**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

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

 

**For the quarterly period ended June 30,2010**

 

**Or**

 

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

 

**Commission filenumber 333-109686**

 

**Rockwood Specialties Group, Inc.**

(Exact name of Registrant as specified in its charter)

 

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

 

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

(Address of principal executive offices) (Zip Code)

 

**(301) 470-3366**

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

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

 

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

 

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

 

TheRegistrant’s common stock, par value $0.01 per share, is not publically traded.As of August 2, 2010, there were 382,000 outstanding shares of commonstock of the Registrant, all of which is held by its parent company RockwoodSpecialties International, Inc.

 

 

 

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**TABLE OF CONTENTS**

 

**FORM 10-Q**

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

 

2

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**PART I — FINANCIALINFORMATION**

 

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

 

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

**CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Dollars in millions)**

**(Unaudited)**

 
| ** **                                                        | ** ** | **Three months  ended** | ** ** | **Six months ended** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------|------------|----------------------|------------|
| ** **                                                        | ** ** | **June 30,**       | ** ** | **June 30,**    | ** ** |
| ** **                                                        | ** ** | **2010**                | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net sales                                                         |       | $                       | 874.5      |                 | $          | 730.4 |   | $ | 1,708.4 |   | $ | 1,390.4 |   |
| Cost of products sold                                             |       | 593.0                   |       | 527.2                |       | 1,160.2 |   | 1,005.1 |   |
| Gross profit                                                      |       | 281.5                   |       | 203.2                |       | 548.2 |   | 385.3 |   |
| Selling, general and  administrative expenses                     |       | 173.5                   |       | 151.0                |       | 342.8 |   | 296.1 |   |
| Restructuring and other severance  costs                          |       | 1.2                     |       | 4.0                  |       | 3.4 |   | 11.8 |   |
| Loss on sale of assets and other                                  |       | 0.1                     |       | —               |       | 0.1 |   | 0.1 |   |
| Operating income                                                  |       | 106.7                   |       | 48.2                 |       | 201.9 |   | 77.3 |   |
| Other expenses, net:                                              |       |                    |       |                 |       |   |   |   |   |
| Interest expense, net (a)                                         |       | (36.3                   | )          | (28.5                | )          | (78.1 | ) | (77.8 | ) |
| Loss on early extinguishment of  debt                             |       | —                  |       | (27.9                | )          | — |   | (25.7 | ) |
| Foreign exchange (loss) gain, net                                 |       | (0.4                    | )          | 16.5                 |       | (0.1 | ) | 10.9 |   |
| Other, net                                                        |       | —                  |       | 0.3                  |       | 0.5 |   | 0.4 |   |
| Other expenses, net                                               |       | (36.7                   | )          | (39.6                | )          | (77.7 | ) | (92.2 | ) |
| Income (loss) from continuing operations  before taxes            |       | 70.0                    |       | 8.6                  |       | 124.2 |   | (14.9 | ) |
| Income tax provision (benefit)                                    |       | 15.2                    |       | 10.6                 |       | 32.7 |   | (6.1 | ) |
| Income (loss) from continuing  operations                         |       | 54.8                    |       | (2.0                 | )          | 91.5 |   | (8.8 | ) |
| Income from discontinued  operations, net of tax                  |       | —                  |       | 1.1                  |       | — |   | 3.4 |   |
| Net income (loss)                                                 |       | 54.8                    |       | (0.9                 | )          | 91.5 |   | (5.4 | ) |
| Net (income) loss attributable to  noncontrolling interest        |       | (2.4                    | )          | 2.6                  |       | (2.2 | ) | 5.6 |   |
| Net income attributable to  Rockwood Specialties Group, Inc. |       | $                       | 52.4       |                 | $          | 1.7 |   | $ | 89.3 |   | $ | 0.2 |   |
|                                                              |       |                    |       |                 |       |   |   |   |   |
| Amounts attributable to Rockwood Specialties  Group, Inc.:   |       |                    |       |                 |       |   |   |   |   |
| Income (loss) from continuing  operations                         |       | $                       | 52.4       |                 | $          | 0.6 |   | $ | 89.3 |   | $ | (3.2 | ) |
| Income from discontinued  operations                              |       | —                  |       | 1.1                  |       | — |   | 3.4 |   |
| Net income                                                        |       | $                       | 52.4       |                 | $          | 1.7 |   | $ | 89.3 |   | $ | 0.2 |   |

 

----

| (a) Interest expense, net  includes:    |   |   |   |   |   |   |   |   |   |
|----------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Interest expense on debt, net                |   | $      | (40.4  | )      | $      | (38.5  | )      | $      | (82.7  | ) | $ | (75.8 | ) |
| Mark-to-market gains on interest  rate swaps |   | 5.6    |   | 12.2   |   | 7.7    |   | 2.6    |   |
| Deferred financing costs                     |   | (1.5   | )      | (2.2   | )      | (3.1   | )      | (4.6   | )      |
| Total                                        |   | $      | (36.3  | )      | $      | (28.5  | )      | $      | (78.1  | ) | $ | (77.8 | ) |

 

See accompanying notes to condensed consolidatedfinancial statements.

 

3

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

**CONDENSED CONSOLIDATED BALANCESHEETS**

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

**(Unaudited)**

 
| ** **                                                                                          | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                          | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| **ASSETS**                                                                                          |       |              |       |                  |       |
| Current assets:                                                                                     |       |              |       |                  |       |
| Cash and cash equivalents                                                                           |       | $                 | 363.6      |                  | $          | 300.5 |   |
| Accounts receivable, net                                                                            |       | 504.1             |       | 450.4                 |       |
| Inventories                                                                                         |       | 476.4             |       | 517.0                 |       |
| Deferred income taxes                                                                               |       | 9.2               |       | 12.6                  |       |
| Prepaid expenses and other current  assets                                                          |       | 65.1              |       | 66.5                  |       |
| Total current assets                                                                                |       | 1,418.4           |       | 1,347.0               |       |
| Property, plant and equipment, net                                                                  |       | 1,503.1           |       | 1,702.5               |       |
| Goodwill                                                                                            |       | 803.3             |       | 939.2                 |       |
| Other intangible assets, net                                                                        |       | 595.4             |       | 704.7                 |       |
| Deferred debt issuance costs, net  of accumulated amortization of $12.4 and $10.8, respectively     |       | 20.4              |       | 26.0                  |       |
| Deferred income taxes                                                                               |       | 20.5              |       | 24.8                  |       |
| Other assets                                                                                        |       | 36.0              |       | 37.5                  |       |
| Total assets                                                                                        |       | $                 | 4,397.1    |                  | $          | 4,781.7 |   |
| **LIABILITIES**                                                                                     |       |              |       |                  |       |
| Current liabilities:                                                                                |       |              |       |                  |       |
| Accounts payable                                                                                    |       | $                 | 224.2      |                  | $          | 237.3 |   |
| Income taxes payable                                                                                |       | 13.6              |       | 11.5                  |       |
| Accrued compensation                                                                                |       | 109.5             |       | 77.7                  |       |
| Accrued expenses and other current  liabilities                                                     |       | 170.3             |       | 179.0                 |       |
| Deferred income taxes                                                                               |       | 3.5               |       | 2.6                   |       |
| Long-term debt, current portion                                                                     |       | 257.4             |       | 94.2                  |       |
| Total current liabilities                                                                           |       | 778.5             |       | 602.3                 |       |
| Long-term debt                                                                                      |       | 2,052.2           |       | 2,434.1               |       |
| Pension and related liabilities                                                                     |       | 358.6             |       | 410.1                 |       |
| Deferred income taxes                                                                               |       | 67.3              |       | 69.1                  |       |
| Other liabilities                                                                                   |       | 119.3             |       | 144.1                 |       |
| Total liabilities                                                                                   |       | 3,375.9           |       | 3,659.7               |       |
| **EQUITY**                                                                                          |       |              |       |                  |       |
| Rockwood Specialties  Group, Inc. stockholder’s equity:                                   |       |              |       |                  |       |
| Common stock ($0.01 par value,  1,000,000 shares authorized, 382,000 shares issued and outstanding) |       | —            |       | —                |       |
| Paid-in capital                                                                                     |       | 1,044.0           |       | 1,044.0               |       |
| Accumulated other comprehensive  income                                                             |       | 33.9              |       | 207.5                 |       |
| Accumulated deficit                                                                                 |       | (330.2            | )          | (419.5                | )          |
| Total Rockwood Specialties  Group, Inc. stockholder’s equity                              |       | 747.7             |       | 832.0                 |       |
| Noncontrolling interest                                                                             |       | 273.5             |       | 290.0                 |       |
| Total equity                                                                                        |       | 1,021.2           |       | 1,122.0               |       |
| Total liabilities and equity                                                                        |       | $                 | 4,397.1    |                  | $          | 4,781.7 |   |

 

See accompanying notes to condensed consolidatedfinancial statements.

 

4

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

**CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Dollars in millions)**

**(Unaudited)**

 
| ** **                                                                                                                                                                                                                | ** ** | **Six months ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                                                                                                                                                | ** ** | **June 30,**    | ** ** |
| ** **                                                                                                                                                                                                                | ** ** | **2010**             | ** ** | **2009** | ** ** |
| **CASH FLOWS FROM  OPERATING ACTIVITIES:**                                                                                                                                                                                |       |                 |       |   |   |
| Net income (loss)                                                                                                                                                                                                         |       | $                    | 91.5       |   | $ | (5.4 | ) |
| Adjustments to reconcile net  income (loss) to net cash provided by operating activities:                                                                                                                                 |       |                 |       |   |   |
| Income from discontinued  operations, net of tax                                                                                                                                                                          |       | —               |       | (3.4 | ) |
| Depreciation and amortization                                                                                                                                                                                             |       | 129.9                |       | 137.0 |   |
| Deferred financing costs  amortization                                                                                                                                                                                    |       | 3.1                  |       | 4.6 |   |
| Loss on early extinguishment of  debt (a)                                                                                                                                                                                 |       | —               |       | 25.7 |   |
| Foreign exchange loss (gain), net                                                                                                                                                                                         |       | 0.1                  |       | (10.9 | ) |
| Fair value adjustment of  derivatives                                                                                                                                                                                     |       | (7.7                 | )          | (2.6 | ) |
| Bad debt provision                                                                                                                                                                                                        |       | (0.6                 | )          | 0.4 |   |
| Stock-based compensation                                                                                                                                                                                                  |       | 5.8                  |       | 1.5 |   |
| Deferred income taxes                                                                                                                                                                                                     |       | 18.7                 |       | (16.4 | ) |
| Restructuring and other                                                                                                                                                                                                   |       | 2.2                  |       | 0.1 |   |
| Changes in assets and liabilities,  net of the effect of foreign currency translation and acquisitions:                                                                                                                   |       |                 |       |   |   |
| Accounts receivable                                                                                                                                                                                                       |       | (101.3               | )          | (6.5 | ) |
| Inventories                                                                                                                                                                                                               |       | (8.4                 | )          | 100.4 |   |
| Prepaid expenses and other assets                                                                                                                                                                                         |       | (8.8                 | )          | (3.2 | ) |
| Accounts payable                                                                                                                                                                                                          |       | 17.0                 |       | (40.7 | ) |
| Income taxes payable                                                                                                                                                                                                      |       | (7.1                 | )          | (3.6 | ) |
| Accrued expenses and other  liabilities                                                                                                                                                                                   |       | 42.1                 |       | (46.4 | ) |
| **Net cash provided  by operating activities**                                                                                                                                                                            |       | 176.5                |       | 130.6 |   |
| **CASH FLOWS FROM  INVESTING ACTIVITIES:**                                                                                                                                                                                |       |                 |       |   |   |
| Acquisitions, including  transaction fees and payments for prior acquisitions, net of cash acquired                                                                                                                       |       | (0.9                 | )          | (0.3 | ) |
| Capital expenditures, excluding  capital leases                                                                                                                                                                           |       | (71.9                | )          | (81.2 | ) |
| Contractual advance to Titanium  Dioxide Pigments noncontrolling shareholder                                                                                                                                              |       | —               |       | (1.3 | ) |
| Proceeds on sale of assets                                                                                                                                                                                                |       | 1.8                  |       | 6.8 |   |
| Net cash used in investing  activities of continuing operations                                                                                                                                                           |       | (71.0                | )          | (76.0 | ) |
| Net cash used in investing  activities of discontinued operations                                                                                                                                                         |       | —               |       | (0.4 | ) |
| **Net cash used in  investing activities**                                                                                                                                                                                |       | (71.0                | )          | (76.4 | ) |
| **CASH FLOWS FROM  FINANCING ACTIVITIES:**                                                                                                                                                                                |       |                 |       |   |   |
| Prepayment of 2014 Notes                                                                                                                                                                                                  |       | —               |       | (146.8 | ) |
| Repayment of Titanium Dioxide  Pigments revolving credit facility                                                                                                                                                         |       | (14.3                | )          | — |   |
| Prepayment of senior secured debt                                                                                                                                                                                         |       | —               |       | (102.3 | ) |
| Repayment of senior secured debt                                                                                                                                                                                          |       | (25.1                | )          | (36.8 | ) |
| Payments on other long-term debt                                                                                                                                                                                          |       | (2.5                 | )          | (5.4 | ) |
| Loan from Viance noncontrolling  shareholder                                                                                                                                                                              |       | —               |       | 2.0 |   |
| Fees related to early  extinguishment of debt                                                                                                                                                                             |       | —               |       | (8.3 | ) |
| Deferred financing costs                                                                                                                                                                                                  |       | (0.3                 | )          | (13.7 | ) |
| **Net cash used in  financing activities**                                                                                                                                                                                |       | (42.2                | )          | (311.3 | ) |
| Effect of exchange rate changes on  cash and cash equivalents                                                                                                                                                             |       | (0.2                 | )          | (13.9 | ) |
| Net increase (decrease) in cash  and cash equivalents                                                                                                                                                                     |       | 63.1                 |       | (271.0 | ) |
| Cash and cash equivalents,  beginning of period                                                                                                                                                                           |       | 300.5                |       | 468.7 |   |
| Cash and cash equivalents, end of  period                                                                                                                                                                                 |       | $                    | 363.6      |   | $ | 197.7 |   |
|                                                                                                                                                                                                                      |       |                 |       |   |   |
|                                                                                                                                                                                                                           |
| (a) Includes the write-off of  deferred financing costs of $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. |
|                                                                                                                                                                                                                      |       |                 |       |   |   |
| Supplemental disclosures of cash  flow information:                                                                                                                                                                       |       |                 |       |   |   |
| Interest paid                                                                                                                                                                                                             |       | $                    | 82.2       |   | $ | 78.5 |   |
| Income taxes paid, net of refunds                                                                                                                                                                                         |       | 21.0                 |       | 14.8 |   |
| Non-cash investing activities:                                                                                                                                                                                            |       |                 |       |   |   |
| Acquisition of capital equipment                                                                                                                                                                                          |       | 8.5                  |       | 12.3 |   |
| Fees related to early  extinguishment of debt                                                                                                                                                                             |       | —               |       | 3.7 |   |

 

See accompanying notes to condensed consolidatedfinancial statements.

