has subsequently provided the required information;however, the business received a fine for $0.1 million as a result of thisviolation. The Company does not believe, based upon currently availableinformation, that this issue will have a material adverse impact on its resultsof operations, financial position or liquidity.

 

***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.Liabilities are recorded when potential liabilities are either known or believedto be probable 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 $61.0 million and $55.1 million for known environmentalliabilities as of June 30, 2009 and December 31, 2008,respectively.  As of June 30, 2009and December 31, 2008, $54.7 million and $55.1 million, respectively, wereclassified as other non-current liabilities in the Condensed ConsolidatedBalance Sheets.  The increase in the reserve was primarily due tounanticipated cost increases at a State Superfund remediation project inLaurel, MD related to legacy obligations assumed in connection with theacquisition of Laporte, plc in 2000.  Forthis Superfund project, the Company expects to be indemnified by EvonikDegussa, as successor to Laporte, for a portion of this reserve and hasrecorded a receivable of $5.0 million as June 30, 2009.  Included in the $61.0 million as of June 30,2009 is $21.7 million that is discounted using discount rates ranging from 5.0%to 7.5%, with the undiscounted amount of these reserves equaling $31.3 million.Included in the $55.1 million as of December 31, 2008 is $21.4 millionthat is discounted using discount rates ranging from 5.0% to 7.5%, with theundiscounted amount of these reserves equaling $30.9 million. In certain cases,the Company’s remediation liabilities are payable over periods of up to 30years. At a number of the sites described above, the extent of contaminationhas not yet been fully investigated or the final scope of remediation is notyet determinable and could potentially affect the range. The Company estimatesthat the potential range for such environmental matters as of June 30,2009 is from $61.0 million to $104.6 million. For the six months ended June 30,2009, the Company recorded charges of $1.5 million ($6.5 million increase tothe environmental reserve less the $5.0 million receivable recorded as notedabove) to increase its environmental liabilities and made payments of $1.2million for clean-up and remediation costs, which reduced its environmentalliabilities. For the six months ended June 30, 2009, the recurring cost ofmanaging hazardous substances for ongoing operations is $21.0 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 flow 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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**16. 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.

 

**ROCKWOOD SPECIALTIES GROUP, INC. ANDSUBSIDIARIES**

**CONSOLIDATING STATEMENT OF OPERATIONS**

**THREE MONTHS ENDED JUNE 30, 2009**

**(Dollars in millions)**

 
| ** **                                                               | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                               | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| Net sales                                                                |       | $           | —     |             | $          | 155.5             |       | $                | 574.9      |   | $ | 730.4 |   |
| Cost of products sold                                                    |       | —      |       | 120.6            |       | 406.6             |       | 527.2            |       |
| Gross profit                                                             |       | —      |       | 34.9             |       | 168.3             |       | 203.2            |       |
| Selling, general and administrative expenses                             |       | 0.1         |       | 33.6             |       | 117.3             |       | 151.0            |       |
| Restructuring and other severance costs                                  |       | —      |       | 1.3              |       | 2.7               |       | 4.0              |       |
| Operating (loss) income                                                  |       | (0.1        | )          | —           |       | 48.3              |       | 48.2             |       |
| Other income (expenses), net:                                            |       |        |       |             |       |              |       |             |       |
| Intergroup interest, net                                                 |       | 28.1        |       | (13.3            | )          | (14.8             | )          | —           |       |
| Interest expense                                                         |       | (20.0       | )          | (0.3             | )          | (8.6              | )          | (28.9            | )          |
| Interest income                                                          |       | 0.2         |       | —           |       | 0.2               |       | 0.4              |       |
| Intergroup other, net                                                    |       | 0.1         |       | 1.4              |       | (1.5              | )          | —           |       |
| Gain (loss) on early extinguishment of debt, net                         |       | 1.0         |       | (6.1             | )          | (22.8             | )          | (27.9            | )          |
| Foreign exchange gain, net                                               |       | 4.3         |       | —           |       | 12.2              |       | 16.5             |       |
| Other, net                                                               |       | (0.1        | )          | 0.1              |       | 0.3               |       | 0.3              |       |
| Other income (expenses), net                                             |       | 13.6        |       | (18.2            | )          | (35.0             | )          | (39.6            | )          |
| Income (loss) from continuing operations before  taxes                   |       | 13.5        |       | (18.2            | )          | 13.3              |       | 8.6              |       |
| Income tax provision                                                     |       | 7.1         |       | 2.5              |       | 1.0               |       | 10.6             |       |
| Income (loss) from continuing operations                                 |       | 6.4         |       | (20.7            | )          | 12.3              |       | (2.0             | )          |
| Income from discontinued operations, net of tax                          |       | 1.1         |       | —           |       | —            |       | 1.1              |       |
| Net income (loss)                                                        |       | 7.5         |       | (20.7            | )          | 12.3              |       | (0.9             | )          |
| Net loss attributable to the noncontrolling interest                     |       | —      |       | —           |       | 2.6               |       | 2.6              |       |
| Net  income (loss) attributable to Rockwood Specialties Group, Inc. |       | $           | 7.5        |             | $          | (20.7             | )          | $                | 14.9       |   | $ | 1.7 |   |

 

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**ROCKWOOD SPECIALTIES GROUP, INC. ANDSUBSIDIARIES**

**CONSOLIDATING STATEMENT OF OPERATIONS**

**THREE MONTHS ENDED JUNE 30, 2008**

**(Dollars in millions)**

 
| ** **                                                        | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|-------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                        | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| Net sales                                                         |       | $           | —     |             | $          | 204.7             |       | $                | 718.5      |   | $ | 923.2 |   |
| Cost of products sold                                             |       | —      |       | 151.3            |       | 488.6             |       | 639.9            |       |
| Gross profit                                                      |       | —      |       | 53.4             |       | 229.9             |       | 283.3            |       |
| Selling, general and administrative expenses                      |       | 0.1         |       | 39.3             |       | 136.4             |       | 175.8            |       |
| Restructuring and other severance costs                           |       | —      |       | 0.1              |       | 1.4               |       | 1.5              |       |
| Loss on sale of assets                                            |       | —      |       | —           |       | 0.8               |       | 0.8              |       |
| Operating (loss) income                                           |       | (0.1        | )          | 14.0             |       | 91.3              |       | 105.2            |       |
| Other income (expenses), net:                                     |       |        |       |             |       |              |       |             |       |
| Intergroup interest, net                                          |       | 28.3        |       | (9.4             | )          | (18.9             | )          | —           |       |
| Interest expense                                                  |       | (2.2        | )          | (0.4             | )          | (7.1              | )          | (9.7             | )          |
| Interest income                                                   |       | 1.3         |       | —           |       | 0.1               |       | 1.4              |       |
| Intergroup other, net                                             |       | —      |       | 2.7              |       | (2.7              | )          | —           |       |
| Foreign exchange (loss) gain, net                                 |       | (1.8        | )          | (0.1             | )          | 1.1               |       | (0.8             | )          |
| Other, net                                                        |       | —      |       | —           |       | 0.1               |       | 0.1              |       |
| Other income (expenses), net                                      |       | 25.6        |       | (7.2             | )          | (27.4             | )          | (9.0             | )          |
| Income from continuing operations before taxes                    |       | 25.5        |       | 6.8              |       | 63.9              |       | 96.2             |       |
| Income tax provision                                              |       | 0.6         |       | 3.0              |       | 17.0              |       | 20.6             |       |
| Income from continuing operations                                 |       | 24.9        |       | 3.8              |       | 46.9              |       | 75.6             |       |
| Income from discontinued operations, net of tax                   |       | —      |       | 2.4              |       | —            |       | 2.4              |       |
| Net  income attributable to Rockwood Specialties Group, Inc. |       | $           | 24.9       |             | $          | 6.2               |       | $                | 46.9       |   | $ | 78.0 |   |

 

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**ROCKWOOD SPECIALTIES GROUP, INC. ANDSUBSIDIARIES**

**CONSOLIDATING STATEMENT OF OPERATIONS**

**SIX MONTHS ENDED JUNE 30, 2009**

**(Dollars in millions)**

 
| ** **                                                               | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                               | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| Net sales                                                                |       | $           | —     |             | $          | 312.0             |       | $                | 1,078.4    |   | $ | 1,390.4 |   |
| Cost of products sold                                                    |       | —      |       | 239.0            |       | 766.1             |       | 1,005.1          |       |
| Gross profit                                                             |       | —      |       | 73.0             |       | 312.3             |       | 385.3            |       |
| Selling, general and administrative expenses                             |       | 0.1         |       | 67.3             |       | 228.7             |       | 296.1            |       |
| Restructuring and other severance costs                                  |       | —      |       | 3.1              |       | 8.7               |       | 11.8             |       |
| Loss on sale of assets                                                   |       | —      |       | 0.1              |       | —            |       | 0.1              |       |
| Operating (loss) income                                                  |       | (0.1        | )          | 2.5              |       | 74.9              |       | 77.3             |       |
| Other income (expenses), net:                                            |       |        |       |             |       |              |       |             |       |
| Intergroup interest, net                                                 |       | 53.7        |       | (24.7            | )          | (29.0             | )          | —           |       |
| Interest expense                                                         |       | (56.5       | )          | (0.7             | )          | (21.4             | )          | (78.6            | )          |
| Interest income                                                          |       | 0.7         |       | (0.2             | )          | 0.3               |       | 0.8              |       |
| Intergroup other, net                                                    |       | 155.3       |       | (149.5           | )          | (5.8              | )          | —           |       |
| Gain (loss) on early extinguishment of debt, net                         |       | 4.5         |       | (6.2             | )          | (24.0             | )          | (25.7            | )          |
| Foreign exchange (loss) gain, net                                        |       | (3.3        | )          | (0.1             | )          | 14.3              |       | 10.9             |       |
| Other, net                                                               |       | (0.4        | )          | 0.4              |       | 0.4               |       | 0.4              |       |
| Other income (expenses), net                                             |       | 154.0       |       | (181.0           | )          | (65.2             | )          | (92.2            | )          |
| Income (loss) from continuing operations before  taxes                   |       | 153.9       |       | (178.5           | )          | 9.7               |       | (14.9            | )          |
| Income tax (benefit) provision                                           |       | (0.8        | )          | 4.6              |       | (9.9              | )          | (6.1             | )          |
| Income (loss) from continuing operations                                 |       | 154.7       |       | (183.1           | )          | 19.6              |       | (8.8             | )          |
| Income from discontinued operations, net of tax                          |       | 1.2         |       | 0.1              |       | 2.1               |       | 3.4              |       |
| Net income (loss)                                                        |       | 155.9       |       | (183.0           | )          | 21.7              |       | (5.4             | )          |
| Net loss attributable to the noncontrolling interest                     |       | —      |       | —           |       | 5.6               |       | 5.6              |       |
| Net  income (loss) attributable to Rockwood Specialties Group, Inc. |       | $           | 155.9      |             | $          | (183.0            | )          | $                | 27.3       |   | $ | 0.2 |   |

 

31

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**ROCKWOOD SPECIALTIES GROUP, INC. ANDSUBSIDIARIES**

**CONSOLIDATING STATEMENT OF OPERATIONS**

**SIX MONTHS ENDED JUNE 30, 2008**

**(Dollars in millions)**

 
| ** **                                                        | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|-------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                        | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| Net sales                                                         |       | $           | —     |             | $          | 390.2             |       | $                | 1,376.8    |   | $ | 1,767.0 |   |
| Cost of products sold                                             |       | —      |       | 286.4            |       | 924.8             |       | 1,211.2          |       |
| Gross profit                                                      |       | —      |       | 103.8            |       | 452.0             |       | 555.8            |       |
| Selling, general and administrative expenses                      |       | 0.1         |       | 80.2             |       | 262.1             |       | 342.4            |       |
| Restructuring and other severance costs                           |       | —      |       | 0.5              |       | 1.8               |       | 2.3              |       |
| Loss on sale of assets                                            |       | —      |       | —           |       | 0.9               |       | 0.9              |       |
| Operating (loss) income                                           |       | (0.1        | )          | 23.1             |       | 187.2             |       | 210.2            |       |
| Other income (expenses), net:                                     |       |        |       |             |       |              |       |             |       |
| Intergroup interest, net                                          |       | 56.0        |       | (18.9            | )          | (37.1             | )          | —           |       |
| Interest expense                                                  |       | (66.7       | )          | (0.9             | )          | (15.8             | )          | (83.4            | )          |
| Interest income                                                   |       | 4.0         |       | (0.1             | )          | (0.3              | )          | 3.6              |       |
| Intergroup other, net                                             |       | —      |       | 4.1              |       | (4.1              | )          | —           |       |
| Foreign exchange gain (loss), net                                 |       | 19.4        |       | (0.3             | )          | (4.8              | )          | 14.3             |       |
| Other, net                                                        |       | (0.4        | )          | 0.4              |       | 0.5               |       | 0.5              |       |
| Other income (expenses), net                                      |       | 12.3        |       | (15.7            | )          | (61.6             | )          | (65.0            | )          |
| Income from continuing operations before taxes                    |       | 12.2        |       | 7.4              |       | 125.6             |       | 145.2            |       |
| Income tax provision                                              |       | 0.9         |       | 4.6              |       | 34.8              |       | 40.3             |       |
| Income from continuing operations                                 |       | 11.3        |       | 2.8              |       | 90.8              |       | 104.9            |       |
| Income from discontinued operations, net of tax                   |       | —      |       | 1.4              |       | —            |       | 1.4              |       |
| Net income                                                        |       | 11.3        |       | 4.2              |       | 90.8              |       | 106.3            |       |
| Net income attributable to the noncontrolling  interest           |       | —      |       | —           |       | (0.6              | )          | (0.6             | )          |
| Net  income attributable to Rockwood Specialties Group, Inc. |       | $           | 11.3       |             | $          | 4.2               |       | $                | 90.2       |   | $ | 105.7 |   |

 