 

5

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

**CONDENSED CONSOLIDATED STATEMENTSOF EQUITY**

**(Dollars in millions)**

**(Unaudited)**

 
| ** **                                                                                       | ** ** | **2010**               | ** ** | **2009**           | ** ** |
|--------------------------------------------------------------------------------------------------|------------|------------------------|------------|--------------------|------------|
| ** **                                                                                       | ** ** | **Rockwood**           | ** ** | ** **         | ** ** | ** ** | ** ** | **Rockwood** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                       | ** ** | **Specialties**        | ** ** | ** **         | ** ** | ** ** | ** ** | **Specialties** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                       | ** ** | **Group, Inc.**   | ** ** | ** **         | ** ** | ** ** | ** ** | **Group, Inc.** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                       | ** ** | **Stockholder’s** | ** ** | **Noncontrolling** | ** ** | **Total** | ** ** | **Stockholder’s** | ** ** | **Noncontrolling** | ** ** | **Total** | ** ** |
| ** **                                                                                       | ** ** | **Equity**             | ** ** | **Interest**       | ** ** | **Equity** | ** ** | **Equity** | ** ** | **Interest** | ** ** | **Equity** | ** ** |
| Balance at January 1                                                                        |       | $                      | 832.0      |               | $          | 290.0 |   | $ | 1,122.0 |   | $ | 810.4 |   | $ | 315.4 |   | $ | 1,125.8 |   |
|                                                                                             |       |                   |       |               |       |   |   |   |   |   |   |   |   |
| Net income (loss)                                                                                |       | 89.3                   |       | 2.2                |       | 91.5 |   | 0.2 |   | (5.6 | ) | (5.4 | ) |
| Other comprehensive (loss) income,  net of tax                                                   |       | (173.6                 | )          | —             |       | (173.6 | ) | 15.4 |   | (4.2 | ) | 11.2 |   |
| Comprehensive (loss) income                                                                      |       | (84.3                  | )          | 2.2                |       | (82.1 | ) | 15.6 |   | (9.8 | ) | 5.8 |   |
| Change in estimate of fair value  of assets contributed to the Titanium Dioxide Pigments venture |       | —                 |       | —             |       | — |   | — |   | (16.5 | ) | (16.5 | ) |
| Foreign currency translation                                                                     |       | —                 |       | (18.7              | )          | (18.7 | ) | — |   | (0.7 | ) | (0.7 | ) |
| Balance at June 30                                                                          |       | $                      | 747.7      |               | $          | 273.5 |   | $ | 1,021.2 |   | $ | 826.0 |   | $ | 288.4 |   | $ | 1,114.4 |   |

 

See accompanying notes to condensed consolidatedfinancial statements.

 

6

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

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

 

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

 

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

 

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

 

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

 

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

 

Unlessotherwise noted, all balance sheet-related items which are denominated in Eurosare converted at the June 30, 2010 exchange rate of €1.00 = $1.2238.

 

***Stock-Based Compensation***— Holdings has previously granted awards under the 2008 Amended andRestated Stock Purchase and Option Plan of Rockwood Holdings, Inc. andSubsidiaries (the “Plan”). Under the Plan, Holdings granted stock options,restricted stock and other stock-based awards to the Company’s employees anddirectors and allowed employees and directors to purchase shares of its commonstock. There were 10,000,000 authorized shares available for grant under thePlan. However, Holdings no longer issues equity awards under this Plan. InApril 2009, Holdings adopted the 2009 Stock Incentive Plan (the “New Plan”;together with the Plan, the “Plans”), which has 11,000,000 authorized shares.All equity awards granted after this date will be awarded under the New Plan.

 

Theaggregate compensation cost for stock options, restricted stock units andHoldings’ Board of Director stock grants recorded under the Plans caused incomefrom continuing operations before taxes to decrease by $3.2 million and $0.7million for the three months ended June 30, 2010 and 2009, respectively,and $5.8 million and $1.5 million for the six months ended June 30, 2010and 2009, respectively. The total tax benefit recognized related to stockoptions was $0.3 million and $0.1 million for the three months ended June 30,2010 and 2009, respectively, and $0.5 million and $0.1 million for the sixmonths ended June 30, 2010 and 2009, respectively.

 

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

 

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

 

InJune 2009, the FASB issued a statement that requires an enterprise toperform an analysis to determine whether it has a controlling financialinterest in a variable interest entity. It requires additional disclosuresabout involvement with variable interest entities and any significant changesin risk exposure due to that involvement. The Company adopted thisstatement on January 1, 2010. This 

 

7

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statementdid not have a material impact on its financial statements. See Note 3, “VariableInterest Entities,” for the disclosure requirements of this statement.

 

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

 

**2.  COMPREHENSIVE INCOME:**

 

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

 

Comprehensiveincome (loss) is summarized as follows:

 
| ** **                                                                         | ** ** | **Three months  ended** | ** ** | **Six months ended** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------|------------|
| ** **                                                                         | ** ** | **June 30,**       | ** ** | **June 30,**    | ** ** |
| **($ in millions)**                                                           | ** ** | **2010**                | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net income (loss)                                                                  |       | $                       | 54.8       |                 | $          | (0.9 | ) | $ | 91.5 |   | $ | (5.4 | ) |
| Pension related adjustments, net  of tax                                           |       | 1.8                     |       | (0.2                 | )          | 3.8 |   | (0.1 | ) |
| Foreign currency translation                                                       |       | (49.3                   | )          | 69.4                 |       | (77.6 | ) | 7.4 |   |
| Intercompany foreign currency  loans                                               |       | (74.1                   | )          | 41.0                 |       | (121.0 | ) | 3.4 |   |
| Net investment hedges, net of tax                                                  |       | 13.1                    |       | (48.7                | )          | 21.5 |   | 0.6 |   |
| Foreign exchange contracts, net of  tax                                            |       | (0.3                    | )          | 0.2                  |       | (0.3 | ) | (0.1 | ) |
| Comprehensive (loss) income                                                        |       | (54.0                   | )          | 60.8                 |       | (82.1 | ) | 5.8 |   |
| Comprehensive (income) loss  attributable to noncontrolling interest               |       | (2.4                    | )          | 2.9                  |       | (2.2 | ) | 9.8 |   |
| Comprehensive (loss) income attributable  to Rockwood Specialties Group, Inc. |       | $                       | (56.4      | )                    | $          | 63.7 |   | $ | (84.3 | ) | $ | 15.6 |   |

 

**3.  VARIABLE INTEREST ENTITIES:**

 

**Viance LLC Joint Venture**

 

InJanuary 2007, Chemical Specialties, Inc. (“CSI”), a wholly-ownedsubsidiary of the Company within the Timber Treatment Chemicals business of thePerformance Additives segment, and Rohm and Haas Company (a subsidiary of TheDow Chemical Company) completed the formation of Viance, LLC (“Viance”), ajoint venture that provides an extensive range of advanced wood treatmenttechnologies and services to the global wood treatment industry. TheCompany has concluded that Rockwood is the primary beneficiary of Viance and assuch has consolidated the joint venture and reported Rohm and Haas’ interest asnoncontrolling interest. This conclusion was made as Rockwood has theobligation to absorb losses of Viance that could potentially be significant toViance and/or the right to receive benefits from Viance that could potentiallybe significant to Viance. In addition, CSI has the power to direct activitiesof Viance that most significantly impact Viance’s performance as Viance doesnot own manufacturing facilities. As a result, Viance primarily relies onCSI to provide product and distribution requirements through a supply agreement.

 

At June 30,2010 and December 31, 2009, no consolidated assets of the Company werepledged as collateral for any joint venture obligations and the generalcreditors of the joint venture had no recourse against the Company. Thepartners have provided $4.0 million of short-term financing to the venture.However, this financing is not subordinated and management believes that suchfinancing could have been readily obtained externally. All intercompanyaccounts, balances and transactions have been eliminated.  Viance’s assetscan only be used to settle direct obligations of Viance. The carrying values ofthe assets and liabilities of the Viance joint venture included in thecondensed consolidated balance sheets are as follows:

 

8

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| ** **                                      | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| **ASSETS**                                      |       |              |       |                  |       |
| Current assets:                                 |       |              |       |                  |       |
| Cash and cash equivalents                       |       | $                 | 6.9        |                  | $          | 6.3 |   |
| Accounts receivable, net                        |       | 9.2               |       | 6.9                   |       |
| Inventories                                     |       | 0.8               |       | 1.1                   |       |
| Prepaid expenses and other current  assets      |       | 4.7               |       | 4.4                   |       |
| Total current assets                            |       | 21.6              |       | 18.7                  |       |
| Property, plant and equipment, net              |       | 1.9               |       | 2.0                   |       |
| Other intangible assets, net                    |       | 74.8              |       | 78.0                  |       |
| Other assets                                    |       | 1.8               |       | 1.9                   |       |
| Total assets                                    |       | $                 | 100.1      |                  | $          | 100.6 |   |
| **LIABILITIES**                                 |       |              |       |                  |       |
| Current liabilities:                            |       |              |       |                  |       |
| Accounts payable                                |       | $                 | 1.5        |                  | $          | 1.5 |   |
| Income taxes payable                            |       | 0.1               |       | 0.1                   |       |
| Accrued compensation                            |       | 0.8               |       | 1.5                   |       |
| Accrued expenses and other current  liabilities |       | 3.0               |       | 2.0                   |       |
| Long-term debt, current portion                 |       | 2.0               |       | 2.0                   |       |
| Total current liabilities                       |       | 7.4               |       | 7.1                   |       |
| Deferred income taxes                           |       | 0.1               |       | 0.1                   |       |
| Other liabilities                               |       | 0.8               |       | 0.8                   |       |
| Total liabilities                               |       | $                 | 8.3        |                  | $          | 8.0 |   |

 

**Titanium Dioxide Pigments Venture**

 

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

 

Inconjunction with this venture, there is a power plant that is legally owned andoperated by a Finnish power cooperative (“PVO”). Kemira is a cooperativeparticipant and has an indirect interest in the power plant via ownership of aspecial share class. The venture utilizes the majority of power supplied. This powerplant was determined to be a VIE as the equity holders of the power plant as agroup (including Kemira) lack the ability to influence decision making sincePVO effectively controls the power plant. It was determined that Rockwood andKemira jointly form the primary beneficiary of the power plant. The venture hasa long-term agreement expiring in August 2018 to purchase steam andelectricity (“energy”) from Kemira. Due to the terms of this agreement underwhich Kemira has the risks and benefits of the majority of the expected life ofthe power plant, the Company concluded that Kemira is the party most closelyassociated with the venture and therefore is the primary beneficiary within therelated party group. Accordingly, the Company does not consolidate the powerplant. The venture purchased $8.4 million and $7.5 million of energy fromKemira in the three months ended June 30, 2010 and 2009, respectively, and$18.3 million and $15.5 million of energy from Kemira in the six months ended June 30,2010 and 2009, respectively. Minimum annual payments under the energy agreementare approximately $14.7 million. In connection with this energy arrangement,the venture has approximately $26.2 million (includes a contractual advance of$16.0 million made in 2009) of non-interest bearing notes receivable fromKemira that are due in August 2028. The carrying value of the notesreceivable were $4.8 million at June 30, 2010. Interest is imputed at aneffective rate of 8.96%. Apart from routine payables to Kemira or PVO inconnection with this agreement, no results or balances of the power plant arereflected in the Company’s financial statements.

 

**Other**

 

Rockwood’sSpecialty Chemicals segment has several unconsolidated ventures. Two of theseventures do not fit the criteria for classification as a VIE as they arefinancially self-sustaining, “50/50” ventures both as to control and economics.Other ventures 

 

9

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manufactureand market products in China and an additional venture is a service provider ata key manufacturing facility. As the parties share risks and benefitsdisproportionate to their voting interests, the Company has concluded thatthese ventures are VIEs. However, the Company has also concluded that it shouldnot consolidate these VIEs as it is not the primary beneficiary. The Companydoes not have the power and/or ability to direct the activities most affectingventure performance due to governance structure and significant expertiseprovided and/or functions performed by its venture partners. As of June 30,2010, Rockwood’s aggregate net investment in these ventures was $10.6 million.This investment is classified as “Other assets” in the condensed consolidatedbalance sheet and represents Rockwood’s approximate net exposure to losses onthese investments. Rockwood does not guarantee debt for or have other financialsupport obligations to these ventures.

 

**4.  SEGMENT INFORMATION:**

 

Rockwoodoperates in five reportable segments according to the nature and economic characteristicsof its products and services as well as the manner in which the information isused internally by the Company’s key decision maker, who is the Company’s ChiefExecutive Officer. The five segments are: (1) Specialty Chemicals, whichconsists of the surface treatment and fine chemicals business lines;(2) Performance Additives, which consists of color pigments and services,timber treatment chemicals and clay-based additives; (3) Titanium DioxidePigments; (4) Advanced Ceramics; and (5) Specialty Compounds.

 

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

 

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

 
| ** **                                | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **    | ** ** | ** **       | ** ** |
|-------------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|---------------|------------|------------------|------------|
| ** **                                | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | **Corporate** | ** ** | ** **       | ** ** |
| **($ in millions)**                  | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **and other** | ** ** | **Consolidated** | ** ** |
| **Three months ended June 30, 2010** |       |          |       |            |       |         |       |         |       |          |       |          |       |             |       |
| Net sales                                 |       | $             | 287.3      |            | $          | 199.4        |       | $            | 190.3      |          | $          | 129.6         |       | $                | 66.2       |   | $ | 1.7 |   | $ | 874.5 |   |
| Total Adjusted EBITDA                     |       | 73.4          |       | 37.0            |       | 29.6         |       | 40.6         |       | 10.1          |       | (18.5         | )          | 172.2            |       |
| **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            |       |
| **Six months ended June 30, 2010**   |       |          |       |            |       |         |       |         |       |          |       |          |       |             |       |
| Net sales                                 |       | $             | 576.9      |            | $          | 376.6        |       | $            | 371.4      |          | $          | 254.3         |       | $                | 126.0      |   | $ | 3.2 |   | $ | 1,708.4 |   |
| Total Adjusted EBITDA                     |       | 147.2         |       | 66.5            |       | 60.3         |       | 77.6         |       | 19.2          |       | (33.6         | )          | 337.2            |       |
| **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            |       |

 
| ** **                 | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **    | ** ** | ** **           | ** ** | ** **       | ** ** |
|----------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|---------------|------------|----------------------|------------|------------------|------------|
| ** **                 | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | **Corporate** | ** ** | ** **           | ** ** | ** **       | ** ** |
| **($ in millions)**   | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **and other** | ** ** | **Eliminations (a)** | ** ** | **Consolidated** | ** ** |
| Identifiable assets as of: |       |          |       |            |       |         |       |         |       |          |       |          |       |                 |       |             |       |
| June 30, 2010         |       | $             | 1,940.1    |            | $          | 746.7        |       | $            | 804.3      |          | $          | 757.1         |       | $                    | 133.9      |             | $          | 374.3 |   | $ | (359.3 | ) | $ | 4,397.1 |   |
| December 31, 2009     |       | 2,088.9       |       | 762.7           |       | 945.1        |       | 866.3        |       | 124.9         |       | 323.6         |       | (329.8               | )          | 4,781.7          |       |
|                            |            |               |            |                 |            |              |            |              |            |               |            |               |            |                      |            |                  |            |  |  |  |  |  |  |  |  |

 

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(a)                Amountscontained in the “Eliminations” column represent the individual subsidiaries’retained interest in their cumulative net cash balance (deposits lesswithdrawals) included in the corporate centralized cash system and within theidentifiable assets of the respective segment. These amounts are eliminated asthe corporate centralized cash system is included in the Corporate and othersegment’s identifiable assets.