32

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**ROCKWOOD SPECIALTIES GROUP, INC. ANDSUBSIDIARIES**

**CONSOLIDATING BALANCE SHEET**

**JUNE 30, 2009**

**(Dollars in millions)**

 
| ** **                                                        | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | ** **       | ** ** |
|-------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                                        | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                                        |       |        |       |             |       |              |       |             |       |             |       |
| Current assets:                                                   |       |        |       |             |       |              |       |             |       |             |       |
| Cash and cash equivalents                                         |       | $           | 10.5       |             | $          | 24.3              |       | $                | 162.9      |             | $          | — |   | $ | 197.7 |   |
| Accounts receivable, net                                          |       | —      |       | 91.8             |       | 384.2             |       | —           |       | 476.0            |       |
| Inventories                                                       |       | —      |       | 124.8            |       | 418.8             |       | —           |       | 543.6            |       |
| Deferred income taxes                                             |       | 3.2         |       | 12.3             |       | 11.3              |       | —           |       | 26.8             |       |
| Prepaid expenses and other current assets                         |       | 0.7         |       | 13.9             |       | 56.3              |       | —           |       | 70.9             |       |
| Total current assets                                              |       | 14.4        |       | 267.1            |       | 1,033.5           |       | —           |       | 1,315.0          |       |
| Property, plant and equipment, net                                |       | —      |       | 286.4            |       | 1,429.3           |       | —           |       | 1,715.7          |       |
| Investment in subsidiary                                          |       | 1,423.2     |       | 90.7             |       | —            |       | (1,513.9         | )          | —           |       |
| Goodwill                                                          |       | —      |       | 16.8             |       | 902.7             |       | —           |       | 919.5            |       |
| Intergroup receivable                                             |       | 2,094.0     |       | 220.2            |       | 3,542.6           |       | (5,856.8         | )          | —           |       |
| Other intangible assets, net                                      |       | —      |       | 104.9            |       | 615.3             |       | —           |       | 720.2            |       |
| Deferred debt issuance costs, net                                 |       | 0.8         |       | 6.7              |       | 20.7              |       | —           |       | 28.2             |       |
| Deferred income taxes                                             |       | —      |       | —           |       | 22.6              |       | —           |       | 22.6             |       |
| Other assets                                                      |       | —      |       | 0.9              |       | 36.4              |       | —           |       | 37.3             |       |
| Total assets                                                      |       | $           | 3,532.4    |             | $          | 993.7             |       | $                | 7,603.1    |             | $          | (7,370.7 | ) | $ | 4,758.5 |   |
| **LIABILITIES**                                                   |       |        |       |             |       |              |       |             |       |             |       |
| Current liabilities:                                              |       |        |       |             |       |              |       |             |       |             |       |
| Accounts payable                                                  |       | $           | —     |             | $          | 45.9              |       | $                | 165.6      |             | $          | — |   | $ | 211.5 |   |
| Income taxes payable                                              |       | —      |       | (2.0             | )          | 3.1               |       | —           |       | 1.1              |       |
| Accrued compensation                                              |       | —      |       | 6.7              |       | 54.7              |       | —           |       | 61.4             |       |
| Restructuring liability                                           |       | —      |       | 1.6              |       | 10.3              |       | —           |       | 11.9             |       |
| Accrued expenses and other current liabilities                    |       | 40.1        |       | 47.1             |       | 125.3             |       | —           |       | 212.5            |       |
| Deferred income taxes                                             |       | —      |       | —           |       | 8.6               |       | —           |       | 8.6              |       |
| Long-term debt, current portion                                   |       | 15.6        |       | —           |       | 43.3              |       | —           |       | 58.9             |       |
| Total current liabilities                                         |       | 55.7        |       | 99.3             |       | 410.9             |       | —           |       | 565.9            |       |
| Long-term debt                                                    |       | 1,990.2     |       | —           |       | 460.6             |       | —           |       | 2,450.8          |       |
| Pension and related liabilities                                   |       | —      |       | 15.7             |       | 342.5             |       | —           |       | 358.2            |       |
| Intergroup payable                                                |       | 83.8        |       | 1,311.2          |       | 4,461.8           |       | (5,856.8         | )          | —           |       |
| Deferred income taxes                                             |       | 3.1         |       | 5.2              |       | 76.6              |       | —           |       | 84.9             |       |
| Other liabilities                                                 |       | 65.1        |       | 27.9             |       | 91.3              |       | —           |       | 184.3            |       |
| Total liabilities                                                 |       | 2,197.9     |       | 1,459.3          |       | 5,843.7           |       | (5,856.8         | )          | 3,644.1          |       |
| **EQUITY**                                                        |       |        |       |             |       |              |       |             |       |             |       |
| Rockwood Specialties Group, Inc. stockholder’s  equity: |       |        |       |             |       |              |       |             |       |             |       |
| Common stock                                                      |       | —      |       | 190.6            |       | 164.7             |       | (355.3           | )          | —           |       |
| Paid-in capital                                                   |       | 1,044.0     |       | 104.9            |       | 1,053.7           |       | (1,158.6         | )          | 1,044.0          |       |
| Accumulated other comprehensive income                            |       | 23.4        |       | (6.6             | )          | 205.6             |       | —           |       | 222.4            |       |
| Retained earnings (deficit)                                       |       | 267.1       |       | (754.5           | )          | 47.0              |       | —           |       | (440.4           | )          |
| Total Rockwood Specialties Group, Inc.                       |       |        |       |             |       |              |       |             |       |             |       |
| stockholder’s equity                                         |       | 1,334.5     |       | (465.6           | )          | 1,471.0           |       | (1,513.9         | )          | 826.0            |       |
| Noncontrolling interest                                           |       | —      |       | —           |       | 288.4             |       | —           |       | 288.4            |       |
| Total equity                                                      |       | 1,334.5     |       | (465.6           | )          | 1,759.4           |       | (1,513.9         | )          | 1,114.4          |       |
| Total liabilities and equity                                      |       | $           | 3,532.4    |             | $          | 993.7             |       | $                | 7,603.1    |             | $          | (7,370.7 | ) | $ | 4,758.5 |   |

 

33

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**ROCKWOOD SPECIALTIES GROUP, INC. ANDSUBSIDIARIES**

**CONSOLIDATING BALANCE SHEET**

**DECEMBER 31, 2008**

**(Dollars in millions)**

 
| ** **                                                        | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | ** **       | ** ** |
|-------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                                        | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                                        |       |        |       |             |       |              |       |             |       |             |       |
| Current assets:                                                   |       |        |       |             |       |              |       |             |       |             |       |
| Cash and cash equivalents                                         |       | $           | 272.7      |             | $          | 11.5              |       | $                | 184.5      |             | $          | — |   | $ | 468.7 |   |
| Accounts receivable, net                                          |       | —      |       | 91.6             |       | 373.0             |       | —           |       | 464.6            |       |
| Inventories                                                       |       | —      |       | 154.0            |       | 487.0             |       | —           |       | 641.0            |       |
| Deferred income taxes                                             |       | 3.2         |       | 11.9             |       | 7.1               |       | —           |       | 22.2             |       |
| Prepaid expenses and other current assets                         |       | 1.4         |       | 13.3             |       | 51.2              |       | —           |       | 65.9             |       |
| Total current assets                                              |       | 277.3       |       | 282.3            |       | 1,102.8           |       | —           |       | 1,662.4          |       |
| Property, plant and equipment, net                                |       | —      |       | 290.2            |       | 1,462.0           |       | —           |       | 1,752.2          |       |
| Investment in subsidiary                                          |       | 1,423.2     |       | 90.7             |       | —            |       | (1,513.9         | )          | —           |       |
| Goodwill                                                          |       | —      |       | 18.2             |       | 899.6             |       | —           |       | 917.8            |       |
| Intergroup receivable                                             |       | 1,877.0     |       | 701.2            |       | 3,501.3           |       | (6,079.5         | )          | —           |       |
| Other intangible assets, net                                      |       | —      |       | 116.2            |       | 638.6             |       | —           |       | 754.8            |       |
| Deferred debt issuance costs, net                                 |       | 1.7         |       | 3.1              |       | 34.3              |       | —           |       | 39.1             |       |
| Deferred income taxes                                             |       | —      |       | —           |       | 11.6              |       | —           |       | 11.6             |       |
| Other assets                                                      |       | —      |       | 1.5              |       | 38.0              |       | —           |       | 39.5             |       |
| Total assets                                                      |       | $           | 3,579.2    |             | $          | 1,503.4           |       | $                | 7,688.2    |             | $          | (7,593.4 | ) | $ | 5,177.4 |   |
| **LIABILITIES**                                                   |       |        |       |             |       |              |       |             |       |             |       |
| Current liabilities:                                              |       |        |       |             |       |              |       |             |       |             |       |
| Accounts payable                                                  |       | $           | —     |             | $          | 48.6              |       | $                | 212.2      |             | $          | — |   | $ | 260.8 |   |
| Income taxes payable                                              |       | (0.6        | )          | (1.7             | )          | 6.4               |       | —           |       | 4.1              |       |
| Accrued compensation                                              |       | —      |       | 19.0             |       | 73.6              |       | —           |       | 92.6             |       |
| Restructuring liability                                           |       | —      |       | 1.9              |       | 17.0              |       | —           |       | 18.9             |       |
| Accrued expenses and other current liabilities                    |       | 40.2        |       | 51.4             |       | 123.9             |       | —           |       | 215.5            |       |
| Deferred income taxes                                             |       | —      |       | —           |       | 9.0               |       | —           |       | 9.0              |       |
| Long-term debt, current portion                                   |       | 24.4        |       | —           |       | 66.5              |       | —           |       | 90.9             |       |
| Total current liabilities                                         |       | 64.0        |       | 119.2            |       | 508.6             |       | —           |       | 691.8            |       |
| Long-term debt                                                    |       | 2,191.4     |       | —           |       | 528.9             |       | —           |       | 2,720.3          |       |
| Pension and related liabilities                                   |       | —      |       | 15.4             |       | 336.6             |       | —           |       | 352.0            |       |
| Intergroup payable                                                |       | 78.8        |       | 1,619.1          |       | 4,381.6           |       | (6,079.5         | )          | —           |       |
| Deferred income taxes                                             |       | 1.5         |       | 3.6              |       | 92.6              |       | —           |       | 97.7             |       |
| Other liabilities                                                 |       | 68.9        |       | 29.6             |       | 91.3              |       | —           |       | 189.8            |       |
| Total liabilities                                                 |       | 2,404.6     |       | 1,786.9          |       | 5,939.6           |       | (6,079.5         | )          | 4,051.6          |       |
| **EQUITY**                                                        |       |        |       |             |       |              |       |             |       |             |       |
| Rockwood Specialties Group, Inc. stockholder’s  equity: |       |        |       |             |       |              |       |             |       |             |       |
| Common stock                                                      |       | —      |       | 190.6            |       | 164.7             |       | (355.3           | )          | —           |       |
| Paid-in capital                                                   |       | 1,044.0     |       | 104.2            |       | 1,054.4           |       | (1,158.6         | )          | 1,044.0          |       |
| Accumulated other comprehensive income                            |       | 19.4        |       | (6.6             | )          | 194.2             |       | —           |       | 207.0            |       |
| Retained earnings (deficit)                                       |       | 111.2       |       | (571.7           | )          | 19.9              |       | —           |       | (440.6           | )          |
| Total  Rockwood Specialties Group, Inc.                      |       |        |       |             |       |              |       |             |       |             |       |
| stockholder’s  equity                                        |       | 1,174.6     |       | (283.5           | )          | 1,433.2           |       | (1,513.9         | )          | 810.4            |       |
| Noncontrolling interest                                           |       | —      |       | —           |       | 315.4             |       | —           |       | 315.4            |       |
| Total equity                                                      |       | 1,174.6     |       | (283.5           | )          | 1,748.6           |       | (1,513.9         | )          | 1,125.8          |       |
| Total liabilities and equity                                      |       | $           | 3,579.2    |             | $          | 1,503.4           |       | $                | 7,688.2    |             | $          | (7,593.4 | ) | $ | 5,177.4 |   |

 

34

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGSTATEMENT OF CASH FLOWS**

**SIXMONTHS ENDED JUNE 30, 2009**

**(Dollars in millions)**

 
| ** **                                                                                              | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                              | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                                              |       |        |       |             |       |              |       |             |       |
| Net income (loss)                                                                                       |       | $           | 155.9      |             | $          | (183.0            | )          | $                | 21.7       |   | $ | (5.4 | ) |
| Adjustments to reconcile net income (loss) to net  cash provided by (used in) operating activities:     |       |        |       |             |       |              |       |             |       |
| Income from discontinued operations, net of tax                                                         |       | (1.2        | )          | (0.1             | )          | (2.1              | )          | (3.4             | )          |
| Depreciation and amortization                                                                           |       | —      |       | 27.5             |       | 109.5             |       | 137.0            |       |
| Deferred financing costs amortization                                                                   |       | 0.2         |       | 0.5              |       | 3.9               |       | 4.6              |       |
| Loss on early extinguishment of debt, net (a)                                                           |       | 5.7         |       | 2.0              |       | 18.0              |       | 25.7             |       |
| Foreign exchange loss (gain), net                                                                       |       | 3.3         |       | 0.1              |       | (14.3             | )          | (10.9            | )          |
| Fair value adjustment of derivatives                                                                    |       | (5.0        | )          | —           |       | 2.4               |       | (2.6             | )          |
| Bad debt provision                                                                                      |       | —      |       | 0.5              |       | (0.1              | )          | 0.4              |       |
| Stock-based compensation                                                                                |       | —      |       | 1.1              |       | 0.4               |       | 1.5              |       |
| Deferred income taxes                                                                                   |       | (1.6        | )          | 4.1              |       | (18.9             | )          | (16.4            | )          |
| 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                                                                                     |       | —      |       | (0.6             | )          | (5.9              | )          | (6.5             | )          |
| Inventories                                                                                             |       | —      |       | 29.2             |       | 71.2              |       | 100.4            |       |
| Prepaid expenses and other assets                                                                       |       | 0.3         |       | 0.2              |       | (3.7              | )          | (3.2             | )          |
| Accounts payable                                                                                        |       | —      |       | (1.7             | )          | (39.0             | )          | (40.7            | )          |
| Income taxes payable                                                                                    |       | 2.4         |       | (0.3             | )          | (5.7              | )          | (3.6             | )          |
| Accrued expenses and other liabilities                                                                  |       | 23.7        |       | (46.5            | )          | (23.6             | )          | (46.4            | )          |
| Intercompany operating activities, net                                                                  |       | 231.5       |       | (178.0           | )          | (53.5             | )          | —           |       |
| Net cash provided by (used in) operating activities  of continuing operations                           |       | 415.2       |       | (344.9           | )          | 60.3              |       | 130.6            |       |
| Net cash provided by operating activities of  discontinued operations                                   |       | —      |       | —           |       | —            |       | —           |       |
| **Net cash provided by (used in)  operating activities**                                                |       | 415.2       |       | (344.9           | )          | 60.3              |       | 130.6            |       |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                                              |       |        |       |             |       |              |       |             |       |
| Acquisitions, including transaction fees paid, net  of cash acquired                                    |       | —      |       | —           |       | (0.3              | )          | (0.3             | )          |
| Capital expenditures, excluding capital leases                                                          |       | —      |       | (16.7            | )          | (64.5             | )          | (81.2            | )          |
| Proceeds on sale of assets                                                                              |       | —      |       | 2.0              |       | 4.8               |       | 6.8              |       |
| Net cash used in investing activities of continuing  operations                                         |       | —      |       | (14.7            | )          | (60.0             | )          | (74.7            | )          |
| Net cash used in investing activities of  discontinued operations                                       |       | —      |       | (0.4             | )          | —            |       | (0.4             | )          |
| **Net cash used in investing  activities**                                                              |       | —      |       | (15.1            | )          | (60.0             | )          | (75.1            | )          |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                                              |       |        |       |             |       |              |       |             |       |
| Prepayment of 2014 Notes                                                                                |       | (146.8      | )          | —           |       | —            |       | (146.8           | )          |
| Prepayment of senior secured debt                                                                       |       | (40.8       | )          | —           |       | (61.5             | )          | (102.3           | )          |
| Repayment of senior secured debt                                                                        |       | (11.9       | )          | —           |       | (24.9             | )          | (36.8            | )          |
| Payments on other long-term debt                                                                        |       | —      |       | —           |       | (5.4              | )          | (5.4             | )          |
| Deferred financing costs                                                                                |       | (13.7       | )          | —           |       | —            |       | (13.7            | )          |
| Fees related to early extinguishment of debt                                                            |       | (8.3        | )          | —           |       | —            |       | (8.3             | )          |
| Loan from Viance noncontrolling shareholder                                                             |       | —      |       | —           |       | 2.0               |       | 2.0              |       |
| Contractual  advance to Titanium Dioxide Pigments noncontrolling shareholder                            |       | —      |       | —           |       | (1.3              | )          | (1.3             | )          |
| Intercompany financing related activity                                                                 |       | (455.9      | )          | 373.0            |       | 82.9              |       | —           |       |
| Net  cash (used in) provided by financing activities of continuing operations                           |       | (677.4      | )          | 373.0            |       | (8.2              | )          | (312.6           | )          |
| Net cash used in financing activities of  discontinued operations                                       |       | —      |       | —           |       | —            |       | —           |       |
| **Net cash (used in) provided by  financing activities**                                                |       | (677.4      | )          | 373.0            |       | (8.2              | )          | (312.6           | )          |
| Effect of exchange rate changes on cash and cash  equivalents                                           |       | —      |       | (0.2             | )          | (13.7             | )          | (13.9            | )          |
| Net (decrease) increase in cash and cash equivalents                                                    |       | (262.2      | )          | 12.8             |       | (21.6             | )          | (271.0           | )          |
| 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                                      |       | $           | 10.5       |             | $          | 24.3              |       | $                | 162.9      |   | $ | 197.7 |   |

 

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(a) Includes the write-off of deferred financing costsof $20.9 and lender fees related to the early extinguishment of debt of $11.1,partially offset by a discount on the prepayment of the 2014 Notes of $6.3.