 

10

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

 

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

 
| ** **                                            | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **         | ** ** | ** **       | ** ** |
|-------------------------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|--------------------|------------|------------------|------------|
| ** **                                            | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | **Corporate**      | ** ** | ** **       | ** ** |
| **($ in millions)**                         | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **and other** | ** ** | **Consolidated** | ** ** |
| **Three months ended June 30, 2010**             |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| Income (loss) from continuing operations before taxes |       | $             | 38.4       |            | $          | 14.2         |       | $            | 10.1       |          | $          | 20.9               |       | $                | 5.6        |   | $ | (19.2 | ) | $ | 70.0 |   |
| Interest expense, net (a)                             |       | 14.9          |       | 7.6             |       | 3.3          |       | 7.2          |       | 2.5           |       | 0.8                |       | 36.3             |       |
| Depreciation and amortization                         |       | 17.9          |       | 14.2            |       | 16.1         |       | 11.9         |       | 2.0           |       | 0.9                |       | 63.0             |       |
| Restructuring and other severance costs               |       | 0.5           |       | 0.6             |       | —       |       | 0.1          |       | —        |       | —             |       | 1.2              |       |
| Systems/organization establishment expenses           |       | 0.3           |       | 0.1             |       | 0.1          |       | —       |       | —        |       | —             |       | 0.5              |       |
| Acquisition and disposal costs                        |       | 0.4           |       | —          |       | —       |       | —       |       | —        |       | —             |       | 0.4              |       |
| Loss on sale of assets and other                      |       | 0.1           |       | —          |       | —       |       | —       |       | —        |       | —             |       | 0.1              |       |
| Foreign exchange loss (gain), net                     |       | 0.9           |       | —          |       | —       |       | 0.5          |       | —        |       | (1.0               | )          | 0.4              |       |
| Other                                                 |       | —        |       | 0.3             |       | —       |       | —       |       | —        |       | —             |       | 0.3              |       |
| Total Adjusted EBITDA                                 |       | $             | 73.4       |            | $          | 37.0         |       | $            | 29.6       |          | $          | 40.6               |       | $                | 10.1       |   | $ | (18.5 | ) | $ | 172.2 |   |
| **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, net (a)                             |       | 15.1          |       | 7.3             |       | 4.8          |       | 8.2          |       | 2.3           |       | (9.2               | )          | 28.5             |       |
| 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                  |       | 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 |   |
| **Six months ended June 30, 2010**               |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| Income (loss) from continuing operations before taxes |       | $             | 78.2       |            | $          | 18.8         |       | $            | 18.3       |          | $          | 37.6               |       | $                | 10.1       |   | $ | (38.8 | ) | $ | 124.2 |   |
| Interest expense, net (a)                             |       | 31.3          |       | 15.3            |       | 7.9          |       | 15.4         |       | 5.0           |       | 3.2                |       | 78.1             |       |
| Depreciation and amortization                         |       | 36.5          |       | 28.9            |       | 33.8         |       | 24.5         |       | 4.1           |       | 2.1                |       | 129.9            |       |
| Restructuring and other severance costs               |       | 0.6           |       | 2.6             |       | —       |       | 0.1          |       | —        |       | 0.1                |       | 3.4              |       |
| Systems/organization establishment expenses           |       | 0.7           |       | 0.3             |       | 0.3          |       | 0.1          |       | —        |       | —             |       | 1.4              |       |
| Acquisition and disposal costs                        |       | 0.5           |       | —          |       | —       |       | —       |       | —        |       | 0.1                |       | 0.6              |       |
| Loss on sale of assets and other                      |       | 0.1           |       | —          |       | —       |       | —       |       | —        |       | —             |       | 0.1              |       |
| Foreign exchange (gain) loss, net                     |       | (0.1          | )          | 0.1             |       | —       |       | (0.1         | )          | —        |       | 0.2                |       | 0.1              |       |
| Other                                                 |       | (0.6          | )          | 0.5             |       | —       |       | —       |       | —        |       | (0.5               | )          | (0.6             | )          |
| Total Adjusted EBITDA                                 |       | $             | 147.2      |            | $          | 66.5         |       | $            | 60.3       |          | $          | 77.6               |       | $                | 19.2       |   | $ | (33.6 | ) | $ | 337.2 |   |
| **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, net (a)                             |       | 29.9          |       | 14.5            |       | 14.6         |       | 16.2         |       | 4.6           |       | (2.0               | )          | 77.8             |       |
| 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                  |       | 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 |   |

 

11

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(a)                Includesgains of $5.6 million and $12.2 million for the three months ended June 30,2010 and 2009, respectively, and gains of $7.7 million and $2.6 million for thesix months ended June 30, 2010 and 2009, respectively, representing themovement in the mark-to-market valuation of the Company’s interest rate andcross-currency hedging instruments.

 

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

 

*Items excluded from Adjusted EBITDA*

 

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

 

·                  *Restructuring and other severance costs*: Restructuring and other severance costs of $1.2 million and $4.0million were recorded in the three months ended June 30, 2010 and 2009,respectively, and $3.4 million and $11.8 million were recorded in the sixmonths ended June 30, 2010 and 2009, respectively, for miscellaneousrestructuring activities, including headcount reductions, asset write-offs andfacility closures (see Note 13, “Restructuring and Other Severance Costs,” forfurther details).

 

·                  *Systems/organization establishment expenses*: For the three and six months ended June 30, 2010, expenses of$0.5 million and $1.4 million were recorded primarily related to costs incurredin conjunction with reorganizing certain business functions within theSpecialty Chemicals segment and the integration of the Titanium DioxidePigments venture completed in September 2008. For the three and sixmonths ended June 30, 2009, expenses of $1.0 million and $3.1 million wererecorded related to the integration of businesses acquired, primarily relatedto the completion of the Titanium Dioxide Pigments venture and the acquisitionof the global color pigments business of Elementis plc in the PerformanceAdditives segment.

 

·                  *Acquisition and disposal costs:*Costsof $0.4 million and $0.6 million were recorded in the three and six monthsended June 30, 2010, respectively, primarily related to a cancelledacquisition in the Special Chemicals segment.

 

·                  *Loss on early extinguishment of debt*: In the second quarter of 2009, the Company recorded a loss on earlyextinguishment of debt 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 a discount of $2.7 million relatedto the repurchase at a discount of $137.7 million in aggregate principal amountof the 2014 Notes. For the six months ended June 30, 2009, theCompany recorded a loss on early extinguishment of debt of $25.7 millionrelated to write-off of deferred financing costs of $20.9 million and lenderfees related to the early extinguishment of debt of $11.1 million, partiallyoffset by a discount of $6.3 million related to the repurchase of $153.2million in aggregate principal amount of the 2014 Notes.

 

·                  *Foreign exchange (gain) loss, net*: For the three and six months ended June 30, 2009, the Companyrecorded foreign exchange gains of $16.5 million and $10.9 million,respectively, primarily due to the impact of the stronger pound sterling as ofJune 30, 2009 versus March 31, 2009 and December 31, 2008,respectively, in connection with non-operating Euro-denominated transactions.

 

·                  *Other*: For the sixmonths ended June 30, 2010, the Company recorded income of $0.6 millionprimarily related to a gain on the sale of an investment previously accountedfor under the equity method and the reversal of a reserve covering legacyobligations assumed in connection with the acquisition of the Dynamit Nobelbusinesses in 2004. For the three and six months ended June 30, 2009, theCompany recorded expenses of $2.9 million and $4.8 million, respectively,primarily related to an increase in reserves covering legacy obligationsassumed in connection with the KKR acquisition in 2000 and the acquisition ofthe Dynamit Nobel businesses in 2004.

 

**5.  DERIVATIVES:**

 

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

 

**Interest Rate Risk**

 

Afterhedging, the Company had $1,152.7 million and $1,186.9 million of variable ratedebt outstanding as of June 30, 2010 and December 31, 2009,respectively, a portion of which is subject to a Libor or Euribor floor of2.00%. Historically, the Company has entered into interest rate swaps to manageits exposure to changes in interest rates related to variable rate debt. Asof June 30, 2010 

 

12

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andDecember 31, 2009, these contracts cover notional amounts of €468.7million (at interest rates ranging from 2.995% to 4.416%) and €482.2 million(at interest rates ranging from 2.995% to 4.416%), respectively. Thesederivative contracts effectively convert a portion of the senior secured creditobligations and a portion of the obligations under the Titanium DioxidePigments term loan facility to fixed rate obligations. These hedges will maturebetween December 2010 and July 2012. The Company has not appliedhedge accounting for these interest rate swaps and has recorded themark-to-market of these derivatives as a component of interest expense in itscondensed consolidated statements of operations. The Company may in the futureconsider adjusting the amounts covered by these derivative contracts to bettersuit its capital structure. The Company may allow all or a portion of theseswaps to lapse, enter into replacement swaps or settle these swaps prior toexpiration.

 

In July 2010,the Company entered into forward starting interest rate swaps to manage itsexposure to changes in interest rates related to variable rate debt (see Note16, “Subsequent Events,” for details).

 

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

 

**Foreign Currency Risk**

 

InDecember 2008, the Company entered into foreign currency forward contractsto manage its exposure to fluctuations in currency rates on certain forecastedsales denominated in a currency other than the functional currency of the legalentity in its Specialty Chemicals segment. These foreign currency forwardcontracts hedged the exposure to movements in foreign exchange rates for forecastedtransactions for twelve months, and expired in December 2009. Theinstruments were designated as foreign exchange cash flow hedges and wereeffective at generating offsetting changes in the fair value or cash flows ofthe hedged item or transaction. There was no gain or loss reclassified fromaccumulated other comprehensive income into earnings as a result of thediscontinuance of cash flow hedges because it was not probable that theoriginal forecasted transactions would not occur.

 

InFebruary 2010, the Company entered into foreign currency forward contractsto manage its exposure to fluctuations in currency rates on forecasted salesdenominated in a currency other than the functional currency of the legalentity. As of June 30, 2010, the Company had notional amountsoutstanding for these foreign currency forward contracts of $2.9 million. TheCompany has not applied hedge accounting for these foreign currency forwardcontracts.

 

In June 2010,the Company entered into foreign currency forward contracts to manage itsexposure to fluctuations in currency rates on cash flows on certain forecastedsales denominated in a currency other than the functional currency of a legalentity in its Titanium Dioxide segment. These foreign currency forwardcontracts hedge the exposure to movements in foreign exchange rates forforecasted transactions for six months, and expire inDecember 2010. As of June 30, 2010, the Company had notionalamounts outstanding for these foreign currency forward contracts of $48.0million. The instruments were designated as foreign exchange cash flow hedgesand were effective at generating offsetting changes in the fair value or cashflows of the hedged item or transaction. There was no gain or loss reclassifiedfrom accumulated other comprehensive income into earnings as a result of thediscontinuance of cash flow hedges because it was not probable that theoriginal forecasted transactions would not occur.

 

Inconnection with the offering of the 2014 Notes, the Company entered into across-currency interest rate swap with a five-year term which expired inNovember 2009 and a notional amount of €155.6 million that effectivelyconverted the U.S. dollar fixed rate debt in respect of the 2014dollar-denominated notes sold into Euro fixed rate debt. The Company paid$32.9 million in connection with the settlement of this cross-currency swap inNovember 2009. The Company previously designated this contract as a hedgeof the foreign currency exposure of its net investment in its Euro-denominatedoperations. In addition, the Company has designated a portion of itsEuro-denominated debt that is recorded on its U.S. books as a net investmenthedge of its Euro-denominated investments (Euro debt of €103.1 million at June 30,2010; $126.2 million). Any foreign currency gains and losses resulting from thedesignated portion of Euro-denominated debt discussed above is accounted for asa component of accumulated other comprehensive income for as long as the hedgeremains effective. There was no ineffective portion of the net investment hedgeas of June 30, 2010.

 

13

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

 
| ** **                                               | ** ** | ** **                                      | ** ** | **Asset Derivatives**   | ** ** | **Liability  Derivatives**  | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                               | ** ** | ** **                                      | ** ** | **Fair Value as of**    | ** ** | **Fair Value as of**        | ** ** |
| **(in millions)**                                        | ** ** | **Balance Sheet  Location**                     | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
| **Derivatives  designated as hedging instruments:**      | ** ** | ** **                                      |       |                    |       |                        |       |   |   |   |   |
| Foreign exchange contracts                               |       | Accrued expenses and other current  liabilities |       | $                       | —     |                        | $          | — |   | $ | 0.5 |   | $ | — |   |
| Total derivatives designated as  hedging instruments     |       |                                            |       | $                       | —     |                        | $          | — |   | $ | 0.5 |   | $ | — |   |
|                                                     |       |                                            |       |                    |       |                        |       |   |   |   |   |
| **Derivatives not  designated as hedging instruments:**  | ** ** | ** **                                      |       |                    |       |                        |       |   |   |   |   |
| Interest rate swaps                                      |       | Accrued expenses and other current  liabilities |       | $                       | —     |                        | $          | — |   | $ | 5.1 |   | $ | 8.8 |   |
|                                                     |       | Other liabilities                               |       | —                  |       | —                      |       | 20.0 |   | 23.5 |   |
| Cross-currency interest rate swaps                       |       | Accrued expenses and other current  liabilities |       | —                  |       | —                      |       | — |   | 5.2 |   |
| Total derivatives not designated  as hedging instruments |       |                                            |       | $                       | —     |                        | $          | — |   | $ | 25.1 |   | $ | 37.5 |   |
| **Total derivatives**                                    | ** ** | ** **                                      |       | $                       | —     |                        | $          | — |   | $ | 25.6 |   | $ | 37.5 |   |

 

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

 
| ** **                                                                                | ** ** | **Amount of Gain or  (Loss) Recognized in OCI on Derivatives** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                                | ** ** | **and Other  Financial Instruments (Effective Portion)**       | ** ** |
| ** **                                                                                | ** ** | **Three months  ended June 30,**                          | ** ** | **Six months ended  June 30,** | ** ** |
| **(in millions)**                                                                         | ** ** | **2010**                                                       | ** ** | **2009** | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Derivatives in  Cash Flow Hedging Relationships:**                                      |       |                                                           |       |   |   |   |   |   |   |
| Foreign exchange contracts                                                                |       | $                                                              | (0.4       | ) | $ | 0.3 |   | $ | (0.4 | ) | $ | (0.2 | ) |
|                                                                                      |       |                                                           |       |   |   |   |   |   |   |
| **Derivatives and  Other Financial Instruments in Net Investment Hedging Relationships:** |       |                                                           |       |   |   |   |   |   |   |
| Cross-currency interest rate swaps  — net investment hedge                           |       | $                                                              | —     |   | $ | (12.2 | ) | $ | — |   | $ | (2.1 | ) |
| Euro-denominated debt                                                                     |       | 13.1                                                           |       | (43.3 | ) | 21.5 |   | 4.1 |   |
|                                                                                      |       | $                                                              | 13.1       |   | $ | (55.5 | ) | $ | 21.5 |   | $ | 2.0 |   |

 

Inthe three and six months ended June 30, 2010 and 2009, no gains or losseswere reclassified from accumulated other comprehensive income into income.

 

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

 
| ** **                                             | ** ** | **Amount of Gain or  (Loss) Recognized in Income on Derivatives** | ** ** | **Location of Gain  or (Loss)**     | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                             | ** ** | **Three months  ended June 30,**                             | ** ** | **Six months ended  June 30,** | ** ** | **Recognized in  Income on** | ** ** |
| **(in millions)**                                      | ** ** | **2010**                                                          | ** ** | **2009**                            | ** ** | **2010** | ** ** | **2009** | ** ** | **Derivatives** | ** ** |
| **Derivatives Not  Designated as Hedging Instruments** | ** ** | ** **                                                        | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest rate contracts                                |       | $                                                                 | 5.1        |                                | $          | 12.8 |   | $ | 6.1 |   | $ | 2.0 |   | Interest expense, net |   |
| Cross-currency interest rate swaps                     |       | 0.5                                                               |       | (0.6                                | )          | 1.6 |   | 0.6 |   | Interest expense, net |   |
|                                                   |       | $                                                                 | 5.6        |                                | $          | 12.2 |   | $ | 7.7 |   | $ | 2.6 |   |   |   |

 

**6.             FAIRVALUE MEASUREMENTS:**

 

TheCompany follows a fair value measurement hierarchy to measure assets andliabilities. As of June 30, 2010 and December 31, 

 

14

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2009,the assets and liabilities measured at fair value on a recurring basis arederivatives and marketable securities. In addition, the Company measures itspension plan assets at fair value (see Note 15, “Employee Benefit Plans” in theCompany’s 2009 Form 10-K for further details). The Company’s financialassets and liabilities are measured using inputs from the three levels of thefair value hierarchy. The three levels are as follows:

 

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

 

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

 

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

 

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

 
| ** **                      | ** ** | **As of**               | ** ** | **Fair Value  Measurements** | ** ** |
|---------------------------------|------------|-------------------------|------------|------------------------------|------------|
| **(in millions)**               | ** ** | **June 30,  2010** | ** ** | **Level 1**                  | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Assets                          |       |                    |       |                         |       |   |   |   |   |
| Marketable securities (a)       |       | $                       | 203.6      |                         | $          | 203.6 |   | $ | — |   | $ | — |   |
| Total assets at fair value      |       | $                       | 203.6      |                         | $          | 203.6 |   | $ | — |   | $ | — |   |
|                            |       |                    |       |                         |       |   |   |   |   |
| Liabilities                     |       |                    |       |                         |       |   |   |   |   |
| Interest rate swaps (b)         |       | $                       | 25.1       |                         | $          | — |   | $ | 25.1 |   | $ | — |   |
| Foreign exchange contracts (b)  |       | 0.5                     |       | —                       |       | 0.5 |   | — |   |
| Total liabilities at fair value |       | $                       | 25.6       |                         | $          | — |   | $ | 25.6 |   | $ | — |   |

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

 

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

 

(b)               See Note5, “Derivatives,” for further details of the Company’s derivative instruments.

 

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

 

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

 

15

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***Debt***—TheCompany estimates that its debt under the senior secured credit facility andTitanium Dioxide Pigments venture facility agreement, based on current interestrates and terms, approximates fair value. Based on quoted market prices atJune 30, 2010, the Company estimated the fair value of its 2014 Notesapproximated $508.6 million. As of June 30, 2010, the aggregateprincipal carrying amount of the 2014 Notes was $506.1 million.

 

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

 

**7.             INVENTORIES:**

 

Inventoriesare comprised of the following:

 
| ** **               | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-------------------|------------|-----------------------|------------|
| **($ in millions)** | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| Raw materials            |       | $                 | 148.5      |                  | $          | 165.6 |   |
| Work-in-process          |       | 69.8              |       | 73.7                  |       |
| Finished goods           |       | 251.4             |       | 270.7                 |       |
| Packaging materials      |       | 6.7               |       | 7.0                   |       |
| Total                    |       | $                 | 476.4      |                  | $          | 517.0 |   |

 

**8.             GOODWILL:**

 

Beloware goodwill balances and activity by segment:

 
| ** **                      | ** ** | **Specialty** | ** ** | **Advanced** | ** ** | ** ** | ** ** |
|---------------------------------|------------|---------------|------------|--------------|------------|------------|------------|
| **($ in millions)**        | ** ** | **Chemicals** | ** ** | **Ceramics** | ** ** | **Total**  | ** ** |
| Balance, December 31, 2009 |       | $             | 661.7      |         | $          | 277.5      |       | $ | 939.2 |   |
| Foreign exchange                |       | (93.8         | )          | (42.1        | )          | (135.9     | )          |
| Balance, June 30, 2010     |       | $             | 567.9      |         | $          | 235.4      |       | $ | 803.3 |   |

 

**9.             OTHERINTANGIBLE ASSETS, NET:**

 

Otherintangible assets, net consist of:

 
| ** **                               | ** ** | **As of  June 30, 2010** | ** ** | **As of  December 31, 2009** | ** ** |
|------------------------------------------|------------|-------------------------------|------------|-----------------------------------|------------|
| ** **                               | ** ** | **Gross**                     | ** ** | ** **                        | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Carrying**                  | ** ** | **Accumulated**                   | ** ** | ** ** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| **($ in millions)**                 | ** ** | **Amount**                    | ** ** | **Amortization**                  | ** ** | **Net** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Patents and other intellectual  property |       | $                             | 342.1      |                              | $          | (130.3 | ) | $ | 211.8 |   | $ | 384.3 |   | $ | (133.0 | ) | $ | 251.3 |   |
| Trade names and trademarks               |       | 127.4                         |       | (32.8                             | )          | 94.6 |   | 146.3 |   | (33.7 | ) | 112.6 |   |
| Customer relationships                   |       | 352.2                         |       | (120.9                            | )          | 231.3 |   | 390.1 |   | (117.7 | ) | 272.4 |   |
| Supply agreements                        |       | 57.4                          |       | (14.0                             | )          | 43.4 |   | 62.8 |   | (12.3 | ) | 50.5 |   |
| Other                                    |       | 40.0                          |       | (25.7                             | )          | 14.3 |   | 48.8 |   | (30.9 | ) | 17.9 |   |
| Total                                    |       | $                             | 919.1      |                              | $          | (323.7 | ) | $ | 595.4 |   | $ | 1,032.3 |   | $ | (327.6 | ) | $ | 704.7 |   |

 

Amortizationof other intangible assets was $18.8 million and $20.0 million for the threemonths ended June 30, 2010 and 2009, respectively, and $38.8 million and$39.5 million for the six months ended June 30, 2010 and 2009,respectively.

 

16

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

 
| **($ in millions)** | ** ** | **Amortization** | ** ** |
|--------------------------|------------|------------------|------------|
| **Year ended**           | ** ** | **Expense**      | ** ** |
| 2010                     |       | $                | 77.7       |   |
| 2011                     |       | 72.8             |       |
| 2012                     |       | 69.7             |       |
| 2013                     |       | 67.4             |       |
| 2014                     |       | 62.5             |       |
|                          |            |                  |            |  |

 

**10.      LONG-TERMDEBT**

 

Long-termdebt and loans payable are summarized as follows:

 
| ** **                                                                                              | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **($ and € in millions)**                                                                     | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| Senior secured credit facilities:                                                                       |       |              |       |                  |       |
| Tranche A-1 term loans (€3.8 and  €4.2, respectively)                                         |       | $                 | 4.6        |                  | $          | 6.0 |   |
| Tranche A-2 term loans (€32.8 and  €36.5, respectively)                                       |       | 40.2              |       | 52.3                  |       |
| Tranche E term loans                                                                                    |       | 138.7             |       | 139.4                 |       |
| Tranche G term loans (€64.8 and  €65.1, respectively)                                         |       | 79.3              |       | 93.2                  |       |
| Tranche H term loans                                                                                    |       | 932.5             |       | 937.2                 |       |
| Tranche I term loans (€193.7 and  €194.7, respectively)                                       |       | 237.0             |       | 278.8                 |       |
| 2014 Notes (€250.1 and $200.0 as  of June 30, 2010 and December 31, 2009)                |       | 506.1             |       | 558.2                 |       |
| Titanium Dioxide Pigments venture  term loans (€230.0 and €240.0, respectively)               |       | 281.5             |       | 343.7                 |       |
| Titanium Dioxide Pigments venture  revolving short-term loans (€10.0 as of December 31, 2009) |       | —            |       | 14.3                  |       |
| Capitalized lease obligations  (€30.5 and €31.9, respectively)                                |       | 37.3              |       | 45.7                  |       |
| Other loans                                                                                             |       | 52.4              |       | 59.5                  |       |
|                                                                                                    |       | 2,309.6           |       | 2,528.3               |       |
| Less current maturities                                                                                 |       | (257.4            | )          | (94.2                 | )          |
|                                                                                                    |       | $                 | 2,052.2    |                  | $          | 2,434.1 |   |

 

On July 29,2010, the Company voluntarily prepaid $200.0 million of its senior secured termloans (see Note 16, “Subsequent Events,” for details).

 

**11.      INCOMETAXES:**

 

Theeffective tax rate for the six months ended June 30, 2010 and 2009 was26.3% and 40.9%, respectively. The decrease in the effective tax rate from theprior year is primarily related to domestic income that was not tax effecteddue to the utilization of net operating losses for which the Company hadprovided a valuation allowance. In both periods, federal taxes are zero as aresult of a full valuation allowance. The domestic income in 2010 has increasedover 2009 resulting in a benefit in the effective tax rate for the six monthsended June 30, 2010. The other differences between the effective rate andthe U.S. statutory rate of 35.0% in the six months ended June 30, 2010primarily relates to favorable foreign rate differentials, as well as thefavorable settlement of certain tax positions. The difference between theeffective tax rate and the U.S. statutory rate of 35.0% for the six monthsended June 30, 2009 primarily relates to a nonrecurring tax benefitrelated to functional currency changes as well as domestic tax benefitsallocated from other comprehensive income.

 

17

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Inthe six months ended June 30, 2010, the Company decreased its worldwidevaluation allowances by $9.8 million. The decrease in the valuation allowancewas due to domestic gains recorded in other comprehensive income and domesticand foreign taxable income. The change in the valuation allowance for the sixmonths ended June 30, 2010 decreased the tax provision by $2.5 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,  2009        |       | $             | 133.1      |   |
| Decrease as reflected in income  tax expense |       | (2.5          | )          |
| Other (a)                                    |       | (7.3          | )          |
| Balance as of June 30, 2010             |       | $             | 123.3      |   |

 

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(a)               Primarilyrelated to temporary differences of the mark-to-market of the Company’sEuro-denominated debt.

 

Inthe six months ended June 30, 2010, based on the Company’s policy andreview of available information, including the Company’s steady-state analysis,it was determined that there was not sufficient positive evidence of futuretaxable income to release the U.S. federal valuation allowance that has beenrecorded. During the six months ended June 30, 2010, the Company’s netU.S. federal deferred tax assets and liabilities were maintained at a zerolevel, other than a noncurrent deferred tax liability relating to goodwill withan indefinite reversal period and a noncurrent deferred tax asset relating to aFederal Alternative Minimum Tax (“AMT”) Credit. It is the Company’s policy thatthe valuation allowance is reversed in the year management determines it ismore likely than not that the deferred tax assets will be realized.

 

Unrecognizedtax benefits at June 30, 2010 were $12.8 million, all of which ifrecognized would effect the effective tax rate. The Company had accrued $8.0million for interest and penalties as of June 30, 2010. The Companyrecognizes interest and penalties related to unrecognized tax benefits in itsincome tax provision.

 

Duringthe next twelve months, it is reasonably possible that resolution of uncertaintax liabilities could result in a benefit of up to $3.3 million or a cost of upto $6.0 million. Audit outcomes and the timing of audit settlements are subjectto significant uncertainty.

 

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

 

**12.      EMPLOYEEBENEFIT PLANS:**

 

Thefollowing table represents the net periodic benefit costs and relatedcomponents:

 
| ** **                         | ** ** | **Three months  ended** | ** ** | **Six months ended** | ** ** |
|------------------------------------|------------|-------------------------|------------|----------------------|------------|
| ** **                         | ** ** | **June 30,**       | ** ** | **June 30,**    | ** ** |
| **($ in millions)**           | ** ** | **2010**                | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| Service cost                       |       | $                       | 1.8        |                 | $          | 2.2 |   | $ | 3.8 |   | $ | 4.2 |   |
| Interest cost                      |       | 8.1                     |       | 8.7                  |       | 16.7 |   | 17.0 |   |
| Expected return on assets          |       | (3.5                    | )          | (3.8                 | )          | (7.3 | ) | (7.4 | ) |
| Amortization of actuarial losses   |       | 0.5                     |       | 0.2                  |       | 1.1 |   | 0.4 |   |
| Amortization of prior service cost |       | 0.1                     |       | —               |       | 0.3 |   | — |   |
| Other                              |       | 0.3                     |       | —               |       | 0.3 |   | — |   |
| Net periodic pension cost          |       | 7.3                     |       | 7.3                  |       | 14.9 |   | 14.2 |   |
| Settlement/curtailment             |       | —                  |       | (0.2                 | )          | — |   | (0.2 | ) |
| Total pension cost                 |       | $                       | 7.3        |                 | $          | 7.1 |   | $ | 14.9 |   | $ | 14.0 |   |

 

**13.      RESTRUCTURINGAND OTHER SEVERANCE COSTS:**

 

TheCompany records restructuring liabilities that represent charges incurred inconnection with consolidations and cessations of certain of its operations,including operations from acquisitions, as well as headcount reductionprograms. These charges consist primarily of severance and facility closurecosts. Severance charges are based on various factors including the employee’slength of service, contract provisions, salary levels and local 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 

 

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theseestimates.

 

Forthe three and six months ended June 30, 2010, the Company expensed $1.0million and $2.9 million of restructuring charges, primarily in the SpecialtyChemicals segment primarily for facility closures and an asset write-off inconnection with the elimination of a duplicate manufacturing facility in thePerformance Additives segment.

 

Forthe three and six months ended June 30, 2009, the Company expensed $1.2million and $2.6 million, respectively, of restructuring charges. For the sixmonths ended June 30, 2009, the primary components of the restructuringcharge of $2.6 million included $1.2 million in the Color Pigments and Servicesbusiness within the Performance Additives segment related to a restructuringplan implemented in March 2008 in connection with the integration of thebusinesses acquired from Elementis plc. In addition, $1.0 million wasrecorded in the Specialty Chemicals segment in the six months endedJune 30, 2009 primarily for headcount reduction and facility closure costsas part of restructuring plans in 2008 and 2007.

 

“Restructuringand other severance costs” in the condensed consolidated statements ofoperations also included other severance-related costs of $0.2 million and $2.8million for the three months ended June 30, 2010 and 2009, respectively,and $0.5 million and $9.2 million for the six months ended June 30, 2010and 2009, respectively, related to headcount reductions undertaken throughoutthe Company.

 

Allrestructuring actions still in progress as of June 30, 2010 are expectedto be substantially complete by the end of the year. However, payouts ofcertain liabilities resulting from these actions will take place over severalyears. In particular, as of June 30, 2010, restructuring liabilities of$4.8 million includes $1.7 million in the Corporate and other segment relatedto an unexpired lease in connection with the 2006 restructuring of the WaferReclaim business. Management believes that the majority of the remaining $3.1million obligation will be utilized in 2010. Selected information foroutstanding liabilities from recent restructuring actions is as follows:

 
| ** **                                 | ** ** | **Severance/** | ** ** | **Facility** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|----------------|------------|--------------|------------|------------|------------|
| **($ in millions)**                   | ** ** | **Relocation** | ** ** | **Closure**  | ** ** | **Total**  | ** ** |
| Liability balance, December 31,  2009 |       | $              | 4.2        |         | $          | 3.3        |       | $ | 7.5 |   |
| Restructuring charge in 2010 (a)           |       | 0.3            |       | 0.5          |       | 0.8        |       |
| Utilized                                   |       | (1.7           | )          | (1.2         | )          | (2.9       | )          |
| Foreign exchange and other                 |       | (0.3           | )          | (0.3         | )          | (0.6       | )          |
| Liability balance, June 30,  2010     |       | $              | 2.5        |         | $          | 2.3        |       | $ | 4.8 |   |

 

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(a)               Excludesasset write-off described above.