 

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**ROCKWOOD SPECIALTIES GROUP, INC. ANDSUBSIDIARIES**

**CONSOLIDATING STATEMENT OF CASH FLOWS**

**SIX MONTHS ENDED JUNE 30, 2008**

**(Dollars in millions)**

 
| ** **                                                                                               | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                               | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                               |       |        |       |             |       |              |       |             |       |
| Net income                                                                                               |       | $           | 11.3       |             | $          | 4.2               |       | $                | 90.8       |   | $ | 106.3 |   |
| Adjustments to  reconcile net income to net cash (used in) provided by operating activities:             |       |        |       |             |       |              |       |             |       |
| Income from  discontinued operations, net of tax                                                         |       | —      |       | (1.4             | )          | —            |       | (1.4             | )          |
| Depreciation and  amortization                                                                           |       | —      |       | 22.3             |       | 102.7             |       | 125.0            |       |
| Deferred  financing costs amortization                                                                   |       | 0.2         |       | 0.5              |       | 4.0               |       | 4.7              |       |
| Foreign exchange  (gain) loss, net                                                                       |       | (19.4       | )          | 0.3              |       | 4.8               |       | (14.3            | )          |
| Fair value  adjustment of derivatives                                                                    |       | (6.4        | )          | —           |       | 3.2               |       | (3.2             | )          |
| Bad debt  provision                                                                                      |       | —      |       | (0.3             | )          | 1.3               |       | 1.0              |       |
| Stock-based  compensation                                                                                |       | —      |       | 2.6              |       | 1.5               |       | 4.1              |       |
| Deferred income  taxes                                                                                   |       | (0.9        | )          | 3.7              |       | 13.9              |       | 16.7             |       |
| Gain on sale of  assets and other                                                                        |       | —      |       | —           |       | 0.4               |       | 0.4              |       |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions: |       |        |       |             |       |              |       |             |       |
| Accounts  receivable                                                                                     |       | —      |       | (27.5            | )          | (62.5             | )          | (90.0            | )          |
| Inventories                                                                                              |       | —      |       | (13.1            | )          | (1.6              | )          | (14.7            | )          |
| Prepaid expenses  and other assets                                                                       |       | 2.8         |       | 0.4              |       | 4.6               |       | 7.8              |       |
| Accounts payable                                                                                         |       | —      |       | 0.7              |       | (13.8             | )          | (13.1            | )          |
| Income taxes  payable                                                                                    |       | 0.9         |       | (2.6             | )          | 1.6               |       | (0.1             | )          |
| Accrued expenses  and other liabilities                                                                  |       | (3.0        | )          | (9.0             | )          | 3.2               |       | (8.8             | )          |
| Intercompany  operating activities, net                                                                  |       | 2.5         |       | 13.6             |       | (16.1             | )          | —           |       |
| Net cash (used  in) provided by operating activities of continuing operations                            |       | (12.0       | )          | (5.6             | )          | 138.0             |       | 120.4            |       |
| Net cash  provided by operating activities of discontinued operations                                    |       | —      |       | 3.3              |       | —            |       | 3.3              |       |
| **Net  cash (used in) provided by operating activities**                                                 |       | (12.0       | )          | (2.3             | )          | 138.0             |       | 123.7            |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                               |       |        |       |             |       |              |       |             |       |
| Acquisitions,  including transaction fees paid, net of cash acquired                                     |       | —      |       | (1.6             | )          | (9.8              | )          | (11.4            | )          |
| Post closing  purchase price consideration                                                               |       | —      |       | —           |       | 29.1              |       | 29.1             |       |
| Post closing  purchase price consideration, related intercompany                                         |       | 10.0        |       | —           |       | (10.0             | )          | —           |       |
| Capital  expenditures, excluding capital leases                                                          |       | —      |       | (14.4            | )          | (89.8             | )          | (104.2           | )          |
| Proceeds on sale  of assets                                                                              |       | —      |       | 2.2              |       | 0.7               |       | 2.9              |       |
| Net cash  provided by (used in) investing activities of continuing operations                            |       | 10.0        |       | (13.8            | )          | (79.8             | )          | (83.6            | )          |
| Net cash used in  investing activities of discontinued operations                                        |       | —      |       | (4.9             | )          | —            |       | (4.9             | )          |
| **Net  cash provided by (used in) investing activities**                                                 |       | 10.0        |       | (18.7            | )          | (79.8             | )          | (88.5            | )          |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                               |       |        |       |             |       |              |       |             |       |
| Repayment of  senior secured credit facilities                                                           |       | (12.6       | )          | —           |       | (20.9             | )          | (33.5            | )          |
| Payments on  other long-term debt                                                                        |       | —      |       | —           |       | (5.6              | )          | (5.6             | )          |
| Equity  contributions                                                                                    |       | 0.2         |       | —           |       | —            |       | 0.2              |       |
| Deferred  financing costs                                                                                |       | —      |       | —           |       | (3.0              | )          | (3.0             | )          |
| Distribution to  noncontrolling shareholder                                                              |       | —      |       | —           |       | (2.9              | )          | (2.9             | )          |
| Intercompany  financing related activity                                                                 |       | 59.3        |       | (67.0            | )          | 7.7               |       | —           |       |
| Net cash  provided by (used in) financing activities of continuing operations                            |       | 46.9        |       | (67.0            | )          | (24.7             | )          | (44.8            | )          |
| Net cash used in  financing activities of discontinued operations                                        |       | —      |       | —           |       | —            |       | —           |       |
| **Net  cash provided by (used in) financing activities**                                                 |       | 46.9        |       | (67.0            | )          | (24.7             | )          | (44.8            | )          |
| Effect of  exchange rate changes on cash and cash equivalents                                            |       | (1.1        | )          | (0.3             | )          | 1.2               |       | (0.2             | )          |
| Net increase  (decrease) in cash and cash equivalents                                                    |       | 43.8        |       | (88.3            | )          | 34.7              |       | (9.8             | )          |
| Cash and cash  equivalents of continuing operations, beginning of period                                 |       | 370.7       |       | (84.3            | )          | 60.5              |       | 346.9            |       |
| Cash and cash  equivalents of continuing operations, end of period                                       |       | $           | 414.5      |             | $          | (172.6            | )          | $                | 95.2       |   | $ | 337.1 |   |

 

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

 

*In2008, we completed the sale of our pool and spa chemicals business and in 2007,we completed the sale of our Groupe Novasep and Electronics segments. As aresult, our condensed consolidated financial statements have been reclassifiedto reflect these segments as discontinued operations for all periods presented.See Note 3, “Discontinued Operations,” for further details.*

 

*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 2008 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 June 30, 2009 exchange rate of €1.00 = $1.4033.*

 

**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, product returns and allowances.In addition, net sales include shipping and handling costs billed to 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:

 

·                  We have cut costs, reduced overhead and eliminated duplicativepositions in both acquired and existing businesses. In the fourth quarterof 2008, a restructuring plan was implemented in our Surface Treatmentbusiness within our Specialty Chemicals segment which included headcountreductions and the closure of two manufacturing facilities in 2009;

 

·                  In the fourth quarter of 2008, we reduced overhead and eliminatedduplicative positions throughout the Company as part of our global cost controlinitiatives.  To cope with the downturn in the economy, we have continuedthis activity in the first half of 2009, and we remain focused on reducingcosts, improving productivity, and conserving cash by controlling workingcapital and capital spending;

 

·                  We acquired Holliday Pigments in August 2008, which is included inour Color Pigments and Service business, and in September 2008, weacquired Nalco’s Finishing Technologies business which is included in ourSpecialty Chemicals segment;

 

·                  We completed the Titanium Dioxide Pigments venture with Kemira in September 2008.See Note 7, “Acquisitions,” for further details;

 

·                  In October 2008, we completed the sale of our pool and spachemicals business; and

 

·                  In the first half of 2009, we repurchased a portion of ourEuro-denominated senior subordinated notes due in 2014, voluntarily prepaid aportion of our senior secured term loans and amended our senior secured creditagreement.  See discussion below in “Liquidityand Capital Resources” for further details.

 

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**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 in which weoperate that impacted our results of operations during the periods presented includethe following:

 

***Specialty Chemicals***

 

·                  Demand for Surface Treatment products in our Specialty Chemicalssegment generally follows the activity levels of metal processingmanufacturers, including the automotive supply, steel and aerospace industries.Sales growth in the Surface Treatment business occurred in 2008 in most marketsand regions served, primarily aerospace, general industrial and Europeanautomotive industries. This growth was driven by price increases and theimpact of bolt-on acquisitions that offset raw material cost increases andlower volumes from a slowdown in the automotive markets.  In the first sixmonths of 2009, results declined on lower volumes in most businesses. Results for the remainder of 2009 could be negatively impacted by continuedeconomic downturns in all business sectors and regions.

 

·                  Demand for our lithium products in the Fine Chemicals business line ofour Specialty Chemicals segment is generally driven by demand for lithiumcarbonate 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. Growthin the Fine Chemicals business occurred in 2008 in most market segments, drivenby price increases and higher volumes of lithium applications.  In thefirst six months of 2009, lower volumes in most applications, particularly inlithium and metal sulfide applications, had a negative impact on results. A continued economic downturn could have a negative impact on the results ofthis business for the remainder of 2009.

 

***Performance Additives***

 

·                  Generally, a trend towards the increased use of colored concreteproducts in the construction market has historically had a positive effect onour Color Pigments and Services business line. However, a general slowdownin the construction market negatively impacted construction sales.  NorthAmerican and European volumes were lower in 2008 and continued to decline inthe first six months of 2009.  A continued slowdown in the constructionindustry could have a negative impact on our results for the remainder of 2009.

 

·                  Demand for our wood protection products, in particular alkaline copperquaternary, or ACQ, is generally driven by new construction, as well asremodeling and renovations.  The market position of ACQ was negativelyimpacted in 2008 and the first half of 2009 by customer shifts to substituteproducts, a general slowdown in the construction market and the use of woodsubstitutes. These trends are expected to continue for the remainder of2009.  In 2008, we introduced our newest*Ecolife* system which utilizes*Ecovance*, ahigh-performance non-metallic preservative with enhanced environmentalbenefits. Commercialization began in 2008, but did not have a significantimpact in 2008 or the first half of 2009. We do not expect these products to have a significant impact for theremainder of the year.

 

·                  In the Clay-based Additives business, net sales increased in 2008 asincreased selling prices and volumes for oilfield applications and increasedselling prices of coatings and inks were partially offset by lower volumes ofcoatings and carbonless applications.  As a result of the economicslowdown, volumes were lower in most applications in the first six months of2009.   A continued economic slowdowncould have a negative impact on the results of this business for the remainderof 2009.

 

·                  Raw material costs have increased in the first six months of 2009 inthe Performance Additives segment. Our ability to pass on additionalselling price increases for raw material increases in 2009 is uncertain inthese businesses.

 

***Titanium Dioxide Pigments***

 

·                  Demand for our titanium dioxide products in anatase grade is drivenmainly by demand in the synthetic fiber industry, while demand for titaniumdioxide products in rutile grade and our functional additives is driven bydemand in the coatings, construction, cosmetics, pharmaceutical, food, paperand plastics industries. Market conditions, including pricing pressure andcurrent industry overcapacity, have continued to negatively impact thissegment. Volumes and selling prices in fiber anatase

 

38

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applications decreased in2008.  In the first six months of 2009, lower volumes of fiber anataseapplications were partially offset by increased selling prices.  Sales oftitanium dioxide products in rutile grade were down in 2008 due to lowerselling prices, partially offset by slightly higher volumes.  In the firstsix months of 2009, sales of rutile applications were up due to higher volumesas a result of the venture with Kemira that was completed on September 1,2008, partially offset by lower selling prices.  Our functional additivessales were down in 2008 and in the first six months of 2009 on lower volumes,partially offset by increased selling prices in both years.  A continuedeconomic downturn could have a negative impact on the results of theseapplications for the remainder of 2009.

 

***Advanced Ceramics***

 

·                  Demand for our ceramic medical devices is mainly tied to the agingpopulation in Europe and the United States. Although the volume of our productsused in medical device applications sold experienced double-digit growth eachyear from 2001 through 2005, in 2006 some customers in the U.S. reduced theirdemand due to high inventory levels and delayed approvals resulting in lowervolumes. However, sales of our medical device applications increased in 2008 onhigher volumes and continued to increase in the first six months of 2009. We expect this trend to continue throughout the remainder of 2009.

 

·                  Despite the negative impact of pricing pressure from Asian competitors,sales of ceramic products for use in cutting tool products were up slightly in2008 on higher volumes.  However, sales of these applications were lowerin the first half of 2009.  Sales of mechanical systems and applications,electronic applications and multi-functional applications were down in 2008 andin the first half of 2009 from lower volumes. Volumes for these applications,particularly cutting tools, electronics and multi-functional, as well as otherindustrial driven applications, could be negatively impacted by a continuedeconomic downturn, particularly in the automotive industry.

 

***Specialty Compounds***

 

·                  Our largest product line in the Specialty Compounds segment is wire andcable compounds. Sales within this product line are dependent upon the telecommunicationsmarket and related sectors, specifically demand for high-end voice and datacommunication wire and cable, for which our Specialty Compounds segment is asignificant provider of sheathing materials. Newly developed non-halogenproducts for wire and cable data communication, military and other applicationshave expanded business in North America for those applications and createdopportunities in Europe.  However, as a result of a general downturn inthe wire and cable market, volumes of wire and cable products were down in 2008and in the first six months of 2009.  Acontinued economic downturn could have a negative impact on our wire and cableapplications for the remainder of 2009.

 

·                  Most of the other end-use markets for which Specialty Compounds’products are used generally track growth of gross domestic product, butmany are also application specific, such as automotive. We are focusing more ofour efforts towards increasing high margin specialty products, in particular,thermoplastic elastomers, and less of our efforts in automotive and footwear.Our net sales in consumer/industrial thermoplastic elastomers were flat in2008, but were lower in the first six months of 2009.  Net sales ofregulated packaging were lower in 2008 and in the first six months of2009.  Results for the remainder of 2009could be negatively impacted by continued economic downturns in theseapplications.

 

·                  Raw material prices for polyvinyl chloride (“PVC”) resin andplasticizers, key raw materials used in the production of wire and cableproducts, were down in the first half of 2009 and are expected to be lower forthe remainder of 2009 compared to prior year.

 

**GlobalExposure**

 

We operate ageographically diverse business. Of our 2008 net sales, 54% were shipments toEurope, 29% to North America (predominantly the United States) and 17% 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 our2008 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 94 manufacturing facilities in 26countries. Consequently, we are exposed to global economic and political changes,particularly currency fluctuations that could impact our profitability anddemand 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 and six months ended June 30, 2009, the average exchange rate ofthe euro against the U.S. dollar was lower compared to the same period in 2008.As a result, our net sales, gross profit and operating income were negativelyimpacted. Historically, however, our operating margins have not beensignificantly impacted by currency fluctuations because, in general, sales andcosts of products sold are generated or incurred

 

39

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in the same currency,subject to certain exceptions.

 

**RawMaterials**

 

Raw materials constitutedapproximately 52% of our 2008 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 2008. Nonetheless, the significant pricefluctuations our raw materials have experienced in the past during periods ofhigh demand have had an adverse impact on our results of operations. We cannotaccurately predict the impact of any future price increases for raw materialsor any raw material shortages on our business as a whole or in specificgeographic regions. In addition, we may not be able to pass on raw materialprice increases to our customers. See details of our ten most significantraw materials (in terms of dollars) in 2008 in Item 1, “Business — RawMaterials” in our 2008 Form 10-K.

 

**EnergyCosts**

 

In 2008, energy purchasesrepresented approximately 7% 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. Natural gas prices in North America were higher during2008, but were down in the first six months of 2009.  Natural gas pricesin Europe, where our Titanium Dioxide Pigments segment is located, havehistorically been relatively stable, although prices were higher in 2008 andthe first six months of 2009.

 

**IncomeTaxes**

 

We recorded an income taxprovision of $10.6 million in the second quarter of 2009 on income fromcontinuing operations before taxes of $8.6 million. The income tax provision inthe second quarter of 2009 was positively impacted by $2.0 million ofnonrecurring items primarily related to foreign taxes and negatively impactedby $6.6 million of domestic tax costs allocated from other comprehensive incomeand the domestic valuation allowance.

 

In the second quarter of2009, the worldwide valuation allowance increased by $26.0 million. This wasprimarily due to an increase of $4.1 million related to net operating lossesand a $22.4 million increase due to domestic losses in other comprehensiveincome. Of the $26.0 million increase in the valuation allowance for the secondquarter of 2009, $4.1 million impacted the tax provision.

 

**Acquisitions**

 

In 2008, we madeacquisitions pursuant to our business strategy of achieving profitable growth.See Note 7, “Acquisitions,” for further details.

 

**SpecialCharges and Credits**

 

During the periodspresented, we incurred certain special charges that includedsystems/organization establishment expenses, restructuring and other severancecosts, foreign exchange gains and losses and a loss on the early extinguishmentof debt, net. See “Items excluded from Adjusted EBITDA” section in Note 4, “SegmentInformation,” for a discussion of special charges and credits recorded in thethree and six months ended June 30, 2009 and 2008.

 

**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.

 

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**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 of deferred financingfees;

·                  extraordinary losses and non-recurring charges;

·                  non-cash charges;

·                  losses on asset sales;

·                  restructuring charges or reserves (including severance, relocationcosts and one-time compensation charges and costs relating to the closure offacilities);

·                  expenses paid by us or any of our subsidiaries in connection with theDynamit Nobel Acquisition, the senior secured credit agreement, the granting ofliens under the security documents (as such term is defined in the senior securedcredit agreement), the indenture governing the 2014 Notes and the offering ofthe 2014 Notes and any other related transactions;

·                  any expenses or charges incurred in connection with any issuance ofdebt or equity securities;

·                  any fees and expenses related to permitted acquisitions;

·                  any deduction for noncontrolling interest expense; and

·                  items arising in connection with CCA litigation related to our TimberTreatment Chemicals business of our Performance Additives segment;

 

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 senior subordinatednotes, due in 2014 (“2014 Notes”) and the facility agreement governing ourTitanium Dioxide Pigments venture excludes certain adjustments prescribedwithin the senior secured credit agreement. Given that borrowings under thesenior secured credit agreement are secured by most of our assets and giventhat the calculation does not materially differ from the calculation ofAdjusted EBITDA for performance measurement purposes, we believe this is themost appropriate computation of Adjusted EBITDA to present.

 

**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 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 noteholdersaccelerating the maturity of the 2014 Notes. In addition, if we cannot satisfy

 

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these financial covenantsin the indenture governing the 2014 Notes, we cannot engage in certainactivities, such as incurring additional indebtedness or making certainpayments. Consequently, Adjusted EBITDA is critical to our assessment of ourliquidity.

 

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 tax provision(benefit), and restructuring as well as non-recurring charges related tosecurities issuance, acquisition activities, and systems/organizationestablishment, generally represent charges (gains) which may significantlyaffect funds available for use in our operating, investing and financingactivities;

 

·                  non-operating foreign exchange gains (losses), although not immediatelyaffecting cash used in investing activities, may affect the amount of fundsneeded to service our debt if those currency impacts remain in place as we meetour future principal repayment obligations; and

 

·                  depreciation, amortization, non-cash (gains) charges and impairmentcharges, though not directly affecting our current cash position, represent thewear and tear and/or reduction in value of the plant, equipment and intangibleassets which permit us to manufacture and/or market our products; these itemsmay be indicative of future needs for capital expenditures, for development oracquisition of intangible assets or relevant trends causing asset valuechanges.

 

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. AdjustedEBITDA is not an alternative to net income (loss) or income (loss) fromcontinuing 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 Annual Report. We alsostrongly urge you not to rely on any single financial measure to evaluate ourbusiness. Our measure of Adjusted EBITDA may not be comparable to those ofother companies.

 

**Resultsof Operations**

 

**ActualResults of Operations**

 

The following tablepresents the major components of our operations on an actual basis and AdjustedEBITDA (the reconciliation to net income is set forth in—Reconciliation of NetIncome Attributable to Rockwood Specialties Group, Inc. to Adjusted EBITDAfor the three and six months ended June 30, 2009 and 2008), including as apercentage 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.

 

42

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| ** **                                                        | ** ** | **Three  months ended** | ** ** | **Six months  ended** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                        | ** ** | **June 30,**       | ** ** | **June 30,**     | ** ** |
| **($ in  millions)**                                         | ** ** | **2009**                | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Statement of operations data:**                                 |       |                    |       |                  |       |   |   |   |   |
| **Net sales:**                                                    |       |                    |       |                  |       |   |   |   |   |
| Specialty Chemicals                                               |       | $                       | 236.2      |                  | $          | 335.5 |   | $ | 461.5 |   | $ | 647.2 |   |
| Performance Additives                                             |       | 180.1                   |       | 242.3                 |       | 335.4 |   | 453.6 |   |
| Titanium Dioxide Pigments                                         |       | 164.3                   |       | 124.3                 |       | 303.3 |   | 240.2 |   |
| Advanced Ceramics                                                 |       | 97.1                    |       | 145.3                 |       | 185.0 |   | 278.5 |   |
| Specialty Compounds                                               |       | 51.6                    |       | 73.2                  |       | 102.7 |   | 142.2 |   |
| Corporate and other                                               |       | 1.1                     |       | 2.6                   |       | 2.5 |   | 5.3 |   |
| Total net sales                                                   |       | 730.4                   |       | 923.2                 |       | 1,390.4 |   | 1,767.0 |   |
|                                                              |       |                    |       |                  |       |   |   |   |   |
| Gross profit                                                      |       | 203.2                   |       | 283.3                 |       | 385.3 |   | 555.8 |   |
|                                                              |       | 27.8                    | %          | 30.7                  | %          | 27.7 | % | 31.5 | % |
| Selling, general and administrative expenses                      |       | 151.0                   |       | 175.8                 |       | 296.1 |   | 342.4 |   |
|                                                              |       | 20.7                    | %          | 19.0                  | %          | 21.3 | % | 19.4 | % |
| Restructuring and other severance costs                           |       | 4.0                     |       | 1.5                   |       | 11.8 |   | 2.3 |   |
| Loss on sale of assets and other                                  |       | —                  |       | 0.8                   |       | 0.1 |   | 0.9 |   |
| **Operating income (loss):**                                      |       |                    |       |                  |       |   |   |   |   |
| Specialty Chemicals                                               |       | 37.0                    |       | 64.3                  |       | 66.2 |   | 127.9 |   |
|                                                              |       | 15.7                    | %          | 19.2                  | %          | 14.3 | % | 19.8 | % |
| Performance Additives                                             |       | 4.4                     |       | 17.4                  |       | 6.2 |   | 32.9 |   |
|                                                              |       | 2.4                     | %          | 7.2                   | %          | 1.8 | % | 7.3 | % |
| Titanium Dioxide Pigments                                         |       | 0.4                     |       | 0.5                   |       | 2.8 |   | 10.4 |   |
|                                                              |       | 0.2                     | %          | 0.4                   | %          | 0.9 | % | 4.3 | % |
| Advanced Ceramics                                                 |       | 11.6                    |       | 32.6                  |       | 14.2 |   | 58.9 |   |
|                                                              |       | 11.9                    | %          | 22.4                  | %          | 7.7 | % | 21.1 | % |
| Specialty Compounds                                               |       | 6.2                     |       | 6.9                   |       | 11.3 |   | 12.6 |   |
|                                                              |       | 12.0                    | %          | 9.4                   | %          | 11.0 | % | 8.9 | % |
| Corporate and other                                               |       | (11.4                   | )          | (16.5                 | )          | (23.4 | ) | (32.5 | ) |
| Total operating income                                            |       | 48.2                    |       | 105.2                 |       | 77.3 |   | 210.2 |   |
| **Other expenses, net:**                                          |       |                    |       |                  |       |   |   |   |   |
| Interest expense                                                  |       | (28.9                   | )          | (9.7                  | )          | (78.6 | ) | (83.4 | ) |
| Interest income                                                   |       | 0.4                     |       | 1.4                   |       | 0.8 |   | 3.6 |   |
| Loss on early extinguishment of debt, net                         |       | (27.9                   | )          | —                |       | (25.7 | ) | — |   |
| Foreign exchange gain (loss), net                                 |       | 16.5                    |       | (0.8                  | )          | 10.9 |   | 14.3 |   |
| Other, net                                                        |       | 0.3                     |       | 0.1                   |       | 0.4 |   | 0.5 |   |
| Other expenses, net                                               |       | (39.6                   | )          | (9.0                  | )          | (92.2 | ) | (65.0 | ) |
| **Income (loss) from continuing  operations before taxes**        |       | 8.6                     |       | 96.2                  |       | (14.9 | ) | 145.2 |   |
| Income tax provision (benefit)                                    |       | 10.6                    |       | 20.6                  |       | (6.1 | ) | 40.3 |   |
| (Loss) income from continuing operations                          |       | (2.0                    | )          | 75.6                  |       | (8.8 | ) | 104.9 |   |
| Income from discontinued operations, net of tax                   |       | 1.1                     |       | 2.4                   |       | 3.4 |   | 1.4 |   |
| Net (loss) income                                                 |       | (0.9                    | )          | 78.0                  |       | (5.4 | ) | 106.3 |   |
| Net loss (income) attributable to the noncontrolling  interest    |       | 2.6                     |       | —                |       | 5.6 |   | (0.6 | ) |
| Net income attributable to Rockwood Specialties  Group, Inc. |       | $                       | 1.7        |                  | $          | 78.0 |   | $ | 0.2 |   | $ | 105.7 |   |
|                                                              |       |                    |       |                  |       |   |   |   |   |
| **Adjusted EBITDA:**                                              |       |                    |       |                  |       |   |   |   |   |
| Specialty Chemicals                                               |       | $                       | 57.5       |                  | $          | 82.1 |   | $ | 107.8 |   | $ | 162.6 |   |
|                                                              |       | 24.3                    | %          | 24.5                  | %          | 23.4 | % | 25.1 | % |
| Performance Additives                                             |       | 22.3                    |       | 37.2                  |       | 42.9 |   | 70.9 |   |
|                                                              |       | 12.4                    | %          | 15.4                  | %          | 12.8 | % | 15.6 | % |
| Titanium Dioxide Pigments                                         |       | 19.5                    |       | 14.1                  |       | 41.0 |   | 36.3 |   |
|                                                              |       | 11.9                    | %          | 11.3                  | %          | 13.5 | % | 15.1 | % |
| Advanced Ceramics                                                 |       | 26.1                    |       | 44.9                  |       | 43.9 |   | 83.4 |   |
|                                                              |       | 26.9                    | %          | 30.9                  | %          | 23.7 | % | 29.9 | % |
| Specialty Compounds                                               |       | 8.9                     |       | 10.1                  |       | 16.7 |   | 18.8 |   |
|                                                              |       | 17.2                    | %          | 13.8                  | %          | 16.3 | % | 13.2 | % |
| Corporate and other                                               |       | (9.0                    | )          | (13.3                 | )          | (17.8 | ) | (27.7 | ) |
| Total Adjusted EBITDA (a)                                         |       | $                       | 125.3      |                  | $          | 175.1 |   | $ | 234.5 |   | $ | 344.3 |   |

 

----

(a)                This amount does not include $3.2 millionand $2.4 million of Adjusted EBITDA for the three and six months ended June 30,2008 from the pool and spa chemicals business sold in October 2008.