 

Restructuring reserves by segment are as follows:

 
| ** **               | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-------------------|------------|-----------------------|------------|
| **($ in millions)** | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| Specialty Chemicals      |       | $                 | 2.0        |                  | $          | 3.7 |   |
| Performance Additives    |       | 0.2               |       | 0.7                   |       |
| Advanced Ceramics        |       | 0.7               |       | 1.0                   |       |
| Corporate and other      |       | 1.9               |       | 2.1                   |       |
|                     |       | $                 | 4.8        |                  | $          | 7.5 |   |

 

**14.  COMMITMENTS AND CONTINGENCIES:**

 

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

 

**Advertising Matter**

 

OnMarch 3, 2009, Osmose, Inc. (“OI”) filed an action against Viance,the joint venture in the Timber Treatment Chemicals business, RockwoodHoldings, Inc., and certain individuals, in the U.S. District Court,Northern District of Georgia, claiming that recent 

 

19

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advertisementsby Viance comparing its ACQ product and OI’s MCQ product were false andmisleading in violation of the Lanham Act, constituted unfair competition,violated the Georgia Deceptive Trade Practices Act, were defamatory and thatViance tortiously interfered with OI’s business relationships. OI is seekingdamages, including their attorney’s fees and costs and punitive damages. OIalso sought a temporary restraining order (“TRO”) and a preliminary injunctionprohibiting Viance from continuing to make certain claims in advertisementsrelated to their MCQ product. On March 20, 2009, the district courtgranted Osmose’s motion for a TRO. Viance raised certain counterclaimsrelated to OI’s advertisements and both parties’ claims were heard. InSeptember 2009, the district court issued a preliminary injunctionprohibiting Viance from making certain claims related to MCQ in itsadvertisements and denied Viance’s request for a preliminary injunction relatedto certain claims in Osmose’s advertisements, which Viance subsequentlyappealed. The U.S. Court of Appeals, Eleventh Circuit heard oral arguments onMay 20, 2010 and rendered its decision on July 30, 2010 remanding in part,affirming in part, and vacating in part the preliminary injunction. The Companywill continue to vigorously defend this matter. While the Company believesthe defendants have meritorious defenses against OI’s 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 litigation, and the resolution of this matter may have amaterial adverse effect on its results of operations or cash flows in anyquarterly or annual reporting period.

 

**EC Heat Stabilizers Investigation**

 

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

 

**Lanxess Matter**

 

OnJanuary 18, 2010, Lanxess Deutschland GmbH filed suit in the DistrictCourt of Pori, Finland against Sachtleben Pigments Oy (“Sachtleben”), asubsidiary of the Company’s Titanium Dioxide Pigments venture, claiming breachof contract in connection with Sachtleben’s termination of a supply agreementwith plaintiff. The plaintiff is seeking up to €7.0 million in damagesplus accrued interest and legal fees. Sachtleben’s answer was filed onMarch 19, 2010. The Company believes Sachtleben has meritorious defensesagainst the plaintiff’s claims, and although Sachtleben does not believe thatresolution of this matter will have a material adverse effect on its businessor financial condition, the Company cannot predict the ultimate outcome of thislitigation, and the resolution of this matter may have a material adverseeffect on its results of operations or cash flows in any quarterly or annualreporting period.

 

**Former Glass Sealants Business**

 

Asubsidiary in the Specialty Chemicals segment that formerly manufacturedsealants for insulating glass and resins for laminated glass prior to and afterthe sale of this business has been named as a defendant in several lawsuitsrelating to alleged negligent manufacturing of those products. Pursuant to thesale and purchase agreement with respect to the divested “glass” business, thissubsidiary may be required to pay indemnity claims related to these lawsuits.Although the Company expects its subsidiary to have coverage under its productliability insurance policies should damages ultimately be awarded or agreed to,in such an event, its insurance may not cover such claims and, if not, itssubsidiary may not have sufficient cash flow to pay these claims. Although theCompany does not believe that resolution of these matters will have a materialadverse effect on its business or financial condition, the Company cannotpredict the ultimate outcome of these claims, and the resolution of one or moreof these claims may have a material adverse effect on its results of operationsor cash flows in any quarterly or annual reporting period.

 

**Other Matters**

 

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

 

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Reservesin connection with product liability matters do not individually exceed $1.0million and in the aggregate $2.7 million as of June 30, 2010. The Company’sreserve estimates are based on available facts, including damage claims andinput from its internal and external legal counsel, past experience, and, insome instances where defense costs are being paid by its insurer, knowninsurance recoveries. The Company is unable to estimate the amount or range ofany potential incremental charges should facts and circumstances change and mayin the future revise its estimates based on new information becoming available.Further, the Company cannot predict the outcome of any litigation or thepotential for future litigation.

 

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

 

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

 

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

 

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

 

**General**

 

TheCompany is subject to extensive environmental, health and safety laws in theUnited States, the European Union (“EU”) and elsewhere at the international,national, state, and local levels. Many of these laws impose requirementsrelating to clean up of contamination, and impose liability in the event ofdamage to human beings, natural resources or property, and provide forsubstantial fines, injunctions and potential criminal sanctions for violations.The products, including the raw materials handled, are also subject to rigorousindustrial hygiene regulations and investigation. The nature of the Company’soperations exposes it to risks of liability for breaches of these laws andregulations as a result of the production, storage, transportation and sale ofmaterials that can cause contamination or personal injury when released intothe environment. Environmental laws are subject to change and have tended tobecome stricter over time. Such changes in environmental laws, or the enactmentof new environmental laws, could result in materially increased capital,operating and compliance costs.

 

**Safety, Health and Environmental Management Systems**

 

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

 

**SHE Capital Expenditures**

 

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

 

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**Regulatory Developments**

 

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

 

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

 

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

 

**Remediation Liabilities**

 

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

 

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

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

 

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(a)                TheCompany is currently operating groundwater monitoring and/or remediationsystems at these locations.

 

(b)               TheCompany is currently operating groundwater monitoring and/or remediationsystems at these locations for which prior owners or insurers have assumedresponsibility.

 

(c)             TheCompany is currently conducting investigations into additional possible soiland/or groundwater contamination at these locations.

 

(d)               TheCompany has land restoration obligations relating to landfill activities orsurface mining at these locations.

 

(e)                The Company is responsible for liabilities related to environmental mattersat these closed facilities.

 

TheCompany is also responsible for environmental matters at some of its formeroff-site disposal locations owned by third parties. These sites are consideredSuperfund sites as defined by the EPA or state regulatory authority. TheCompany is a potentially responsible party or*de minimis* participant at the following Superfund locations:Casmalia, CA; Laurel, MD; Niagara Falls, NY; South Gate, CA; and Whittier, CAand has reserves for these matters totaling $0.1 million at June 30, 2010.In addition, the German authorities have ordered the Company to investigateand, depending on the results, potentially remediate a portion of a former sitein Liebenau, Germany. The Company is currently in the process of gatheringadditional information regarding the site and cannot predict the potentialscope of any such remediation.

 

Althoughthe Company cannot provide assurances in this regard, the Company does notbelieve that these issues will have a material adverse effect on its businessor financial condition, but may have a material adverse effect on the resultsof operations or cash flows in any given quarterly or annual reporting period.Nonetheless, the discovery of contamination arising from present or historical 

 

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industrialoperations at some of the Company’s or its predecessor’s former and presentproperties and/or at sites where the Company and its predecessor disposedwastes could expose the Company to cleanup obligations and other damages in thefuture.

 

***Environmental Reserves***

 

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

 

TheCompany’s liability estimates are based upon available facts, existingtechnology, indemnities from third parties, past experience and, in someinstances, insurance recoveries where the remediation costs are being paid byits insurers, and are generated by several means, including State-mandatedschedules, environmental consultants and internal experts, depending on thecircumstances. On a consolidated basis, the Company has accrued $47.1 millionand $55.1 million for known environmental liabilities as of June 30, 2010and December 31, 2009, respectively. The decrease in the balance fromDecember 31, 2009 is primarily related to the impact of currency changes.As of June 30, 2010 and December 31, 2009, $45.3 million and $53.6million, respectively, were classified as other non-current liabilities in theconsolidated balance sheets. Included in the $47.1 million as of June 30,2010 is $20.7 million that is discounted using discount rates ranging from 5.0%to 7.5%, with the undiscounted amount of these reserves equaling $30.4 million.Included in the $55.1 million as of December 31, 2009 is $22.8 million thatis discounted using discount rates ranging from 5.0% to 7.5%, with theundiscounted amount of these reserves equaling $33.5 million. In certain cases,the Company’s remediation liabilities are payable over periods of up to 30years. At a number of the sites described above, the extent of contaminationhas not yet been fully investigated or the final scope of remediation is notyet determinable and could potentially affect the range. The Company estimatesthat the potential range for such environmental matters as of June 30,2010 is from $47.1 million to $82.1 million. For the six months ended June 30,2010, the Company recorded charges of $0.6 million to increase itsenvironmental liabilities and made payments of $2.8 million for clean-up andremediation costs, which reduced its environmental liabilities. For the sixmonths ended June 30, 2010, the recurring cost of managing hazardoussubstances for ongoing operations is $22.5 million.

 

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

 

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

 

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

 

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

 

**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGSTATEMENT OF OPERATIONS**

**THREE MONTHSENDED JUNE 30, 2010**

**(Dollars inmillions)**

 
| ** **                                                               | ** ** | **Parent**  | ** **                                                                                     | **Guarantor**    | ** ** | **Non-Guarantor**                                                                         | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------------|------------|-------------|------------------------------------------------------------------------------------------------|------------------|------------|-------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                               | ** ** | **Company** | ** **                                                                                     | **Subsidiaries** | ** ** | **Subsidiaries**                                                                          | ** ** | **Consolidated** | ** ** |
| Net sales                                                                |       | $           | —                                                                                         |             | $          | 191.7                                                                                     |       | $                | 682.8      |   | $ | 874.5 |   |
| Cost of products sold                                                    |       | —      |                                                                                           | 134.8            |       | 458.2                                                                                     |       | 593.0            |       |
| Gross profit                                                             |       | —      |                                                                                           | 56.9             |       | 224.6                                                                                     |       | 281.5            |       |
| Selling, general and  administrative expenses                            |       | 0.1         |                                                                                           | 45.5             |       | 127.9                                                                                     |       | 173.5            |       |
| Restructuring and other severance  costs                                 |       | —      |                                                                                           | 0.1              |       | 1.1                                                                                       |       | 1.2              |       |
| Loss on sale of assets and other                                         |       | —      |                                                                                           | —           |       | 0.1                                                                                       |       | 0.1              |       |
| Operating income                                                         |       | (0.1        | )                                                                                              | 11.3             |       | 95.5                                                                                      |       | 106.7            |       |
| Other income (expenses), net:                                            |       |        |                                                                                           |             |       |                                                                                      |       |             |       |
| Intergroup interest, net                                                 |       | 37.5        |                                                                                           | (13.8            | )          | (23.7                                                                                     | )          | —           |       |
| Interest expense, net                                                    |       | (30.6       | )                                                                                              | (0.7             | )          | (5.0                                                                                      | )          | (36.3            | )          |
| Intergroup other, net                                                    |       | —      |                                                                                           | 2.9              |       | (2.9                                                                                      | )          | —           |       |
| Foreign exchange gain (loss), net                                        |       | 3.1         |                                                                                           | 0.1              |       | (3.6                                                                                      | )          | (0.4             | )          |
| Other, net                                                               |       | —      |                                                                                           | —           |       | —                                                                                    |       | —           |       |
| Other income (expenses), net                                             |       | 10.0        |                                                                                           | (11.5            | )          | (35.2                                                                                     | )          | (36.7            | )          |
| Income (loss) from continuing  operations before taxes                   |       | 9.9         |                                                                                           | (0.2             | )          | 60.3                                                                                      |       | 70.0             |       |
| Income tax provision                                                     |       | 0.2         |                                                                                           | 1.1              |       | 13.9                                                                                      |       | 15.2             |       |
| Net income (loss)                                                        |       | 9.7         |                                                                                           | (1.3             | )          | 46.4                                                                                      |       | 54.8             |       |
| Net income attributable to the  noncontrolling interest                  |       | —      |                                                                                           | —           |       | (2.4                                                                                      | )          | (2.4             | )          |
| Net income (loss) attributable to  Rockwood Specialties Group, Inc. |       | $           |                 9.7 |             | $          |                (1.3 | )          | $                | 44.0       |   | $ |               52.4 |   |

 

25

----

 

**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGSTATEMENT OF OPERATIONS**

**THREE MONTHSENDED JUNE 30, 2009**

**(Dollars inmillions)**

 
| ** **                                                               | ** ** | **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, net                                                    |       | (19.8       | )                    | (0.3             | )          | (8.4              | )          | (28.5            | )                   |
| Intergroup other, net                                                    |       | 0.1         |                 | 1.4              |       | (1.5              | )          | —           |                |
| Gain (loss) on early  extinguishment of debt                             |       | 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 |   |

 

26

----

 

**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGSTATEMENT OF OPERATIONS**

**SIX MONTHSENDED JUNE 30, 2010**

**(Dollars inmillions)**

 
| ** **                                                               | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                               | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| Net sales                                                                |       | $           | —     |             | $          | 366.5             |       | $                | 1,341.9    |   | $ | 1,708.4 |   |
| Cost of products sold                                                    |       | —      |       | 260.2            |       | 900.0             |       | 1,160.2          |       |
| Gross profit                                                             |       | —      |       | 106.3            |       | 441.9             |       | 548.2            |       |
| Selling, general and  administrative expenses                            |       | 0.1         |       | 88.0             |       | 254.7             |       | 342.8            |       |
| Restructuring and other severance  costs                                 |       | —      |       | 0.1              |       | 3.3               |       | 3.4              |       |
| Loss on sale of assets and other                                         |       | —      |       | —           |       | 0.1               |       | 0.1              |       |
| Operating income                                                         |       | (0.1        | )          | 18.2             |       | 183.8             |       | 201.9            |       |
| Other income (expenses), net:                                            |       |        |       |             |       |              |       |             |       |
| Intergroup interest, net                                                 |       | 77.2        |       | (27.9            | )          | (49.3             | )          | —           |       |
| Interest expense, net                                                    |       | (65.9       | )          | (1.2             | )          | (11.0             | )          | (78.1            | )          |
| Intergroup other, net                                                    |       | —      |       | 7.3              |       | (7.3              | )          | —           |       |
| Foreign exchange gain (loss), net                                        |       | 4.5         |       | (0.2             | )          | (4.4              | )          | (0.1             | )          |
| Other, net                                                               |       | —      |       | —           |       | 0.5               |       | 0.5              |       |
| Other income (expenses), net                                             |       | 15.8        |       | (22.0            | )          | (71.5             | )          | (77.7            | )          |
| Income (loss) from continuing  operations before taxes                   |       | 15.7        |       | (3.8             | )          | 112.3             |       | 124.2            |       |
| Income tax provision                                                     |       | 0.4         |       | 3.0              |       | 29.3              |       | 32.7             |       |
| Net income (loss)                                                        |       | 15.3        |       | (6.8             | )          | 83.0              |       | 91.5             |       |
| Net income attributable to the  noncontrolling interest                  |       | —      |       | —           |       | (2.2              | )          | (2.2             | )          |
| Net income (loss) attributable to  Rockwood Specialties Group, Inc. |       | $           | 15.3       |             | $          | (6.8              | )          | $                | 80.8       |   | $ | 89.3 |   |