 

43

----

 

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

 
| ** **                                                        | ** ** | **Change:  Three months ended June 30, 2009 versus 2008** | ** ** | **Change: Six  months ended June 30, 2009 versus 2008** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                        | ** ** | ** **                                                     | ** ** | ** **                                                   | ** ** | **Constant** | ** ** | **Constant** | ** ** | ** ** | ** ** | ** ** | ** ** | **Constant** | ** ** | **Constant** | ** ** |
| ** **                                                        | ** ** | ** **                                                     | ** ** | **%**                                                        | ** ** | **Currency** | ** ** | **Currency** | ** ** | ** ** | ** ** | **%** | ** ** | **Currency** | ** ** | **Currency** | ** ** |
| **($ in  millions)**                                         | ** ** | **Total**                                                      | ** ** | **Change**                                                   | ** ** | **Effect (a)** | ** ** | **Basis** | ** ** | **Total** | ** ** | **Change** | ** ** | **Effect (a)** | ** ** | **Basis** | ** ** |
| **Statement of operations data:**                                 |       |                                                           |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net sales:**                                                    |       |                                                           |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty Chemicals                                               |       | $                                                              | (99.3      | )                                                            | (29.6      | )% | $ | (26.3 | ) | $ | (73.0 | ) | $ | (185.7 | ) | (28.7 | )% | $ | (54.4 | ) | $ | (131.3 | ) |
| Performance Additives                                             |       | (62.2                                                          | )          | (25.7                                                        | )          | (15.1 | ) | (47.1 | ) | (118.2 | ) | (26.1 | ) | (30.0 | ) | (88.2 | ) |
| Titanium Dioxide Pigments                                         |       | 40.0                                                           |       | 32.2                                                         |       | (13.4 | ) | 53.4 |   | 63.1 |   | 26.3 |   | (24.3 | ) | 87.4 |   |
| Advanced Ceramics                                                 |       | (48.2                                                          | )          | (33.2                                                        | )          | (12.1 | ) | (36.1 | ) | (93.5 | ) | (33.6 | ) | (23.4 | ) | (70.1 | ) |
| Specialty Compounds                                               |       | (21.6                                                          | )          | (29.5                                                        | )          | (4.7 | ) | (16.9 | ) | (39.5 | ) | (27.8 | ) | (11.0 | ) | (28.5 | ) |
| Corporate and other                                               |       | (1.5                                                           | )          | (57.7                                                        | )          | (0.2 | ) | (1.3 | ) | (2.8 | ) | (52.8 | ) | (0.4 | ) | (2.4 | ) |
| Total net sales                                                   |       | (192.8                                                         | )          | (20.9                                                        | )          | (71.8 | ) | (121.0 | ) | (376.6 | ) | (21.3 | ) | (143.5 | ) | (233.1 | ) |
|                                                              |       |                                                           |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross profit                                                      |       | (80.1                                                          | )          | (28.3                                                        | )          | (20.2 | ) | (59.9 | ) | (170.5 | ) | (30.7 | ) | (39.8 | ) | (130.7 | ) |
| Selling, general and administrative expenses                      |       | (24.8                                                          | )          | (14.1                                                        | )          | (15.7 | ) | (9.1 | ) | (46.3 | ) | (13.5 | ) | (31.7 | ) | (14.6 | ) |
| Restructuring and other severance costs                           |       | 2.5                                                            |       |                                                         |       |   |   | 2.5 |   | 9.5 |   |   |   |   |   | 9.5 |   |
| Loss on sale of assets and other                                  |       | (0.8                                                           | )          |                                                         |       |   |   | (0.8 | ) | (0.8 | ) |   |   |   |   | (0.8 | ) |
| Total operating expenses                                          |       | (23.1                                                          | )          | (13.0                                                        | )          | (15.7 | ) | (7.4 | ) | (37.6 | ) | (10.9 | ) | (31.7 | ) | (5.9 | ) |
| **Operating income (loss):**                                      |       |                                                           |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty Chemicals                                               |       | (27.3                                                          | )          | (42.5                                                        | )          | (2.5 | ) | (24.8 | ) | (61.7 | ) | (48.2 | ) | (4.3 | ) | (57.4 | ) |
| Performance Additives                                             |       | (13.0                                                          | )          | (74.7                                                        | )          | (0.8 | ) | (12.2 | ) | (26.7 | ) | (81.2 | ) | (1.2 | ) | (25.5 | ) |
| Titanium Dioxide Pigments                                         |       | (0.1                                                           | )          | (20.0                                                        | )          | 0.4 |   | (0.5 | ) | (7.6 | ) | (73.1 | ) | (0.3 | ) | (7.3 | ) |
| Advanced Ceramics                                                 |       | (21.0                                                          | )          | (64.4                                                        | )          | (2.0 | ) | (19.0 | ) | (44.7 | ) | (75.9 | ) | (3.0 | ) | (41.7 | ) |
| Specialty Compounds                                               |       | (0.7                                                           | )          | (10.1                                                        | )          | (0.1 | ) | (0.6 | ) | (1.3 | ) | (10.3 | ) | (0.3 | ) | (1.0 | ) |
| Corporate and other                                               |       | 5.1                                                            |       | 30.9                                                         |       | 0.5 |   | 4.6 |   | 9.1 |   | 28.0 |   | 1.0 |   | 8.1 |   |
| Total                                                             |       | (57.0                                                          | )          | (54.2                                                        | )          | (4.5 | ) | (52.5 | ) | (132.9 | ) | (63.2 | ) | (8.1 | ) | (124.8 | ) |
| **Other expenses, net:**                                          |       |                                                           |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense                                                  |       | (19.2                                                          | )          | 197.9                                                        |       | 1.0 |   | (20.2 | ) | 4.8 |   | (5.8 | ) | 2.3 |   | 2.5 |   |
| Interest income                                                   |       | (1.0                                                           | )          | (71.4                                                        | )          | — |   | (1.0 | ) | (2.8 | ) | (77.8 | ) | (0.1 | ) | (2.7 | ) |
| Loss on early extinguishment of debt, net                         |       | (27.9                                                          | )          |                                                         |       |   |   |   |   | (25.7 | ) |   |   |   |   |   |   |
| Foreign exchange gain (loss), net                                 |       | 17.3                                                           |       |                                                         |       |   |   |   |   | (3.4 | ) |   |   |   |   |   |   |
| Other, net                                                        |       | 0.2                                                            |       |                                                         |       |   |   |   |   | (0.1 | ) |   |   |   |   |   |   |
| Other expenses, net                                               |       | (30.6                                                          | )          |                                                         |       |   |   |   |   | (27.2 | ) |   |   |   |   |   |   |
| **Income (loss) from continuing  operations before taxes**        |       |                                                           |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty Chemicals                                               |       | (38.4                                                          | )          |                                                         |       |   |   |   |   | (77.9 | ) |   |   |   |   |   |   |
| Performance Additives                                             |       | (15.2                                                          | )          |                                                         |       |   |   |   |   | (28.6 | ) |   |   |   |   |   |   |
| Titanium Dioxide Pigments                                         |       | 4.1                                                            |       |                                                         |       |   |   |   |   | (4.3 | ) |   |   |   |   |   |   |
| Advanced Ceramics                                                 |       | (26.8                                                          | )          |                                                         |       |   |   |   |   | (51.7 | ) |   |   |   |   |   |   |
| Specialty Compounds                                               |       | (1.5                                                           | )          |                                                         |       |   |   |   |   | (2.3 | ) |   |   |   |   |   |   |
| Corporate and other                                               |       | (9.8                                                           | )          |                                                         |       |   |   |   |   | 4.7 |   |   |   |   |   |   |   |
| Total                                                             |       | (87.6                                                          | )          |                                                         |       |   |   |   |   | (160.1 | ) |   |   |   |   |   |   |
| Income tax provision (benefit)                                    |       | (10.0                                                          | )          |                                                         |       |   |   |   |   | (46.4 | ) |   |   |   |   |   |   |
| (Loss) income from continuing operations                          |       | (77.6                                                          | )          |                                                         |       |   |   |   |   | (113.7 | ) |   |   |   |   |   |   |
| Income from discontinued operations, net of tax                   |       | (1.3                                                           | )          |                                                         |       |   |   |   |   | 2.0 |   |   |   |   |   |   |   |
| Net (loss) income                                                 |       | (78.9                                                          | )          |                                                         |       |   |   |   |   | (111.7 | ) |   |   |   |   |   |   |
| Net loss (income) attributable to the noncontrolling  interest    |       | 2.6                                                            |       |                                                         |       |   |   |   |   | 6.2 |   |   |   |   |   |   |   |
| Net income attributable to Rockwood Specialties  Group, Inc. |       | $                                                              | (76.3      | )                                                            |       |   |   |   |   |   | $ | (105.5 | ) |   |   |   |   |   |   |
| **Adjusted EBITDA:**                                              |       |                                                           |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty Chemicals                                               |       | $                                                              | (24.6      | )                                                            | (30.0      | )% | $ | (4.3 | ) | $ | (20.3 | ) | $ | (54.8 | ) | (33.7 | )% | $ | (8.2 | ) | $ | (46.6 | ) |
| Performance Additives                                             |       | (14.9                                                          | )          | (40.1                                                        | )          | (2.0 | ) | (12.9 | ) | (28.0 | ) | (39.5 | ) | (3.7 | ) | (24.3 | ) |
| Titanium Dioxide Pigments                                         |       | 5.4                                                            |       | 38.3                                                         |       | (1.4 | ) | 6.8 |   | 4.7 |   | 12.9 |   | (3.7 | ) | 8.4 |   |
| Advanced Ceramics                                                 |       | (18.8                                                          | )          | (41.9                                                        | )          | (3.6 | ) | (15.2 | ) | (39.5 | ) | (47.4 | ) | (6.2 | ) | (33.3 | ) |
| Specialty Compounds                                               |       | (1.2                                                           | )          | (11.9                                                        | )          | (0.5 | ) | (0.7 | ) | (2.1 | ) | (11.2 | ) | (1.2 | ) | (0.9 | ) |
| Corporate and other                                               |       | 4.3                                                            |       | 32.3                                                         |       | 0.4 |   | 3.9 |   | 9.9 |   | 35.7 |   | 0.8 |   | 9.1 |   |
| Total Adjusted EBITDA                                             |       | $                                                              | (49.8      | )                                                            | (28.4      | )% | $ | (11.4 | ) | $ | (38.4 | ) | $ | (109.8 | ) | (31.9 | )% | $ | (22.2 | ) | $ | (87.6 | ) |

 

----

(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.

 

***Three months ended June 30, 2009 compared to threemonths ended June 30, 2008***

 

**Overview**

 

Net sales decreased$192.8 million in the second quarter of 2009 compared with the same period inthe prior year primarily due to lower volumes and the negative impact ofcurrency changes of $71.8 million, partially offset by increased selling pricesof $24.0 million and bolt-on acquisitions, particularly the Titanium DioxidePigments venture with Kemira. See further discussion by segment below.

 

Operating income andAdjusted EBITDA decreased in the second quarter of 2009 compared with the sameperiod in the prior year primarily due to lower sales volumes and the negativeimpact of currency changes. This was partially offset by higher selling pricesand lower corporate costs due to decreased incentive compensation-related costsand lower professional fees, as well as other cost

 

44

----

 

control measuresthroughout the Company.

 

Net income fromcontinuing operations decreased $77.6 million compared with the same period inthe prior year due to the reasons noted above, a loss on the earlyextinguishment of debt, net of $27.9 million primarily related to the amendmentof our senior secured credit facility in June 2009 and higher interestexpense due to a decrease in mark-to-market gains on our interest rate hedginginstruments.  This was partially offsetby increased foreign exchange gains on financing activities recorded in thesecond quarter of 2009.

 

Income from discontinuedoperations, net of tax decreased $1.3 million in the second quarter of 2009 andwas primarily due to the absence of income from the sale of the pool and spachemicals business in October 2008.

 

Net loss attributable tononcontrolling interest of $2.6 million was recorded in the second quarter of2009 and relates to losses recorded in our Viance LLC timber treatment andTitanium Dioxide Pigment’s ventures.

 

Net income attributableto Rockwood Specialties Group, Inc. decreased $76.3 million in the secondquarter of 2009 compared with the same period in the prior year due to thereasons noted above.

 

**Netsales**

 

*SpecialtyChemicals*.  Net sales decreased $99.3 million over the prior year primarily due to lowervolumes and the negative impact of currency changes of $26.3 million.  Inthe Fine Chemicals business, lower volumes driven by lower demand across mostindustries were partially offset by higher selling prices. Net sales in theSurface Treatment business were lower on decreased volumes, particularly ingeneral industrial and automotive applications, partially offset by higherselling prices and the impact of a bolt-on acquisition in September 2008.

 

*PerformanceAdditives*.  Net sales decreased $62.2 million over the prior year primarily due to lowervolumes of construction-related products in our Color Pigments and Services andTimber Treatment Chemicals businesses, lower volumes in our Clay-basedAdditives business and the negative impact of currency changes of $15.1million. This decrease was partially offset by increased selling prices,particularly in Color Pigments and Services, cost control measures and theimpact of a bolt-on acquisition in August 2008.

 

*TitaniumDioxide Pigments*.  Net sales increased $40.0 million over the prior year due to the completion ofthe venture with Kemira on September 1, 2008, as well as increased sellingprices.  This was partially offset by lower volumes of titanium dioxideproducts and functional additives, and the negative impact of currency changesof $13.4 million.

 

*AdvancedCeramics*.  Net sales decreased $48.2 million over the prior year primarily due to lowervolumes in most applications and the negative impact of currency changes of$12.1 million, partially offset by the impact of a bolt-on acquisition in October 2008.

 

*SpecialtyCompounds*.  Net sales decreased $21.6 million over the prior year primarily due to lowervolumes in most applications, particularly in wire and cable, and the negativeimpact of currency changes of $4.7 million.

 

*Corporateand other*.  Net sales decreased $1.5 million over the prior year primarily due to lowervolumes in the European wafer reclaim business.

 

**Grossprofit**

 

Gross profit decreased$80.1 million over the prior year primarily due to the sales volume decreasesnoted above and the negative impact of currency changes of $20.2 million. In addition, depreciation and amortization costs were higher in most businessesprimarily from the impact of acquisitions. The decrease in gross profitwas partially offset by cost control measures undertaken throughout theCompany.  Gross profit as a percentage ofnet sales decreased to 27.8% in the second quarter of 2009 from 30.7% in thesecond quarter of 2008.

 

**Selling,general and administrative expenses**

 

Selling, general andadministrative expenses, or SG&A, decreased $24.8 million over the prioryear primarily due to the impact of currency changes of $15.7 million, lowercompensation-related costs and professional fees, as well as other cost controlmeasures undertaken throughout the Company.  Lower compensation-relatedcosts include the reversal of certain long-term incentive compensation programaccruals of $1.4 million for which related targets are no longer expected to beachieved.  SG&A expenses as a percentage of net sales were 20.7% and19.0% in the second quarter of 2009 and 2008, respectively.

 

45

----

 

**Restructuringand other severance costs**

 

We recorded $4.0 millionof restructuring and other severance costs in the second quarter of 2009throughout the Company.  These charges primarily relate to headcountreductions as part of our global cost control initiatives.  We recorded$1.5 million of restructuring charges in the second quarter of 2008 forrestructuring actions in the Performance Additives, Advanced Ceramics andSpecialty Chemicals segments for miscellaneous headcount reductions. SeeNote 14, “Restructuring and Other Severance Costs,” for further details.

 

**Operatingincome**

 

*SpecialtyChemicals*.  Operating income decreased $27.3 million over the prior year primarily due tothe lower volumes discussed above, the negative impact of currency changes of$2.5 million, increased reserves of $1.9 million covering a legacy obligationassumed in connection with the acquisition of Dynamit Nobel in 2004 andincreased depreciation and amortization costs of $0.7 million.  This decrease was partially offset by higherselling prices, cost control measures and the impact of a bolt-on acquisition.

 

*PerformanceAdditives*.  Operating income decreased $13.0 million over the prior year due to the lowervolumes discussed above and increased restructuring and other severance costsof $0.7 million.  This decrease waspartially offset by higher selling prices, cost control measures and the impactof a bolt-on acquisition.

 

*TitaniumDioxide Pigments*.  Operating income decreased $0.1 million over the prior year primarily due tothe lower volumes noted above and increased depreciation and amortization costsof $6.0 million primarily related to the Kemira venture completed in September 2008.This was partially offset by increased sales related to the Kemira venture,cost control measures, as well as lower raw material and energy costs of $6.9million.

 

*AdvancedCeramics*.  Operating income decreased $21.0 million over the prior year primarily due tothe lower volumes noted above and increased restructuring and other severancecosts of $1.4 million. This decrease was partially offset by cost controlmeasures and the impact of a bolt-on acquisition in October 2008.

 

*SpecialtyCompounds*.  Operating income decreased $0.7 million over the prior year primarily due tothe lower volumes noted above, partially offset by lower raw material costs of$3.0 million, particularly PVC resin and plasticizer costs, and cost controlmeasures.

 

*Corporateand other. *Operatingloss decreased $5.1 million primarily due to lower compensation-related costsand professional fees, as well as other cost control measures undertakenthroughout the Company, partially offset by the lower sales volumes notedabove.  Lower compensation-related costs include the reversal of certainlong-term incentive compensation accruals of $1.4 million related toperformance targets that are no longer expected to be achieved.

 

**Otherincome (expenses)**

 

*Interestexpense*.  Interestexpense increased $19.2 million in the second quarter of 2009 compared to thesame period in the prior year. The second quarter of 2009 and 2008 includednon-cash gains of $12.2 million and $34.0 million, respectively, representingthe movement in the mark-to-market valuation of our interest rate hedginginstruments. Excluding the impact of these gains, interest expense decreased$2.6 million primarily due to lower interest rates and debt repayments,partially offset by debt incurred during the third quarter of 2008 related tothe Titanium Dioxide Pigments venture with Kemira.

 

*Interestincome*.  Interestincome decreased $1.0 million in the second quarter of 2009 compared to thesame period in the prior year due to lower average cash balances in the secondquarter of 2009 compared to the same period in the prior year and lowershort-term average interest rates.

 

*Loss onearly extinguishment of debt, net*.  In the second quarter of 2009, we recorded aloss on early extinguishment of debt, net of $27.9 million primarily related tothe amendment of our senior secured credit facility on June 15, 2009.  This included the write-off of $19.5 millionof deferred financing costs and $11.1 million of lender fees that wereexpensed.  This was partially offset by adiscount of $2.7 million related to the repurchase of $137.7 million inaggregate principal amount of our Euro-denominated 2014 Notes.

 

*Foreignexchange, net*.  In the second quarter of 2009, we had foreign exchange gains of $16.5 millionprimarily due to the impact of the stronger pound sterling as of June 30,2009 versus March 31, 2009 in connection with non-operatingEuro-denominated transactions.  In the second quarter of 2008, foreignexchange losses of $0.8 million were reported due to the impact of the weakereuro as of June 30, 2008 versus March 31, 2008 related tonon-operating Euro-denominated transactions.

 

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**Provisionfor income taxes**

 

We recorded an income taxprovision of $10.6 million in the second quarter of 2009 on income fromcontinuing operations before taxes of $8.6 million. The income tax provision inthe second quarter of 2009 was positively impacted by $2.0 million ofnonrecurring items primarily related to foreign taxes and negatively impactedby $6.6 million of domestic tax costs allocated from other comprehensive incomeand the domestic valuation allowance. The effective income tax rate was 21.4%for the second quarter of 2008 and was positively impacted by domestic incomewhich was not tax effected due to the Company’s valuation allowance position.

 

**(Loss)income from continuing operations**

 

Loss from continuingoperations for the second quarter of 2009 was $2.0 million as compared toincome from continuing operations of $75.6 million for the second quarter of2008 for the reasons described above.

 

**Income(loss) from discontinued operations, net of tax**

 

Income from discontinuedoperations, net of tax was $1.1 million in the second quarter of 2009 and wasrelated to the reversal of certain reserves in connection with the sale of theElectronics business in December 2007. Income from discontinued operations, net of tax was $2.4 million in thesecond quarter of 2008 from operating the pool and spa chemicals business thatwas sold in October 2008.

 

**Net lossattributable to noncontrolling interest**

 

Net loss attributable tononcontrolling interest for the second quarter of 2009 was $2.6 million. Noncontrolling interest represents the noncontrolling interest portion of theViance, LLC joint venture and the noncontrolling interest portion of theTitanium Dioxide Pigments venture.  The loss attributable tononcontrolling interest in the second quarter of 2009 is due to losses recordedin these ventures.

 

**Netincome attributable to Rockwood Specialties Group, Inc.**

 

Net income attributableto Rockwood Specialties Group, Inc. for the second quarter of 2009 was$1.7 million (income of $0.6 million from continuing operations and income fromdiscontinued operations of $1.1 million) as compared to net income attributableto Rockwood Specialties Group, Inc. of $78.0 million (income of $75.6million from continuing operations and income from discontinued operations of $2.4million) for the same period in the prior year for the reasons described above.

 

**AdjustedEBITDA**

 

*SpecialtyChemicals*.  Adjusted EBITDA decreased $24.6 million over the prior year primarily due tothe lower volumes as discussed above, as well as the negative impact ofcurrency changes of $4.3 million.  Thisdecrease was partially offset by higher selling prices, cost control measuresand the impact of a bolt-on acquisition.

 

*PerformanceAdditives*.  Adjusted EBITDA decreased $14.9 million over the prior year due to the lowervolumes as discussed above, as well as the negative impact of currency changesof $2.0 million.  This decrease waspartially offset by higher selling prices, cost control measures and the impactof a bolt-on acquisition.

 

*TitaniumDioxide Pigments*.  Adjusted EBITDA increased $5.4 million over the prior year due to increasedsales related to the completion of the venture with Kemira, cost controlmeasures and lower raw material and energy costs of $6.9 million. This waspartially offset by the negative impact of currency changes of $1.4 million andlower sales volumes.

 

*AdvancedCeramics*.  Adjusted EBITDA decreased $18.8 million over the prior year primarily due tothe lower volumes noted above and the negative impact of currency changes of$3.6 million. This decrease was partially offset by cost control measures andthe impact of a bolt-on acquisition.

 

*SpecialtyCompounds*.  Adjusted EBITDA decreased $1.2 million over the prior year due to the lowervolumes noted above and the negative impact of currency changes of $0.5million, partially offset by lower raw material costs of $3.0 million and costcontrol measures.

 

*Corporateand other. *AdjustedEBITDA increased $4.3 million primarily due to the reasons described above.

 

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***Six months ended June 30, 2009 compared to six monthsended June 30, 2008***

 

**Overview**

 

Net sales decreased$376.6 million in the six months ended June 30, 2009 compared with thesame period in the prior year primarily due to lower volumes and the negativeimpact of currency changes of $143.5 million, partially offset by increasedselling prices of $61.9 million and bolt-on acquisitions, particularly theTitanium Dioxide Pigments venture with Kemira. See further discussion bysegment below.

 

Operating income andAdjusted EBITDA decreased in the six months ended June 30, 2009 comparedwith the same period in the prior year primarily due to lower sales volumes,higher raw material costs and the negative impact of currency changes. This waspartially offset by higher selling prices and lower corporate costs due todecreased incentive compensation-related costs and lower professional fees, aswell as other cost control measures throughout the Company.

 

Net income from continuingoperations decreased $113.7 million in the six months ended June 30, 2009compared with the same period in the prior year due to the reasons noted above,a loss on the early extinguishment of debt, net of $25.7 million primarilyrelated to the amendment of our senior secured credit facility in June 2009and lower foreign exchange gains on financing activities recorded in the sixmonths ended June 30, 2009.

 

Income from discontinuedoperations, net of tax increased $2.0 million in the six months ended June 30,2009 and was primarily due to the favorable resolution of a claim against theCompany’s former Groupe Novasep business and the reversal of certain reservesin connection with the sale of the Electronics business in December 2007.

 

Net loss attributable tononcontrolling interest increased $6.2 million in the six months ended June 30,2009 and was due to losses recorded in our Viance LLC and Titanium DioxidePigment’s ventures in the first half of 2009.

 

Net income attributableto Rockwood Specialties Group, Inc. decreased $105.5 million in the sixmonths ended June 30, 2009 compared with the same period in the prior yeardue to the reasons noted above.

 

**Netsales**

 

*SpecialtyChemicals*.  Net sales decreased $185.7 million over the prior year primarily due to lowervolumes and the negative impact of currency changes of $54.4 million.  Inthe Fine Chemicals business, lower volumes in most products, particularly inlithium and metal sulfide applications, were partially offset by higher sellingprices. Net sales in the Surface Treatment business were lower on decreasedvolumes, particularly in general industrial and automotive applications,partially offset by higher selling prices and the impact of a bolt-onacquisition in September 2008.

 

*PerformanceAdditives*.  Net sales decreased $118.2 million over the prior year primarily due to lowervolumes of construction-related products in our Color Pigments and Services andTimber Treatment Chemicals businesses, lower volumes in our Clay-basedAdditives business and the negative impact of currency changes of $30.0million. This decrease was partially offset by increased selling prices, costcontrol measures and the impact of a bolt-on acquisition in August 2008.

 

*TitaniumDioxide Pigments*.  Net sales increased $63.1 million over the prior year due to the completion ofthe venture with Kemira on September 1, 2008, as well as increased sellingprices.  This was partially offset by lower volumes of titanium dioxideproducts and functional additives, and the negative impact of currency changesof $24.3 million.

 

*AdvancedCeramics*.  Net sales decreased $93.5 million over the prior year primarily due to lowervolumes in most applications and the negative impact of currency changes of$23.4 million, partially offset by the impact of a bolt-on acquisition in October 2008and higher volumes of medical applications.

 

*SpecialtyCompounds*.  Net sales decreased $39.5 million over the prior year primarily due to lowervolumes in most applications, particularly in wire and cable, and the negativeimpact of currency changes of $11.0 million.

 

*Corporateand other*.  Net sales decreased $2.8 million over the prior year primarily due to lowervolumes in the European wafer reclaim business.

 

**Grossprofit**

 

Gross profit decreased$170.5 million over the prior year primarily due to the sales volume decreasesnoted above, raw material cost increases and the negative impact of currencychanges of $39.8 million.  Raw material costs increased, particularly fromthe impact of

 

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higher phosphoric acidcosts in our Specialty Chemicals segment and higher iron-oxide costs in ourColor Pigments and Services business.  Inaddition, depreciation and amortization costs were higher in most businesses primarilyfrom the impact of acquisitions.  The decrease in gross profit waspartially offset by cost control measures undertaken throughout theCompany.  Gross profit as a percentage ofnet sales decreased to 27.7% in the six months ended June 30, 2009 from31.5% in the six months ended June 30, 2008.

 

**Selling,general and administrative expenses**

 

Selling, general andadministrative expenses, or SG&A, decreased $46.3 million over the prioryear primarily due to the impact of currency changes of $31.7 million, lowercompensation-related costs and professional fees, as well as other cost controlmeasures undertaken throughout the Company.  Lower compensation-relatedcosts include the reversal of discretionary profit-sharing accruals of $2.6million and the reversal of certain long-term incentive compensation programaccruals of $2.7 million for which related targets are no longer expected to beachieved.  SG&A expenses as a percentage of net sales were 21.3% and19.4% in the six months ended June 30, 2009 and 2008, respectively.

 

**Restructuringand other severance costs**

 

We recorded $11.8 millionof restructuring and other severance costs in the six months ended June 30,2009 throughout the Company.  These charges primarily relate to headcountreductions as part of our global cost control initiatives.  We recorded$2.3 million of restructuring charges in the six months ended June 30,2008 for restructuring actions in the Performance Additives, Advanced Ceramicsand Specialty Chemicals segments for miscellaneous headcountreductions. See Note 14, “Restructuring and Other Severance Costs,” forfurther details.

 

**Operatingincome**

 

*SpecialtyChemicals*.  Operating income decreased $61.7 million over the prior year primarily due tothe lower volumes discussed above, higher raw material costs of $9.1 millionprimarily for phosphoric acid, the negative impact of currency changes of $4.3million and increased depreciation and amortization costs of $3.4 million.  This decrease was partially offset by higherselling prices, cost control measures and the impact of a bolt-on acquisition.

 

*PerformanceAdditives*.  Operating income decreased $26.7 million over the prior year due to the lowervolumes discussed above, higher raw material costs of $3.9 million,particularly iron-oxide costs in the Color Pigments and Services business, andincreased restructuring and other severance costs of $3.0 million.  This decrease was partially offset by higherselling prices, cost control measures and the impact of a bolt-on acquisition.

 

*TitaniumDioxide Pigments*.  Operating income decreased $7.6 million over the prior year primarily due tothe lower volumes noted above and increased depreciation and amortization costsof $11.7 million primarily related to the Kemira venture completed in September 2008.This was partially offset by increased sales related to the Kemira venture,cost control measures, as well as lower raw material and energy costs of $4.1million.

 

*AdvancedCeramics*.  Operating income decreased $44.7 million over the prior year primarily due tothe lower volumes noted above, increased restructuring and other severancecosts of $4.3 million and the negative impact of currency changes of $3.0million. This decrease was partially offset by cost control measures, theimpact of a bolt-on acquisition in October 2008 and higher volumes ofmedical applications.

 

*SpecialtyCompounds*.  Operating income decreased $1.3 million over the prior year primarily due tothe lower volumes noted above, partially offset by lower raw material costs of$4.2 million, particularly PVC resin and plasticizer costs, and cost controlmeasures.

 

*Corporateand other. *Operatingloss decreased $9.1 million primarily due to lower compensation-related costsand professional fees, as well as other cost control measures undertakenthroughout the Company, partially offset by the lower sales volumes notedabove.  Lower compensation-related costs include the reversal of certainlong-term incentive compensation accruals of $2.7 million related toperformance targets that are no longer expected to be achieved.

 

**Otherincome (expenses)**

 

*Interestexpense*.  Interestexpense decreased $4.8 million in the six months ended June 30, 2009compared to the same period in the prior year. The six months ended June 30,2009 and 2008 included non-cash gains of $2.6 million and $3.2 million,respectively, representing the movement in the mark-to-market valuation of ourinterest rate hedging instruments. Excluding the impact of these gains,interest expense decreased $5.4 million primarily due to lower interest ratesand debt repayments, partially offset by debt incurred during the third quarterof 2008 related to the Titanium Dioxide Pigments venture with Kemira.

 

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*Interestincome*.  Interestincome decreased $2.8 million in the six months ended June 30, 2009compared to the same period in the prior year due to lower short-term averageinterest rates.

 

*Loss onearly extinguishment of debt, net*.  For the six months ended June 30, 2009,we recorded a loss on early extinguishment of debt, net of $25.7 millionprimarily related to the write-off of deferred financing costs of $20.9 millionand lender fees related to the early extinguishment of debt of $11.1 million,partially offset by a discount of $6.3 million related to the repurchase of$153.2 million in aggregate principal amount of the 2014 Notes.

 

*Foreignexchange, net*.  For the six months ended June 30, 2009, foreign exchange gains of $10.9million were reported primarily due to the impact of the stronger poundsterling as of June 30, 2009 versus December 31, 2008, in connectionwith non-operating Euro-denominated transactions. For the six months endedJune 30, 2008, foreign exchange gains of $14.3 million were reportedprimarily due to the impact of the stronger euro as of June 30, 2008versus December 31, 2007 related to intercompany financing arrangements.