 

27

----

 

**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGSTATEMENT OF OPERATIONS**

**SIX MONTHSENDED JUNE 30, 2009**

**(Dollars inmillions)**

 
| ** **                                                               | ** ** | **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 income                                                         |       | (0.1        | )          | 2.5              |       | 74.9              |       | 77.3             |       |
| Other income (expenses), net:                                            |       |        |       |             |       |              |       |             |       |
| Intergroup interest, net                                                 |       | 53.7        |       | (24.7            | )          | (29.0             | )          | —           |       |
| Interest expense, net                                                    |       | (55.8       | )          | (0.9             | )          | (21.1             | )          | (77.8            | )          |
| Intergroup other, net                                                    |       | 155.3       |       | (149.5           | )          | (5.8              | )          | —           |       |
| Gain (loss) on early  extinguishment of debt                             |       | 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 |   |

 

28

----

 

**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGBALANCE SHEET**

**JUNE 30,2010**

**(Dollars inmillions)**

 
| ** **                                                             | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                                             | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                                             |       |        |       |             |       |              |       |             |       |             |       |
| Current assets:                                                        |       |        |       |             |       |              |       |             |       |             |       |
| Cash and cash equivalents                                              |       | $           | 16.5       |             | $          | 79.2              |       | $                | 267.9      |             | $          | — |   | $ | 363.6 |   |
| Accounts receivable, net                                               |       | —      |       | 104.2            |       | 399.9             |       | —           |       | 504.1            |       |
| Inventories                                                            |       | —      |       | 114.2            |       | 362.2             |       | —           |       | 476.4            |       |
| Deferred income taxes                                                  |       | (4.0        | )          | 8.9              |       | 4.3               |       | —           |       | 9.2              |       |
| Prepaid expenses and other current  assets                             |       | —      |       | 12.8             |       | 52.3              |       | —           |       | 65.1             |       |
| Total current assets                                                   |       | 12.5        |       | 319.3            |       | 1,086.6           |       | —           |       | 1,418.4          |       |
| Property, plant and equipment, net                                     |       | —      |       | 262.9            |       | 1,240.2           |       | —           |       | 1,503.1          |       |
| Investment in subsidiary                                               |       | 1,045.8     |       | 91.0             |       | —            |       | (1,136.8         | )          | —           |       |
| Goodwill                                                               |       | —      |       | 17.1             |       | 786.2             |       | —           |       | 803.3            |       |
| Intergroup receivable                                                  |       | 2,328.8     |       | 102.5            |       | 3,849.2           |       | (6,280.5         | )          | —           |       |
| Other intangible assets, net                                           |       | —      |       | 87.5             |       | 507.9             |       | —           |       | 595.4            |       |
| Deferred debt issuance costs, net                                      |       | 1.1         |       | 5.3              |       | 14.0              |       | —           |       | 20.4             |       |
| Deferred income taxes                                                  |       | 6.8         |       | (7.4             | )          | 21.1              |       | —           |       | 20.5             |       |
| Other assets                                                           |       | —      |       | 1.0              |       | 35.0              |       | —           |       | 36.0             |       |
| Total assets                                                           |       | $           | 3,395.0    |             | $          | 879.2             |       | $                | 7,540.2    |             | $          | (7,417.3 | ) | $ | 4,397.1 |   |
| **LIABILITIES**                                                        |       |        |       |             |       |              |       |             |       |             |       |
| Current liabilities:                                                   |       |        |       |             |       |              |       |             |       |             |       |
| Accounts payable                                                       |       | $           | —     |             | $          | 50.3              |       | $                | 173.9      |             | $          | — |   | $ | 224.2 |   |
| Income taxes payable                                                   |       | —      |       | (0.2             | )          | 13.8              |       | —           |       | 13.6             |       |
| Accrued compensation                                                   |       | —      |       | 32.9             |       | 76.6              |       | —           |       | 109.5            |       |
| Accrued expenses and other current  liabilities                        |       | 20.8        |       | 41.2             |       | 108.3             |       | —           |       | 170.3            |       |
| Deferred income taxes                                                  |       | —      |       | —           |       | 3.5               |       | —           |       | 3.5              |       |
| Long-term debt, current portion                                        |       | 199.6       |       | —           |       | 57.8              |       | —           |       | 257.4            |       |
| Total current liabilities                                              |       | 220.4       |       | 124.2            |       | 433.9             |       | —           |       | 778.5            |       |
| Long-term debt                                                         |       | 1,698.6     |       | —           |       | 353.6             |       | —           |       | 2,052.2          |       |
| Pension and related liabilities                                        |       | —      |       | 12.7             |       | 345.9             |       | —           |       | 358.6            |       |
| Intergroup payable                                                     |       | 71.5        |       | 1,191.1          |       | 5,017.9           |       | (6,280.5         | )          | —           |       |
| Deferred income taxes                                                  |       | —      |       | —           |       | 67.3              |       | —           |       | 67.3             |       |
| Other liabilities                                                      |       | 32.1        |       | 22.9             |       | 64.3              |       | —           |       | 119.3            |       |
| Total liabilities                                                      |       | 2,022.6     |       | 1,350.9          |       | 6,282.9           |       | (6,280.5         | )          | 3,375.9          |       |
| **EQUITY**                                                             |       |        |       |             |       |              |       |             |       |             |       |
| Rockwood Specialties  Group, Inc. stockholder’s equity:      |       |        |       |             |       |              |       |             |       |             |       |
| Common stock                                                           |       | —      |       | 190.6            |       | 164.7             |       | (355.3           | )          | —           |       |
| Paid-in capital                                                        |       | 1,044.0     |       | 186.2            |       | 595.3             |       | (781.5           | )          | 1,044.0          |       |
| Accumulated other comprehensive  income                                |       | (15.4       | )          | 12.0             |       | 37.3              |       | —           |       | 33.9             |       |
| Retained earnings (deficit)                                            |       | 343.8       |       | (860.5           | )          | 186.5             |       | —           |       | (330.2           | )          |
| Total Rockwood Specialties  Group, Inc. stockholder’s equity |       | 1,372.4     |       | (471.7           | )          | 983.8             |       | (1,136.8         | )          | 747.7            |       |
| Noncontrolling interest                                                |       | —      |       | —           |       | 273.5             |       | —           |       | 273.5            |       |
| Total equity                                                           |       | 1,372.4     |       | (471.7           | )          | 1,257.3           |       | (1,136.8         | )          | 1,021.2          |       |
| Total liabilities and equity                                           |       | $           | 3,395.0    |             | $          | 879.2             |       | $                | 7,540.2    |             | $          | (7,417.3 | ) | $ | 4,397.1 |   |

 

29

----

 

**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGBALANCE SHEET**

**DECEMBER 31,2009**

**(Dollars inmillions)**

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

 

30

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGSTATEMENT OF CASH FLOWS**

**SIX MONTHSENDED JUNE 30, 2010**

**(Dollars inmillions)**

 
| ** **                                                                                              | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                              | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS FROM  OPERATING ACTIVITIES:**                                                              |       |        |       |             |       |              |       |             |       |
| Net income (loss)                                                                                       |       | $           | 15.3       |             | $          | (6.8              | )          | $                | 83.0       |   | $ | 91.5 |   |
| Adjustments to reconcile net  income (loss) to net cash provided by (used in) operating activities:     |       |        |       |             |       |              |       |             |       |
| Depreciation and amortization                                                                           |       | —      |       | 25.9             |       | 104.0             |       | 129.9            |       |
| Deferred financing costs  amortization                                                                  |       | 0.1         |       | 0.7              |       | 2.3               |       | 3.1              |       |
| Foreign exchange (gain) loss                                                                            |       | (4.5        | )          | 0.2              |       | 4.4               |       | 0.1              |       |
| Fair value adjustment of  derivatives                                                                   |       | (3.5        | )          | —           |       | (4.2              | )          | (7.7             | )          |
| Bad debt provision                                                                                      |       | —      |       | (0.3             | )          | (0.3              | )          | (0.6             | )          |
| Stock-based compensation                                                                                |       | —      |       | 4.0              |       | 1.8               |       | 5.8              |       |
| Deferred income taxes                                                                                   |       | —      |       | 2.4              |       | 16.3              |       | 18.7             |       |
| Restructuring and other                                                                                 |       | —      |       | —           |       | 2.2               |       | 2.2              |       |
| Changes in assets and liabilities,  net of the effect of foreign currency translation and acquisitions: |       |        |       |             |       |              |       |             |       |
| Accounts receivable                                                                                     |       | —      |       | (27.5            | )          | (73.8             | )          | (101.3           | )          |
| Inventories                                                                                             |       | —      |       | (7.1             | )          | (1.3              | )          | (8.4             | )          |
| Prepaid expenses and other assets                                                                       |       | (0.1        | )          | 8.6              |       | (17.3             | )          | (8.8             | )          |
| Accounts payable                                                                                        |       | —      |       | 11.0             |       | 6.0               |       | 17.0             |       |
| Income taxes payable                                                                                    |       | 0.4         |       | 0.4              |       | (7.9              | )          | (7.1             | )          |
| Accrued expenses and other  liabilities                                                                 |       | (2.0        | )          | 9.3              |       | 34.8              |       | 42.1             |       |
| Intercompany operating activities,  net                                                                 |       | (3.4        | )          | (4.1             | )          | 7.5               |       | —           |       |
| **Net cash provided  by operating activities**                                                          |       | 2.3         |       | 16.7             |       | 157.5             |       | 176.5            |       |
| **CASH FLOWS FROM  INVESTING ACTIVITIES:**                                                              |       |        |       |             |       |              |       |             |       |
| Acquisitions, including transaction  fees paid, net of cash acquired                                    |       | —      |       | —           |       | (0.9              | )          | (0.9             | )          |
| Capital expenditures, excluding  capital leases                                                         |       | —      |       | (8.1             | )          | (63.8             | )          | (71.9            | )          |
| Proceeds on sale of assets                                                                              |       | —      |       | —           |       | 1.8               |       | 1.8              |       |
| **Net cash used in  investing activities**                                                              |       | —      |       | (8.1             | )          | (62.9             | )          | (71.0            | )          |
| **CASH FLOWS FROM  FINANCING ACTIVITIES:**                                                              |       |        |       |             |       |              |       |             |       |
| Repayment of Titanium Dioxide  Pigments revolving credit facility                                       |       | —      |       | —           |       | (14.3             | )          | (14.3            | )          |
| Repayment of senior secured debt                                                                        |       | (7.8        | )          | —           |       | (17.3             | )          | (25.1            | )          |
| Payments on other long-term debt                                                                        |       | —      |       | —           |       | (2.5              | )          | (2.5             | )          |
| Deferred financing costs                                                                                |       | (0.3        | )          | —           |       | —            |       | (0.3             | )          |
| Intercompany financing related  activity                                                                |       | 1.9         |       | 30.9             |       | (32.8             | )          | —           |       |
| **Net cash (used in)  provided by financing activities**                                                |       | (6.2        | )          | 30.9             |       | (66.9             | )          | (42.2            | )          |
| Effect of exchange rate changes on  cash and cash equivalents                                           |       | 0.6         |       | (0.6             | )          | (0.2              | )          | (0.2             | )          |
| Net (decrease) increase in cash  and cash equivalents                                                   |       | (3.3        | )          | 38.9             |       | 27.5              |       | 63.1             |       |
| Cash and cash equivalents,  beginning of period                                                         |       | 19.8        |       | 40.3             |       | 240.4             |       | 300.5            |       |
| Cash and cash equivalents, end of  period                                                               |       | $           | 16.5       |             | $          | 79.2              |       | $                | 267.9      |   | $ | 363.6 |   |

 

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGSTATEMENT OF CASH FLOWS**

**SIX MONTHSENDED JUNE 30, 2009**

**(Dollars inmillions)**

 
| ** **                                                                                              | ** ** | **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 (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**                                                |       | 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            | )          |
| Contractual advance to Titanium  Dioxide Pigments noncontrolling shareholder                            |       | —      |       | —           |       | (1.3              | )          | (1.3             | )          |
| Proceeds on sale of assets                                                                              |       | —      |       | 2.0              |       | 4.8               |       | 6.8              |       |
| Net cash used in investing  activities of continuing operations                                         |       | —      |       | (14.7            | )          | (61.3             | )          | (76.0            | )          |
| Net cash used in investing  activities of discontinued operations                                       |       | —      |       | (0.4             | )          | —            |       | (0.4             | )          |
| **Net cash used in  investing activities**                                                              |       | —      |       | (15.1            | )          | (61.3             | )          | (76.4            | )          |
| **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             | )          |
| Loan from Viance noncontrolling  shareholder                                                            |       | —      |       | —           |       | 2.0               |       | 2.0              |       |
| Fees related to early extinguishment  of debt                                                           |       | (8.3        | )          | —           |       | —            |       | (8.3             | )          |
| Deferred financing costs                                                                                |       | (13.7       | )          | —           |       | —            |       | (13.7            | )          |
| Intercompany financing related  activity                                                                |       | (455.9      | )          | 373.0            |       | 82.9              |       | —           |       |
| **Net cash (used  in) provided by financing activities**                                                |       | (677.4      | )          | 373.0            |       | (6.9              | )          | (311.3           | )          |
| 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 ofdeferred financing costs of $20.9 and lender fees related to the earlyextinguishment of debt of $11.1, partially offset by a discount on theprepayment of the 2014 Notes of $6.3.

 

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**16.  SUBSEQUENT EVENTS:**

 

On July 29,2010, the Company voluntarily prepaid $200.0 million of its senior secured termloans. This includes $22.5 million of tranche E term loans, €5.0 million ($6.5million using the exchange rate in effect at the time of the transaction) oftranche G terms loans, $151.5 million of tranche H term loans, and €15.0million ($19.5 million using the exchange rate in effect at the time of thetransaction) of tranche I term loans. These amounts have been classified as “long-termdebt, current portion” as of June 30, 2010 in the Condensed ConsolidatedBalance Sheet. This prepayment was funded with available cash and cashequivalents.

 

In July 2010,the Company entered into forward starting interest rate swaps to manage itsexposure to changes in interest rates related to variable rate debt. Thesederivative contracts effectively convert all of the obligations under theTitanium Dioxide Pigments term loan facility to fixed rate obligations andamortize over their respective lives. These contracts cover notional amounts of€220.0 million (at a fixed contract rate of 1.40% plus a margin) beginning in December 2010and maturing in June 2013. The Company has not applied hedge accountingfor these interest rate swaps and will record the mark-to-market of thesederivatives as a component of interest expense in its consolidated statementsof operations.

 

**Item 2.     Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

 

*The following discussion contains forward-looking statementsthat involve numerous risks and uncertainties. Our actual results could differmaterially from those discussed in the forward-looking statements as a resultof these risks and uncertainties, including those set forth in “Forward-LookingStatements” at the end of this Management Discussion and Analysis section andthe risk factors section of the Company’s 2009 Form 10-K. You should readthe following discussion and analysis together with our condensed consolidatedfinancial statements and the notes to those statements that appear elsewhere inthis Quarterly Report. Amounts may not recalculate due to rounding differences.*

 

*Unless otherwise noted, all balance sheet- related itemswhich are denominated in Euros are converted at the June 30, 2010 exchangerate of €1.00 = $1.2238.*

 

**General**

 

Weare a global developer, 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) Performance Additives; (3) Titanium Dioxide Pigments;(4) Advanced Ceramics; and (5) Specialty Compounds.