 

**Provisionfor income taxes**

 

The effective income taxrate for the six months ended June 30, 2009 was 40.9% and an income taxbenefit of $6.1 million was recorded for the six months ended June 30,2009. The difference between the effective rate and the U.S. statutory rate of35.0% in the six months ended June 30, 2009 primarily relates to anonrecurring tax benefit related to foreign currency changes offset by adomestic valuation allowance. For the six months ended June 30, 2008, thedifference between the effective tax rate of 27.8% and the U.S. statutory rateof 35.0% is primarily a function of domestic income which is not tax effected as a result of a fullvaluation allowance and favorable European rate changes and geographic earningsmix.

 

**(Loss)income from continuing operations**

 

Loss from continuingoperations for the six months ended June 30, 2009 was $(8.8) million ascompared to income from continuing operations of $104.9 million for the sixmonths ended June 30, 2008 for the reasons described above.

 

**Income(loss) from discontinued operations, net of tax**

 

Income from discontinuedoperations, net of tax was $3.4 million in the six months ended June 30,2009 and was due to the favorable resolution of a claim against the Company’sformer Groupe Novasep business and the reversal of certain reserves inconnection with the sale of the Electronics business in December 2007.  Income from discontinued operations, net oftax was $1.4 million in the six months ended June 30, 2008 from operatingthe pool and spa chemicals business that was sold in October 2008.

 

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

 

Net loss (income)attributable to noncontrolling interest of $5.6 million and $(0.6) million forthe six months ended June 30, 2009 and 2008, respectively, was recorded.Noncontrolling interest represents the noncontrolling interest portion of theViance, LLC joint venture that was completed in January 2007 and thenoncontrolling interest portion of the Titanium Dioxide Pigments venturecompleted in September 2008. The change from the prior year primarilyrelates to losses recorded in these ventures.

 

**Netincome attributable to Rockwood Specialties Group, Inc.**

 

Net income attributableto Rockwood Specialties Group, Inc. for the six months ended June 30,2009 was $0.2 million (loss of $3.2 million from continuing operations andincome from discontinued operations of $3.4 million) as compared to net incomeattributable to Rockwood Specialties Group, Inc. of $105.7 million (incomeof $104.3 million from continuing operations and income from discontinuedoperations of $1.4 million) for the same period in the prior year for thereasons described above.

 

**AdjustedEBITDA**

 

*SpecialtyChemicals*.  Adjusted EBITDA decreased $54.8 million over the prior year primarily due tothe lower sales volumes and higher raw material costs of $9.1 million asdiscussed above, as well as the negative impact of currency changes of $8.2million.  This decrease was partiallyoffset by higher selling prices, cost control measures and the impact of abolt-on acquisition.

 

*PerformanceAdditives*.  Adjusted EBITDA decreased $28.0 million over the prior year due to the lowersales volumes and higher raw material costs of $3.9 million as discussed above,as well as the negative impact of currency changes of $3.7 million.  This decrease was partially offset by higherselling prices, cost control measures and the impact of a bolt-on acquisition.

 

*TitaniumDioxide Pigments*.  Adjusted EBITDA increased $4.7 million over the prior year due to increasedsales related to the completion of the venture with Kemira, cost controlmeasures and lower raw material and energy costs of $4.1 million. This was

 

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partially offset by thenegative impact of currency changes of $3.7 million and lower sales volumes.

 

*AdvancedCeramics*.  Adjusted EBITDA decreased $39.5 million over the prior year primarily due tothe lower sales volumes noted above and the negative impact of currency changesof $6.2 million. This decrease was partially offset by cost control measures,the impact of a bolt-on acquisition in October 2008 and higher volumes ofmedical applications.

 

*SpecialtyCompounds*.  Adjusted EBITDA decreased $2.1 million over the prior year due to the lowersales volumes noted above and the negative impact of currency changes of $1.2million, partially offset by lower raw material costs of $4.2 million and costcontrol measures.

 

*Corporateand other. *AdjustedEBITDA increased $9.9 million primarily due to lower compensation-related costsand professional fees, as well as other cost control measures undertakenthroughout the Company. Lower compensation-related costs include thereversal of certain long-term incentive compensation accruals of $2.7 millionrelated to performance targets that are no longer expected to be achieved.

 

***Reconciliation of Net Income 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 incomeattributable to Rockwood Specialties Group, Inc. to Adjusted EBITDA on aconsolidated basis:

 
| ** **                                                        | ** ** | **Three months ended**

**June 30,** | ** ** | **Six months ended**

**June 30,** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| **($ in millions)**                                          | ** ** | **2009**                                  | ** ** | **2008**                                | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net income attributable to Rockwood Specialties  Group, Inc. |       | $                                         | 1.7        |                                    | $          | 78.0 |   | $ | 0.2 |   | $ | 105.7 |   |
| Net (loss) income attributable to noncontrolling  interest        |       | (2.6                                      | )          | —                                  |       | (5.6 | ) | 0.6 |   |
| Net (loss) income                                                 |       | (0.9                                      | )          | 78.0                                    |       | (5.4 | ) | 106.3 |   |
| Income tax provision (benefit)                                    |       | 10.6                                      |       | 20.6                                    |       | (6.1 | ) | 40.3 |   |
| Income from discontinued operations, net of tax                   |       | (1.1                                      | )          | (2.4                                    | )          | (3.4 | ) | (1.4 | ) |
| Income (loss) from continuing operations before  taxes            |       | 8.6                                       |       | 96.2                                    |       | (14.9 | ) | 145.2 |   |
| Interest expense (a)                                              |       | 28.9                                      |       | 9.7                                     |       | 78.6 |   | 83.4 |   |
| Interest income                                                   |       | (0.4                                      | )          | (1.4                                    | )          | (0.8 | ) | (3.6 | ) |
| Depreciation and amortization                                     |       | 68.9                                      |       | 63.5                                    |       | 137.0 |   | 125.0 |   |
| Restructuring and other severance costs                           |       | 4.0                                       |       | 1.5                                     |       | 11.8 |   | 2.3 |   |
| Systems/organization establishment expenses                       |       | 1.0                                       |       | 2.2                                     |       | 3.1 |   | 3.4 |   |
| Acquisition and disposal costs                                    |       | —                                    |       | 0.7                                     |       | — |   | 0.7 |   |
| Inventory write-up charges                                        |       | —                                    |       | 0.1                                     |       | — |   | 0.5 |   |
| Loss on early extinguishment of debt, net                         |       | 27.9                                      |       | —                                  |       | 25.7 |   | — |   |
| Loss on sale of assets and other                                  |       | —                                    |       | 0.8                                     |       | 0.1 |   | 0.9 |   |
| Foreign exchange (gain) loss, net                                 |       | (16.5                                     | )          | 0.8                                     |       | (10.9 | ) | (14.3 | ) |
| Other                                                             |       | 2.9                                       |       | 1.0                                     |       | 4.8 |   | 0.8 |   |
| Total Adjusted EBITDA (b)                                         |       | $                                         | 125.3      |                                    | $          | 175.1 |   | $ | 234.5 |   | $ | 344.3 |   |

 

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(a)                Includes gains of $12.2 million and $34.0 million forthe three months ended June 30, 2009 and 2008, respectively, and gains of$2.6 million and $3.2 million for the six months ended June 30, 2009 and2008, respectively, representing the movement in the mark-to-market valuationof the Company’s interest rate and cross-currency hedging instruments.

 

(b)               This amount does not include $3.2 million and $2.4 millionof Adjusted EBITDA for the three and six months ended June 30, 2008,respectively, from the pool and spa chemicals business sold in October 2008.

 

**Liquidityand Capital Resources**

 

**CashFlows**

 

*OperatingActivities*.  Net cash provided by operating activities was $130.6 million and $123.7 millionfor the six months ended June 30, 2009 and 2008, respectively. Net cashfrom operating activities increased primarily from an outflow of operating cashfrom working capital changes in the six months ended June 30, 2008 andlower cash interest expense, partially offset by lower net income

 

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and operating cashinflows in the prior year related to operating the pool and spa business thatwas sold in October 2008.

 

*InvestingActivities*.  Netcash used in investing activities was $75.1 million for the six months ended June 30,2009 and was primarily comprised of capital expenditures. Net cash used ininvesting activities was $88.5 million for the six months ended June 30,2008 and was primarily comprised of capital expenditures and funds used forbolt-on acquisitions, partially offset by funds received related to the claimsettlement between the Company and GEA Group and GEA North America in the firstquarter of 2008.

 

*FinancingActivities*.  Net cash used in financing activities was $312.6 million and $44.8 million forthe six months ended June 30, 2009 and 2008, respectively, and includedscheduled payments for long-term debt.  Net cash used in financingactivities increased due to certain debt prepayments.  We used $146.8 million of cash to prepay, ata discount, $153.2 million in aggregate principal amount of ourEuro-denominated senior subordinated notes due in 2014, $102.3 million toprepay our senior secured term loans in the first half of 2009, and $22.0million related to the amendment of the senior secured credit facility in June 2009.

 

**Liquidity**

 

Our primary source ofliquidity has been and will continue to be cash generated from the operationsof our subsidiaries. Events that occurred in 2009 that had or may have animpact on our liquidity include:

 

·                  In the first half of 2009, we used $146.8 million ofcash to repurchase, at a discount, $153.2 million in aggregate principal amountof our Euro-denominated 2014 Notes and $102.3 million to prepay our seniorsecured term loans.

 

·                  On June 15, 2009, we amended oursenior secured credit agreement, which amends and restates in its entirety oursenior secured credit agreement.  Seefurther details in Note 11, “Long-Term Debt,” and below within this Liquidityand Capital Resources section.

 

Our primary liquidityrequirements are working capital, debt service, capital expenditures andacquisitions. Our debt service requirements and other contractual obligationsand commitments over the next several years are significant and aresubstantially higher than historical amounts.  We believe that based oncurrent conditions in our industry and markets, our cash reserves, cash flowsfrom operations and borrowings available under our revolving credit facilitywill be adequate sources of liquidity for the remainder of 2009. However,a prolonged economic downturn or recession may have a material adverse impacton our results of operations, cash flows from operations and our liquidity. SeeItem 1, “Business,” and Item 1A, “Risk Factors” in our 2008 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 have been adverselyimpacted by market conditions. Based upon recent investment performance ofassets in pension plans covering our employees in these countries, we may haveto increase funding and/or make a significant payment to the plan via aone-time payment and/or long-term funding arrangement to one or more of theseplans. However, this could change significantly based on the investmentperformance of the pension plan and the future performance of the pension planassets. Any further deterioration of the capital markets or returns availablein such markets may materially and adversely impact our pension plan assets andincrease our funding obligations for one or more of these plans and adverselyimpact our liquidity. We cannot predict the impact of this or any furthermarket disruption on our pension funding obligations.

 

As of June 30, 2009,we had actual total indebtedness of $2,509.7 million. The revolving creditfacility under the senior secured credit facility provided for additionalborrowings of up to $224.3 million as of June 30, 2009. There were nooutstanding borrowings under this revolving credit facility as of June 30,2009 (as of June 30, 2009, we had outstanding letters of credit of $25.7million that reduced our availability under the senior secured creditfacility). The revolving credit facility under the Titanium Dioxide Pigmentsventure facility provided for additional borrowings of up to €30.0 million($42.1 million). As of June 30, 2009, there were no outstanding borrowingsunder this revolving credit facility.  Asof August 10, 2009, the Titanium Dioxide Pigments venture had €10.0million ($14.1 million using the August 10, 2009 exchange rate of €1.00 =$1.4140) outstanding under this facility, as well as an outstanding bankguarantee of €10.0 million ($14.1 million using the August 10, 2009exchange rate of €1.00 = $1.4140) that reduced its availability under thisfacility.

 

As of June 30, 2009,we had cash and cash equivalents of $197.7 million from several sources,including cash from operations and the net cash proceeds received from the saleof the pool and spa chemicals business in October 2008, less cash used forcertain selective acquisitions and debt repayments.

 

*Seniorsecured credit facilities.*  On June 15, 2009, we amended andrestated our senior secured credit agreement (“Restated Credit Agreement”),which amends and restates in its entirety our senior secured creditagreement.  The Restated Credit Agreementextends the maturity of certain term loans by providing for (i) approximately$942.0 million of new tranche H term loans with a maturity date of May 15,2014, the aggregate amount of which is deemed to convert a like amount ofoutstanding principal of existing tranche E

 

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term loans (that had amaturity date of July 30, 2012) under the existing credit agreement and (ii) approximately€195.6 million ($274.5 million) of new tranche I term loans with a maturitydate of May 15, 2014, the aggregate amount of which is deemed to convert alike amount of outstanding principal of existing tranche G term loans (that hada maturity date of July 30, 2012) under the existing credit agreement. Inthe third quarter of 2009, we extended the maturity of $180 million ofavailability under our revolving credit facility from 2010 to 2012 bearinginterest at our option of either (i) Libor (subject to Libor floor of2.00%) plus 4.50% or (ii) ABR plus 3.25%.

 

The Restated CreditAgreement also provides for a Libor (Euribor for Euro-denominated tranches)floor of 2.00% applicable to all senior secured credit facilities subject topricing based on Libor or Euribor with the following applicable margins aboveLibor or Euribor: applicable margins for Tranches A-1 and A-2 of 3.00%; TrancheE of 2.75%; Tranche G of 3.00%; Tranche H of 4.25%; and Tranche I of 4.50%, ineach case per annum, each with a 0.25% reduction for achieving a designatedcredit rating, with the exception of Tranches A-1 and A-2. As a result,interest expense related to these term loans will be higher in futureperiods.  As of June 30, 2009, theinterest rates for Tranches E, G, H and I were reduced by 0.25% as thedesignated credit ratings were achieved.

 

In addition, the RestatedCredit Agreement replaces the consolidated total debt to consolidated AdjustedEBITDA ratio covenant with a senior secured debt to consolidated Adjusted EBITDAcovenant ratio such that the Company may not permit its senior secured debtratio to exceed 4.40 to 1.00 on the last day of any fiscal quarter through andincluding March 31, 2010, 4.25 to 1.00 on the last day of any fiscalquarter thereafter through and including September 30, 2010, and 4.00 to1.00 on the last day of any fiscal quarter thereafter.  The Restated Credit Agreement also resets theasset sales basket and increases the available amount basket that applies tocertain investment, debt and capital expenditure negative covenants and certainother baskets.

 

As of June 30, 2009,the senior secured credit facilities, as amended, consisted of:

 

·                  tranche A-1 term loans in an aggregate principalamount of €4.6 million ($6.4 million) and tranche A-2 term loans in anaggregate principal amount of €39.8 million ($55.9 million), each maturing on July 30,2011 and bearing interest at a Euribor floor of 2.00% plus 3.00%;

 

·                  tranche E term loans in an aggregate principal amountof $140.1 million, maturing on July 30, 2012 and bearing interest at aLibor floor of 2.00% plus 2.50%;

 

·                  tranche G term loans in an aggregate principal amountof €65.4 million ($91.8 million) maturing on July 30, 2012 and bearinginterest at a Euribor floor of 2.00% plus 2.75%;

 

·                  tranche H term loan in an aggregateprincipal amount of $942.0 million maturing on May 15, 2014 and bearinginterest at a Libor floor of 2.00% plus 4.00%;

 

·                  tranche I term loan in an aggregateprincipal amount of €195.6 million ($274.5 million) maturing on May 15,2014 and bearing interest at a Euribor floor of 2.00% Euribor plus 4.25%; and

 

·                  a revolving credit facility in an aggregate principalamount of $250.0 million maturing on July 30, 2010  bearing interest at the Company’s option ofeither (i) Libor  (subject to Liborfloor of 2.00%) plus 3.00% or (ii) ABR plus 1.75%. As of June 30,2009, we had no borrowings outstanding under this facility and had outstandingletters of credit of $25.7 million that reduced our availability under thecredit facility

 

Libor is the Londoninter-bank offered rate. ABR is the alternate base rate, which is the greaterof (a) Credit Suisse’s Prime Rate, (b) the Federal Funds EffectiveRate plus 0.50% or (c) the Eurodollar Rate for a one month interest periodplus 1.00%. Tranche A-1 and A-2 term loans are payable in January andJuly of each year at escalating percentages of the amended principalamount. Tranches E, G, H and I are payable in January and July ofeach year at amounts equal to 0.50% of the amended principal amount as of June 30,2009, with the remainder due at the final maturity date.

 

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

 

In addition to thefinancial covenants described below under “Covenant Compliance,” the Company’ssenior secured credit facilities contain various affirmative and restrictivecovenants. The restrictive covenants limit our ability to, among other things,incur indebtedness and other liabilities; create liens; merge or consolidate;dispose of assets; make investments; pay dividends and make payments toshareholders; make payments on certain indebtedness or to amend documentsrelated to certain indebtedness and to enter into sale leaseback transactions.In connection with the restated credit agreement in June 2009, some of thebaskets relating to the above restrictions were reset.

 

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*Covenantcompliance.*  In addition to the affirmative and restrictive covenants, the senior securedcredit agreement 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 June 30,2009, 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 3.27 to 1; and

 

·                  an interest coverage ratio: for the twelve-monthperiod ended June 30, 2009, 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 3.47 to 1.

 

These covenants arematerial terms of the senior secured credit agreement. Non-compliance withthese covenants or other covenants could result in a default under the seniorsecured credit agreement and the lenders could elect to declare all amountsborrowed immediately due and payable. Any such acceleration would also resultin a default under the indenture governing the 2014 Notes, which could lead tothe note holders electing to declare the principal, premium, if any, andinterest on the then outstanding notes immediately due and payable.  Thesenior secured credit agreement contains a cross default provision forindebtedness in excess of $30.0 million; therefore, a default under theindenture governing the 2014 Notes, the Titanium Dioxide Pigments term loans orother indebtedness may cause the lenders to declare the principal and intereston the then outstanding senior secured credit facilities immediately due andpayable.

 

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 June 30, 2009.

 

*2014Notes.*  As of June 30, 2009, the 2014 Notes have an aggregate principal amount of€250.1 million ($351.0 million) in the case of the Euro notes and $200.0million in the case of the U.S. Dollar notes, and mature on November 15,2014. Interest on the 2014 Notes is payable semi-annually on May 15 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 16,“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 additional 2014 Notes at any 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 restrictedpayments (such as dividends or other equity distributions, repurchases ofcapital stock or restricted investments), subject to certain permittedpayments, unless, among other things, the fixed charge coverage ratio for themost recently ended four fiscal quarters is at least 2.00 to 1. For thefour-fiscal quarter period ended June 30, 2009, the fixed charge coverageratio equaled 3.47 to 1. This covenant is a material term of the indenturegoverning 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 intereston the then outstanding notes immediately due and payable.

 

*TitaniumDioxide Pigments venture term loans, revolving credit facility and assumeddebt.*  As of June 30, 2009, the Titanium Dioxide Pigments venture had €245.0million ($343.8 million) outstanding under the term loan facility of itsfacility agreement entered into in June 2008, as amended in August 2008.The term loan facility matures on June 17, 2013. The facility alsoprovides for a revolving credit facility in an aggregate amount of €30.0million ($42.1 million), maturing on June 17, 2013. As of June 30,2009,

 

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there were no outstandingborrowings under the revolving credit facility. As of August 10, 2009, the Titanium Dioxide Pigments venture had€10.0 million ($14.1 million using the August 10, 2009 exchange rate of€1.00 = $1.4140) outstanding under this facility, as well as an outstandingbank guarantee of €10.0 million ($14.1 million using the August 10, 2009exchange rate of €1.00 = $1.4140) that reduced its availability under thisfacility.

 

In addition, the TitaniumDioxide Pigments venture has assumed debt of €24.0 million ($33.7 million) at June 30,2009 from Kemira, primarily due to a defined benefit plan, at interest ratesranging from 3.70% to 5.00%.

 

The loans are secured bythe assets of the venture. In the event that either Kemira’s or Rockwood’s ownershipinterest changes, any lender may cancel its commitment and demand repayment ofits 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 occurrenceof an event of default under the facility agreement, the lenders can terminatethe commitments and declare all amounts, including accrued and unpaid interest,to be due and payable.

 

As of June 30, 2009,the interest rate on the term loan and revolving credit facility is Euribor (orLibor if the currency is in USD) plus 3.00%, subject to a step down determinedby reference to a leverage ratio test. The term loan is payable in installmentsover a five-year period from the date of the facility agreement, with paymentscommencing twelve months from such date and the remainder due at the finalmaturity date. The term loan and revolving credit facility may be repaid inadvance without penalty.

 

The facility agreement containsaffirmative and restrictive covenants, subject to certain thresholds andexceptions. The restrictive covenants limit the venture’s ability to undertakecertain actions, including but not limited to acquiring or disposing of assets,creating liens on assets, entering into a merger or corporate restructuring,and incurring additional indebtedness. These covenants are calculated inaccordance with International Financial Reporting Standards and are basedsolely on the results of the venture. In addition, the facility agreementrequires the venture to meet certain financial covenants, including:

 

·                  A leverage coverage ratio: for the twelve-month periodended June 30, 2009, 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 4.00 to 1: for such period,our ratio equaled 3.38to 1;

 

·                  An interest coverage ratio: EBITDA, subject to certainadjustments, (which is substantially similar to the definition of AdjustedEBITDA in our senior secured credit agreement) to cash interest expense (net ofinterest income), must be greater than 3.00 to 1: for such period, our ratioequaled 3.84 to 1; and

 

·                  Cash flow coverage ratio: cash generated for financingactivities (EBITDA, subject to certain adjustments, less working capitalchanges, capital expenditures and interest) to debt service (interest expenseand amortization of debt) must be greater than 1.00: for such period, our ratioequaled 1.70 to 1.

 

We were in compliancewith the above covenants as of June 30, 2009 and December 31, 2008.

 

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Given our use of AdjustedEBITDA (see “Special Note Regarding Non-GAAP Financial Measures” for the definitionof Adjusted EBITDA and management’s uses of Adjusted EBITDA) as a liquiditymeasure, the following table presents a reconciliation of net cash provided byoperating activities from continuing operations to Adjusted EBITDA:

 
| ** **                                                                                                             | ** ** | **Six months  ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| **($ in  millions)**                                                                                              | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| Net  cash provided by operating activities from continuing operations                                                  |       | $                                    | 130.6      |   | $ | 120.4 |   |
| Changes  in assets and liabilities, net of the effect of foreign currency translation  and acquisitions                |       | (1.6                                 | )          | 114.4 |   |
| Current portion of income tax provision                                                                                |       | 10.3                                 |       | 23.6 |   |
| Interest  expense, net, excluding amortization of deferred financing costs and  unrealized losses/gains on derivatives |       | 75.8                                 |       | 78.3 |   |
| Restructuring and other severance costs                                                                                |       | 11.8                                 |       | 2.3 |   |
| Systems/organization establishment expenses                                                                            |       | 3.1                                  |       | 3.4 |   |
| Acquisition and disposal costs                                                                                         |       | —                               |       | 0.7 |   |
| Inventory write-up charges                                                                                             |       | —                               |       | 0.5 |   |
| Bad debt provision                                                                                                     |       | (0.4                                 | )          | (1.0 | ) |
| Loss on sale of assets and other                                                                                       |       | 0.1                                  |       | 0.9 |   |
| Other                                                                                                                  |       | 4.8                                  |       | 0.8 |   |
| Total Adjusted EBITDA                                                                                                  |       | $                                    | 234.5      |   | $ | 344.3 |   |

 

***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.  In addition, liabilities for unrecognizedtax benefits in the amount of $28.0 million as of December 31, 2008related to Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”)No. 48,*Accounting for Uncertainty inIncome Taxes — An Interpretation of FASB Statement No. 109*, were excluded from the ContractualObligations table as we were unable to make a reasonably reliable estimate ofthe period of cash settlement with the respective taxing authorities.Liabilities for these unrecognized tax benefits are classified as non-currentincome tax liabilities (other liabilities) unless expected to be paid in oneyear. A discussion of these contractual obligations is included in the Company’s2008 Form 10-K.  As noted above, we repurchased $153.2 million of ourEuro-denominated 2014 Notes and voluntarily prepaid $102.3 million of oursenior secured term loans in the first half of 2009. We also amended our seniorsecured credit agreement in June 2009.  Except for the debtrepayments made in the first six months of 2009, the extension of the maturityof $1.2 billion of our senior secured debt from 2012 to 2014, and the higherinterest costs associated with the amendment to our senior secured creditagreement, there have not been significant changes to these contractualobligations as of June 30, 2009.

 

***Capital Expenditures***

 

Rockwood’s capitalexpenditures for the six months ended June 30, 2009 consisted primarily ofreplacements of worn, obsolete or damaged equipment as well as investments innew equipment.

 

For the six months ended June 30,2009 and 2008, our capital expenditures, excluding capital leases, were $81.2million and $104.2 million, respectively. Capital expenditures for each of ourreporting segments are provided in the following table:

 
| ** **                      | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **        | ** ** | ** **       | ** ** |
|---------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|-------------------|------------|------------------|------------|
| ** **                      | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | **Corporate and** | ** ** | ** **       | ** ** |
| **($ in millions)**        | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **other**         | ** ** | **Consolidated** | ** ** |
| Six months ended  June 30, 2009 |       | $             | 26.3       |            | $          | 12.2         |       | $            | 20.8       |          | $          | 17.4              |       | $                | 3.8        |   | $ | 0.7 |   | $ | 81.2 |   |
| Six months ended  June 30, 2008 |       | 33.7          |       | 20.4            |       | 19.8         |       | 20.6         |       | 6.4           |       | 3.3               |       | 104.2            |       |
|                                 |            |               |            |                 |            |              |            |              |            |               |            |                   |            |                  |            |  |  |  |  |  |  |  |

 

We may incur future costsfor capital improvements and general compliance under Safety, Health andEnvironmental (“SHE”) laws. For the year ended December 31, 2008, ourcapital expenditures for SHE matters totaled $28.1 million, excluding costs tomaintain and repair pollution control equipment. For 2009, we estimate capitalexpenditures for compliance with SHE laws to be at similar

 

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levels; however, becausecapital expenditures for these matters are subject to changes in and new SHElaws, we cannot provide assurance that our recent expenditures will beindicative of future amounts required to comply with these laws, including theEU’s Registration, Evaluation and Authorization of Chemicals (“REACH”)legislation. See Note 15, “Commitments and Contingencies,” “RegulatoryDevelopments” for a discussion of REACH.

 

***Foreign currency related transactions***

 

As of June 30, 2009,$1,213.2 million of the debt outstanding is denominated in euros.

 

**RecentAccounting Pronouncements**

 

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

 

**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 June 30, 2009, theCompany had approximately $29.7 million of letters of credit and other bankguarantees, of which $27.4 million will expire in 2009 through 2014. Theremaining guarantees have no specified expiration date. This amount includesoutstanding letters of credit of $25.7 million that reduced our availabilityunder the senior secured credit facility. In the opinion of management, suchobligations will not significantly affect the Company’s financial position, resultsof operations or cash flows as the Company anticipates fulfilling itsperformance obligations.

 

**Commitmentsand Contingencies**

 

See Note 15, “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, among otherthings:

 

·                  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 in accordancewith FIN 48;

 

·                  impairment of goodwill, property, plant and equipmentand 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 significantaccounting policies of the Company are described in Note 1,”Description ofBusiness and Summary of Significant Accounting Policies,” to the unauditedcondensed consolidated financial statements and the critical accountingpolicies and estimates are described in the “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” section in theCompany’s 2008 Form 10-K. There have been no significant changes to thesecritical accounting policies and estimates as of June 30, 2009.

 

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**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.Forward-looking statements give our current expectations or forecasts of futureevents and estimates 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 2008 Form 10-K. There have been no significantchanges to these market risks as of June 30, 2009.

 

**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 June 30, 2009 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 thesecond quarter of 2009.

 

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**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 2008 Form 10-K.

 

The European Commission (“EC”)is investigating possible infringement of certain antitrust regulations in themarket for heat stabilizers from 1986 to 2000 by certain industry participants,which included a business sold by a subsidiary in our Specialty Chemicalssegment in 2000.  On March 23, 2009, the EC confirmed that itcommenced 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 this market for heat stabilizers; however, the business sold in 2000was active in this market. In June 2009, the EC held a hearing onthis matter.  The Company expects adecision by the EC in late 2009. The Company will vigorously defend thismatter. While the Company believes its subsidiary has meritorious defensesagainst these claims and does not believe that resolution of this matter willhave a material adverse effect on its business or financial condition, theCompany cannot predict the ultimate outcome of this proceeding and resolutionof this matter may have a material adverse effect on its results of operationsor cash flows in any quarterly or annual reporting period.

 

We do not believe thatthere is any other individual, governmental, legal proceeding or arbitrationthat is likely to have a material adverse effect on our business, results ofoperations, cash flows or financial condition. We cannot predict the outcome ofany legal proceeding or the potential for future legal proceedings. SeeNote 15, “Commitments and Contingencies,” and Item 3, Legal Proceedings in our2008 Form 10-K for descriptions of other legal matters.

 

**Item1A. Risk Factors.**

 

A discussion of theCompany’s risk factors is included in the Company’s Form 10-K for the yearended December 31, 2008. 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.  Submission of Matters to a Vote of Security Holders.**

 

None.

 

**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 the requirementsof the Securities Exchange Act of 1934, the Registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|   | ROCKWOOD SPECIALTIES  GROUP, INC. |
|--------|----------------------------------------|
|   |                                   |
|   |                                   |
|   | By:                                    | /s/ SEIFI GHASEMI |
|   |                                   | Seifi Ghasemi |
|   |                                   | Chairman and Chief  Executive Officer |
|   |                                   | Date: August 13,  2009 |
|   |                                   |   |
|   |                                   |   |
|   | ROCKWOOD SPECIALTIES  GROUP, INC. |
|   |                                   |   |
|   |                                   |   |
|   | By:                                    | /s/ ROBERT J. ZATTA |
|   |                                   | Robert J. Zatta |
|   |                                   | Senior Vice President  and Chief Financial Officer |
|   |                                   | Date: August 13,  2009 |

 

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**Exhibit Index**

 
| **Exhibit No.** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                                                           |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **           | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.1                 |       | Amended and restated  credit agreement dated as of June 15, 2009, among Rockwood Specialties  Group, Inc., Rockwood Specialties Limited, Rockwood Specialties International, Inc.,  Credit Suisse and USB Securities LLC and Goldman Sachs Credit Partners L.P.  (incorporated by reference to the Company’s Current Report on Form 8-K  filed on June 17, 2009) |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                           |
| 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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