 

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

 

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

 

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

 

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

 

·                  Wecontinue to reduce overhead and eliminate duplicative facilities and positionsthroughout the Company as part of our ongoing global cost control initiatives,and we remain focused on reducing costs, improving productivity, and conservingcash by controlling working capital and capital spending.

 

·                  Inthe first half of 2009, we repurchased a portion of our Euro-denominated seniorsubordinated notes due in 2014, voluntarily prepaid a portion of our seniorsecured term loans and amended our senior secured credit agreement; and

 

·                  Asdiscussed in Note 16, “Subsequent Events,” we voluntarily prepaid $200.0million of our senior secured term loans on July 

 

33

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29,2010.

 

**Factors Which Affect Our Results of Operations**

 

**Our Markets**

 

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

 

***Specialty Chemicals***

 

·                  Demandfor Surface Treatment products in our Specialty Chemicals segment generallyfollows the activity levels of metal processing manufacturers, including theautomotive supply, steel and aerospace industries. In 2009, results declined onlower volumes in most businesses, partially offset by increased selling prices.In the first six months of 2010, results were up from higher volumes in allmarkets. Sales are expected to continue to be higher throughout the remainderof 2010 primarily from higher volumes across most markets.

 

·                  Demandfor our lithium carbonate products in the Fine Chemicals business line of ourSpecialty Chemicals segment is generally driven by demand for batteryapplications, glass ceramics, cement, the aluminum industry and the generaldemand in China. Sales of lithium products specifically used in life scienceapplications depend on the trends in drug development and growth inpharmaceuticals markets as well as generic competition. In 2009, lowervolumes in most applications, particularly in lithium and metal sulfideapplications, had a negative impact on results. In the first six months of2010, results were higher primarily from increased volumes of lithium productsand metal sulfide applications. Higher volumes are expected for the remainderof 2010 in lithium applications. Results are expected to be negatively impactedby the highly competitive business environment.

 

***Performance Additives***

 

·                  Generally,a trend towards the increased use of colored concrete products in theconstruction market has historically had a positive effect on our ColorPigments and Services business line. However, a general slowdown in theconstruction market has negatively impacted construction sales. NorthAmerican and European volumes were lower in 2009, and this has not improved throughthe first six months of 2010. Higher volumes of coatings products had afavorable impact on results in the first six months of 2010.

 

·                  Demandfor our wood protection products, in particular alkaline copper quaternary, orACQ, is generally driven by both repair and remodeling, as well as newconstruction. The market position of ACQ was negatively impacted in 2009by a general slowdown in the construction market, some customer shifts tosubstitute products and the use of wood substitutes. In the first six months of2010, volumes of ACQ products increased slightly. However, a continued slowdownin the construction industry and substitute products could have a negativeimpact on our results in the remainder of 2010.

 

·                  Inthe Clay-based Additives business, net sales decreased in 2009 as lower volumesin most applications were partially offset by increased selling prices. In thefirst six months of 2010, higher volumes in most markets had a favorable impacton results. We expect sales growth throughout the remainder of 2010 primarilyfrom higher volumes in most market segments.

 

***Titanium Dioxide Pigments***

 

·                  Demandfor our titanium dioxide products in anatase grade is driven mainly by demandin the synthetic fiber industry, while demand for titanium dioxide products inrutile grade and our functional additives is driven by demand in the coatings,printing inks, construction, cosmetics, pharmaceutical, food, paper andplastics industries. Market conditions, including pricing pressure andindustry overcapacity, have negatively impacted this industry in thepast. Sales decreased in 2009 as lower volumes of fiber anataseapplications were partially offset by increased selling prices. Sales oftitanium dioxide products in rutile grade applications were up in 2009 due tohigher volumes as a result of the venture with Kemira that was completed onSeptember 1, 2008, and higher selling prices. In the first six monthsof 2010, higher volumes, as well as selling price increases, of both rutile andanatase applications had a favorable impact on results. Our functionaladditives sales were down in 2009 as lower volumes were partially offset byhigher selling prices. In the first six months of 2010, higher volumes, as wellas selling price increases of functional additives had a favorable impact onresults. We expect sales of rutile, anatase and functional additivesapplications to continue to be higher throughout the remainder of 2010.

 

34

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***Advanced Ceramics***

 

·                  Demandfor our ceramic medical devices is mainly tied to the aging population inEurope and the United States. Sales of our medical device applicationsincreased in 2009 and the first six months of 2010 on higher volumes. We expectsales to be higher throughout the remainder of 2010.

 

·                  Salesof ceramic products for use in cutting tool applications were lower in2009. Sales of mechanical systems and applications, electronicapplications and multi-functional applications were also down in 2009 fromlower volumes, particularly related to the economic downturn in the automotiveindustry. Sales of all product applications, including cutting tools,mechanical systems and applications, electronic applications andmulti-functional applications, were up in the first six months of 2010 onhigher volumes. We expect sales for these applications to continue to increasethroughout the remainder of 2010.

 

***Specialty Compounds***

 

·                  Ourlargest product line in the Specialty Compounds segment is wire and cablecompounds. Sales within this product line are dependent upon thetelecommunications market and related sectors, specifically demand for high-endvoice and data communication wire and cable, for which our Specialty Compoundssegment is a significant provider of sheathing materials. Non-halogen productsfor wire and cable data communication, military and other applications haveexpanded business in North America for those applications and createdopportunities in Europe. However, as a result of a general downturn in thewire and cable market, volumes of wire and cable products were down in2009. In the first six months of 2010, higher volumes of wire and cableproducts had a favorable impact on results. For the remainder of 2010, weexpect sales of wire and cable products to be higher.

 

·                  Mostof the other end-use markets for which Specialty Compounds’ products are usedgenerally track growth of gross domestic product, but many are also applicationspecific, such as automotive. We are focusing more of our efforts towardsincreasing high margin specialty products, in particular, thermoplasticelastomers, and less of our efforts in automotive and footwear. Our net salesin consumer/industrial thermoplastic elastomers were lower in 2009. Netsales of regulated packaging were lower in 2009. In the first six monthsof 2010, sales of consumer/industrial thermoplastic elastomers and regulatedpackaging increased on higher volumes. We expect sales for these applicationsto be higher throughout the remainder of 2010.

 

·                  Rawmaterial prices for polyvinyl chloride (“PVC”) resin and plasticizers, key rawmaterials used in the production of most products, were down in 2009, but werehigher in the first six months of 2010. These raw material prices are expectedto be slightly higher throughout the remainder of 2010.

 

**Global Exposure**

 

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

 

Weestimate that we sold to customers in more than 60 countries during thisperiod. Currently, we serve our diverse and extensive customer base with 88manufacturing facilities in 24 countries. Consequently, we are exposed toglobal economic and political changes, particularly currency fluctuations thatcould impact our profitability and demand for our products.

 

Oursales and production costs are mainly denominated in U.S. dollars or Euros. Ourresults of operations and financial condition have been historically impactedby the fluctuation of the Euro against our reporting currency, the U.S. dollar.For the three and six months ended June 30, 2010, the average exchangerate of the Euro against the U.S. dollar was lower compared to the same periodin 2009. As a result, our net sales, gross profit and operating income werenegatively impacted. Historically, however, our operating margins have not beensignificantly impacted by currency fluctuations because, in general, sales andcosts of products sold are generated or incurred in the same currency, subjectto certain exceptions.

 

**Raw Materials**

 

Rawmaterials constituted approximately 47% of our 2009 cost of products sold. Wehave a broad raw material base, with the cost of no single raw materialrepresenting more than 3% of our cost of products sold in 2009.  In 2009and the first six months of 2010, lower raw material costs had a favorableimpact on our results of operations. However, 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 

 

35

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wholeor in specific geographic regions. In addition, we may not be able to pass onraw material price increases to our customers. See details of our ten mostsignificant raw materials (in terms of dollars) in Item 1, “Business — RawMaterials” in our 2009 Form 10-K.

 

**Energy Costs**

 

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

 

**Income Taxes**

 

Werecorded an income tax provision of $15.2 million in the second quarter of 2010on income from continuing operations before taxes of $70.0 million. The incometax provision in the second quarter of 2010 was favorably impacted by domesticincome that was not tax effected due to the utilization of net operating lossesfor which the Company provided a valuation allowance and the favorablesettlement of certain tax positions.

 

Inthe second quarter of 2010, the worldwide valuation allowance decreased by $7.8million. This was primarily due to $5.3 million of domestic gains in othercomprehensive income as well as $2.5 million related to increased taxableincome. Of the $7.8 million decrease in the valuation allowance, $3.9 millionimpacted the tax provision.

 

**Special Charges and Credits**

 

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

 

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

 

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

 

**Definition of Adjusted EBITDA**

 

Thepresentation of consolidated Adjusted EBITDA contained in this report iscalculated using the definition set forth in the senior secured credit agreementas a basis and reflects management’s interpretations thereof. Adjusted EBITDA,which is referred to under the senior secured credit agreement as “ConsolidatedEBITDA,” is defined in the senior secured credit agreement as consolidatedearnings (which, as defined in the senior secured credit agreement, equalsincome (loss) before the deduction of income taxes of Rockwood SpecialtiesGroup, Inc. and the Restricted Subsidiaries (as such term is defined inthe senior secured credit agreement), excluding extraordinary items) plus:

 

·                  interestexpense;

·                  depreciationexpense;

·                  amortizationexpense, including amortization of deferred financing fees;

·                  extraordinarylosses and non-recurring charges;

·                  non-cashcharges;

·                  losseson asset sales;

·                  restructuringcharges or reserves (including severance, relocation costs and one-timecompensation charges and costs relating to the closure of facilities);

·                  expensespaid by us or any of our subsidiaries in connection with the Dynamit NobelAcquisition, the senior secured credit agreement, the granting of liens underthe security documents (as such term is defined in the senior secured creditagreement), the indenture governing the 2014 Notes and the offering of the 2014Notes and any other related transactions;

·                  anyexpenses or charges incurred in connection with any issuance of debt or equitysecurities;

 

36

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·                  anyfees and expenses related to permitted acquisitions; and

·                  itemsarising in connection with CCA litigation related to our Timber TreatmentChemicals business of our Performance Additives segment;

 

less:

 

·                  extraordinarygains and non-recurring gains;

·                  non-cashgains; and

·                  gainson asset sales,

 

inall cases, subject to certain exclusions.

 

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

 

**Management’s Uses**

 

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

 

Wealso use Adjusted EBITDA on a consolidated basis as a liquidity measure. Webelieve this financial measure on a consolidated basis is important inanalyzing our liquidity because our senior secured credit agreement andindenture governing the 2014 Notes contain financial covenants that aredetermined based on Adjusted EBITDA. These covenants are material terms ofthese agreements, because they govern substantially all of our long-term debt,which in turn represents a substantial portion of our capitalization.Non-compliance with these financial covenants under our senior secured creditfacilities—our maximum total leverage ratio and our minimum interest coverageratio, in particular—could result in the lenders requiring us to immediatelyrepay all amounts borrowed. Any such acceleration could also lead to thenoteholders accelerating the maturity of the 2014 Notes. In addition, if wecannot satisfy these financial covenants in the indenture governing the 2014Notes, we cannot engage in certain activities, such as incurring additionalindebtedness or making certain payments. Consequently, Adjusted EBITDA iscritical to our assessment of our liquidity.

 

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

 

**Limitations**

 

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

 

·                  thecash portion of interest expense, net, income tax provision (benefit), andrestructuring as well as non-recurring charges related to securities issuance,acquisition activities, and systems/organization establishment, generallyrepresent charges (gains) which may significantly affect funds available to usein our operating, investing and financing activities;

 

37

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·                  non-operatingforeign exchange gains (losses), although not immediately affecting cash usedin investing activities, may affect the amount of funds needed to service ourdebt if those currency impacts remain in place as we meet our future principalrepayment obligations; and

 

·                  depreciation,amortization, non-cash (gains) charges and impairment charges, though notdirectly affecting our current cash position, represent the wear and tearand/or reduction in value of the plant, equipment and intangible assets whichpermit us to manufacture and/or market our products; these items may beindicative of future needs for capital expenditures, for development oracquisition of intangible assets or relevant trends causing asset valuechanges.

 

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

 

**Results of Operations**

 

**Actual Results of Operations**

 

Thefollowing table presents the major components of our operations on an actualbasis and Adjusted EBITDA (the reconciliation from net income is set forthin—Reconciliation of Net Income Attributable to Rockwood Holdings, Inc. toAdjusted EBITDA for the three and six months ended June 30, 2010 and2009), including as a percentage of net sales, for the periods presented. SeeNote 4, “Segment Information,” for segment information and a reconciliation toincome (loss) from continuing operations before taxes to Adjusted EBITDA on asegment basis.

 

38

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| ** **                                                        | ** ** | **Three months  ended** | ** ** | **Six months ended** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------|------------|----------------------|------------|
| ** **                                                        | ** ** | **June 30,**       | ** ** | **June 30,**    | ** ** |
| **($ in millions)**                                          | ** ** | **2010**                | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Statement of  operations data:**                                |       |                    |       |                 |       |   |   |   |   |
| **Net sales:**                                                    |       |                    |       |                 |       |   |   |   |   |
| Specialty Chemicals                                               |       | $                       | 287.3      |                 | $          | 236.2 |   | $ | 576.9 |   | $ | 461.5 |   |
| Performance Additives                                             |       | 199.4                   |       | 180.1                |       | 376.6 |   | 335.4 |   |
| Titanium Dioxide Pigments                                         |       | 190.3                   |       | 164.3                |       | 371.4 |   | 303.3 |   |
| Advanced Ceramics                                                 |       | 129.6                   |       | 97.1                 |       | 254.3 |   | 185.0 |   |
| Specialty Compounds                                               |       | 66.2                    |       | 51.6                 |       | 126.0 |   | 102.7 |   |
| Corporate and other                                               |       | 1.7                     |       | 1.1                  |       | 3.2 |   | 2.5 |   |
| Total net sales                                                   |       | 874.5                   |       | 730.4                |       | 1,708.4 |   | 1,390.4 |   |
|                                                              |       |                    |       |                 |       |   |   |   |   |
| Gross profit                                                      |       | 281.5                   |       | 203.2                |       | 548.2 |   | 385.3 |   |
|                                                              |       | 32.2                    | %          | 27.8                 | %          | 32.1 | % | 27.7 | % |
| Selling, general and  administrative expenses                     |       | 173.5                   |       | 151.0                |       | 342.8 |   | 296.1 |   |
|                                                              |       | 19.8                    | %          | 20.7                 | %          | 20.1 | % | 21.3 | % |
| Restructuring and other severance  costs                          |       | 1.2                     |       | 4.0                  |       | 3.4 |   | 11.8 |   |
| Loss on sale of assets and other                                  |       | 0.1                     |       | —               |       | 0.1 |   | 0.1 |   |
| **Operating income  (loss):**                                     |       |                    |       |                 |       |   |   |   |   |
| Specialty Chemicals                                               |       | 54.3                    |       | 37.0                 |       | 109.4 |   | 66.2 |   |
|                                                              |       | 18.9                    | %          | 15.7                 | %          | 19.0 | % | 14.3 | % |
| Performance Additives                                             |       | 21.8                    |       | 4.4                  |       | 34.1 |   | 6.2 |   |
|                                                              |       | 10.9                    | %          | 2.4                  | %          | 9.1 | % | 1.8 | % |
| Titanium Dioxide Pigments                                         |       | 13.5                    |       | 0.4                  |       | 26.3 |   | 2.8 |   |
|                                                              |       | 7.1                     | %          | 0.2                  | %          | 7.1 | % | 0.9 | % |
| Advanced Ceramics                                                 |       | 28.6                    |       | 11.6                 |       | 52.9 |   | 14.2 |   |
|                                                              |       | 22.1                    | %          | 11.9                 | %          | 20.8 | % | 7.7 | % |
| Specialty Compounds                                               |       | 8.1                     |       | 6.2                  |       | 15.1 |   | 11.3 |   |
|                                                              |       | 12.2                    | %          | 12.0                 | %          | 12.0 | % | 11.0 | % |
| Corporate and other                                               |       | (19.6                   | )          | (11.4                | )          | (35.9 | ) | (23.4 | ) |
| Total operating income                                            |       | 106.7                   |       | 48.2                 |       | 201.9 |   | 77.3 |   |
| **Other expenses,  net:**                                         |       |                    |       |                 |       |   |   |   |   |
| Interest expense, net                                             |       | (36.3                   | )          | (28.5                | )          | (78.1 | ) | (77.8 | ) |
| Loss on early extinguishment of  debt                             |       | —                  |       | (27.9                | )          | — |   | (25.7 | ) |
| Foreign exchange (loss) gain, net                                 |       | (0.4                    | )          | 16.5                 |       | (0.1 | ) | 10.9 |   |
| Other, net                                                        |       | —                  |       | 0.3                  |       | 0.5 |   | 0.4 |   |
| Other expenses, net                                               |       | (36.7                   | )          | (39.6                | )          | (77.7 | ) | (92.2 | ) |
| **Income (loss)  from continuing operations before taxes**        |       | 70.0                    |       | 8.6                  |       | 124.2 |   | (14.9 | ) |
| Income tax provision (benefit)                                    |       | 15.2                    |       | 10.6                 |       | 32.7 |   | (6.1 | ) |
| Income (loss) from continuing  operations                         |       | 54.8                    |       | (2.0                 | )          | 91.5 |   | (8.8 | ) |
| Income from discontinued  operations, net of tax                  |       | —                  |       | 1.1                  |       | — |   | 3.4 |   |
| Net income (loss)                                                 |       | 54.8                    |       | (0.9                 | )          | 91.5 |   | (5.4 | ) |
| Net (income) loss attributable to  the noncontrolling interest    |       | (2.4                    | )          | 2.6                  |       | (2.2 | ) | 5.6 |   |
| Net income attributable to  Rockwood Specialties Group, Inc. |       | $                       | 52.4       |                 | $          | 1.7 |   | $ | 89.3 |   | $ | 0.2 |   |
|                                                              |       |                    |       |                 |       |   |   |   |   |
| **Adjusted EBITDA:**                                              |       |                    |       |                 |       |   |   |   |   |
| Specialty Chemicals                                               |       | $                       | 73.4       |                 | $          | 57.5 |   | $ | 147.2 |   | $ | 107.8 |   |
|                                                              |       | 25.5                    | %          | 24.3                 | %          | 25.5 | % | 23.4 | % |
| Performance Additives                                             |       | 37.0                    |       | 22.3                 |       | 66.5 |   | 42.9 |   |
|                                                              |       | 18.6                    | %          | 12.4                 | %          | 17.7 | % | 12.8 | % |
| Titanium Dioxide Pigments                                         |       | 29.6                    |       | 19.5                 |       | 60.3 |   | 41.0 |   |
|                                                              |       | 15.6                    | %          | 11.9                 | %          | 16.2 | % | 13.5 | % |
| Advanced Ceramics                                                 |       | 40.6                    |       | 26.1                 |       | 77.6 |   | 43.9 |   |
|                                                              |       | 31.3                    | %          | 26.9                 | %          | 30.5 | % | 23.7 | % |
| Specialty Compounds                                               |       | 10.1                    |       | 8.9                  |       | 19.2 |   | 16.7 |   |
|                                                              |       | 15.3                    | %          | 17.2                 | %          | 15.2 | % | 16.3 | % |
| Corporate and other                                               |       | (18.5                   | )          | (9.0                 | )          | (33.6 | ) | (17.8 | ) |
| Total Adjusted EBITDA                                             |       | $                       | 172.2      |                 | $          | 125.3 |   | $ | 337.2 |   | $ | 234.5 |   |

 

39

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

 
| ** **                                                        | ** ** | **Change: Three months ended June 30,  2010 versus 2009** | ** ** | **Change: Six months ended June 30,  2010 versus 2009** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                        | ** ** | ** **                                                     | ** ** | ** **                                                   | ** ** | **Constant** | ** ** | **Constant** | ** ** | ** ** | ** ** | ** ** | ** ** | **Constant** | ** ** | **Constant** | ** ** |
| ** **                                                        | ** ** | ** **                                                     | ** ** | **%**                                                        | ** ** | **Currency** | ** ** | **Currency** | ** ** | ** ** | ** ** | **%** | ** ** | **Currency** | ** ** | **Currency** | ** ** |
| **($ in millions)**                                          | ** ** | **Total**                                                      | ** ** | **Change**                                                   | ** ** | **Effect (a)** | ** ** | **Basis** | ** ** | **Total** | ** ** | **Change** | ** ** | **Effect (a)** | ** ** | **Basis** | ** ** |
| **Statement of operations data:**                                 |       |                                                           |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net sales:**                                                    |       |                                                           |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty Chemicals                                               |       | $                                                              | 51.1       |                                                         | 21.6       | % | $ | (5.8 | ) | $ | 56.9 |   | $ | 115.4 |   | 25.0 | % | $ | 11.5 |   | $ | 103.9 |   |
| Performance Additives                                             |       | 19.3                                                           |       | 10.7                                                         |       | (4.3 | ) | 23.6 |   | 41.2 |   | 12.3 |   | 1.0 |   | 40.2 |   |
| Titanium Dioxide Pigments                                         |       | 26.0                                                           |       | 15.8                                                         |       | (13.3 | ) | 39.3 |   | 68.1 |   | 22.5 |   | (3.1 | ) | 71.2 |   |
| Advanced Ceramics                                                 |       | 32.5                                                           |       | 33.5                                                         |       | (7.3 | ) | 39.8 |   | 69.3 |   | 37.5 |   | (0.7 | ) | 70.0 |   |
| Specialty Compounds                                               |       | 14.6                                                           |       | 28.3                                                         |       | (0.6 | ) | 15.2 |   | 23.3 |   | 22.7 |   | 1.7 |   | 21.6 |   |
| Corporate and other                                               |       | 0.6                                                            |       | 54.5                                                         |       | (0.1 | ) | 0.7 |   | 0.7 |   | 28.0 |   | — |   | 0.7 |   |
| Total net sales                                                   |       | 144.1                                                          |       | 19.7                                                         |       | (31.4 | ) | 175.5 |   | 318.0 |   | 22.9 |   | 10.4 |   | 307.6 |   |
|                                                              |       |                                                           |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross profit                                                      |       | 78.3                                                           |       | 38.5                                                         |       | (9.8 | ) | 88.1 |   | 162.9 |   | 42.3 |   | 4.1 |   | 158.8 |   |
| Selling, general and administrative expenses                      |       | 22.5                                                           |       | 14.9                                                         |       | (5.2 | ) | 27.7 |   | 46.7 |   | 15.8 |   | 3.4 |   | 43.3 |   |
| Restructuring and other severance costs                           |       | (2.8                                                           | )          |                                                         |       |   |   | (2.8 | ) | (8.4 | ) |   |   |   |   | (8.4 | ) |
| Loss on sale of assets and other                                  |       | 0.1                                                            |       |                                                         |       |   |   | 0.1 |   | — |   |   |   |   |   | — |   |
| Total operating expenses                                          |       | 19.8                                                           |       | 12.8                                                         |       | (5.2 | ) | 25.0 |   | 38.3 |   | 12.4 |   | 3.4 |   | 34.9 |   |
| **Operating income (loss):**                                      |       |                                                           |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty Chemicals                                               |       | 17.3                                                           |       | 46.8                                                         |       | (1.1 | ) | 18.4 |   | 43.2 |   | 65.3 |   | 1.6 |   | 41.6 |   |
| Performance Additives                                             |       | 17.4                                                           |       | 395.5                                                        |       | (0.7 | ) | 18.1 |   | 27.9 |   | 450.0 |   | (0.2 | ) | 28.1 |   |
| Titanium Dioxide Pigments                                         |       | 13.1                                                           |       | 3,275.0                                                      |       | (1.3 | ) | 14.4 |   | 23.5 |   | 839.3 |   | (0.6 | ) | 24.1 |   |
| Advanced Ceramics                                                 |       | 17.0                                                           |       | 146.6                                                        |       | (1.7 | ) | 18.7 |   | 38.7 |   | 272.5 |   | (0.3 | ) | 39.0 |   |
| Specialty Compounds                                               |       | 1.9                                                            |       | 30.6                                                         |       | — |   | 1.9 |   | 3.8 |   | 33.6 |   | 0.2 |   | 3.6 |   |
| Corporate and other                                               |       | (8.2                                                           | )          | (71.9                                                        | )          | 0.2 |   | (8.4 | ) | (12.5 | ) | (53.4 | ) | — |   | (12.5 | ) |
| Total                                                             |       | 58.5                                                           |       | 121.4                                                        |       | (4.6 | ) | 63.1 |   | 124.6 |   | 161.2 |   | 0.7 |   | 123.9 |   |
| **Other expenses, net:**                                          |       |                                                           |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense, net                                             |       | (7.8                                                           | )          | 27.4                                                         |       | 1.1 |   | (8.9 | ) | (0.3 | ) | 0.4 |   | 0.1 |   | (0.4 | ) |
| Loss on early extinguishment of debt                              |       | 27.9                                                           |       |                                                         |       |   |   |   |   | 25.7 |   |   |   |   |   |   |   |
| Foreign exchange (loss) gain, net                                 |       | (16.9                                                          | )          |                                                         |       |   |   |   |   | (11.0 | ) |   |   |   |   |   |   |
| Other, net                                                        |       | (0.3                                                           | )          |                                                         |       |   |   |   |   | 0.1 |   |   |   |   |   |   |   |
| Other expenses, net                                               |       | 2.9                                                            |       |                                                         |       |   |   |   |   | 14.5 |   |   |   |   |   |   |   |
| **Income (loss) from continuing operations  before taxes**        |       |                                                           |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty Chemicals                                               |       | 25.3                                                           |       |                                                         |       |   |   |   |   | 51.9 |   |   |   |   |   |   |   |
| Performance Additives                                             |       | 19.4                                                           |       |                                                         |       |   |   |   |   | 29.4 |   |   |   |   |   |   |   |
| Titanium Dioxide Pigments                                         |       | 14.4                                                           |       |                                                         |       |   |   |   |   | 30.0 |   |   |   |   |   |   |   |
| Advanced Ceramics                                                 |       | 23.6                                                           |       |                                                         |       |   |   |   |   | 47.1 |   |   |   |   |   |   |   |
| Specialty Compounds                                               |       | 2.4                                                            |       |                                                         |       |   |   |   |   | 4.1 |   |   |   |   |   |   |   |
| Corporate and other                                               |       | (23.7                                                          | )          |                                                         |       |   |   |   |   | (23.4 | ) |   |   |   |   |   |   |
| Total                                                             |       | 61.4                                                           |       |                                                         |       |   |   |   |   | 139.1 |   |   |   |   |   |   |   |
| Income tax provision (benefit)                                    |       | 4.6                                                            |       |                                                         |       |   |   |   |   | 38.8 |   |   |   |   |   |   |   |
| Income (loss) from continuing operations                          |       | 56.8                                                           |       |                                                         |       |   |   |   |   | 100.3 |   |   |   |   |   |   |   |
| Income from discontinued operations, net of tax                   |       | (1.1                                                           | )          |                                                         |       |   |   |   |   | (3.4 | ) |   |   |   |   |   |   |
| Net income                                                        |       | 55.7                                                           |       |                                                         |       |   |   |   |   | 96.9 |   |   |   |   |   |   |   |
| Net (income) loss attributable to the noncontrolling  interest    |       | (5.0                                                           | )          |                                                         |       |   |   |   |   | (7.8 | ) |   |   |   |   |   |   |
| Net income attributable to Rockwood Specialties  Group, Inc. |       | $                                                              | 50.7       |                                                         |       |   |   |   |   |   | $ | 89.1 |   |   |   |   |   |   |   |
| **Adjusted EBITDA:**                                              |       |                                                           |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty Chemicals                                               |       | $                                                              | 15.9       |                                                         | 27.7       | % | $ | (1.7 | ) | $ | 17.6 |   | $ | 39.4 |   | 36.5 | % | $ | 1.9 |   | $ | 37.5 |   |
| Performance Additives                                             |       | 14.7                                                           |       | 65.9                                                         |       | (1.0 | ) | 15.7 |   | 23.6 |   | 55.0 |   | (0.2 | ) | 23.8 |   |
| Titanium Dioxide Pigments                                         |       | 10.1                                                           |       | 51.8                                                         |       | (2.4 | ) | 12.5 |   | 19.3 |   | 47.1 |   | (0.7 | ) | 20.0 |   |
| Advanced Ceramics                                                 |       | 14.5                                                           |       | 55.6                                                         |       | (2.4 | ) | 16.9 |   | 33.7 |   | 76.8 |   | (0.2 | ) | 33.9 |   |
| Specialty Compounds                                               |       | 1.2                                                            |       | 13.5                                                         |       | — |   | 1.2 |   | 2.5 |   | 15.0 |   | 0.3 |   | 2.2 |   |
| Corporate and other                                               |       | (9.5                                                           | )          | (105.6                                                       | )          | 0.2 |   | (9.7 | ) | (15.8 | ) | (88.8 | ) | — |   | (15.8 | ) |
| Total Adjusted EBITDA                                             |       | $                                                              | 46.9       |                                                         | 37.4       | % | $ | (7.3 | ) | $ | 54.2 |   | $ | 102.7 |   | 43.8 | % | $ | 1.1 |   | $ | 101.6 |   |

 

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

 

40

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

 

**Overview**

 

Netsales increased $144.1 million in the second quarter of 2010 compared with thesame period in the prior year primarily due to higher volumes, partially offsetby the negative impact of currency changes of $31.4 million. See furtherdiscussion by segment below.

 

Operatingincome and Adjusted EBITDA increased in the second quarter of 2010 comparedwith the same period in the prior year primarily due to higher sales volumes.This was partially offset by lower production volumes due to scheduledmaintenance work, higher incentive-compensation related costs and the negativeimpact of currency changes.

 

Net incomefrom continuing operations increased $56.8 million compared with the sameperiod in the prior year primarily due to the reasons noted above, a loss onearly extinguishment of debt of $27.9 million recorded in the second quarter of2009 and a lower effective tax rate in the second quarter of 2010. This waspartially offset by decreased foreign exchange gains on financing activitiesand higher interest expense recorded in the second quarter of 2010 primarilydue to a decrease in mark-to-market gains on our interest rate hedginginstruments.

 

Incomefrom discontinued operations, net of tax was $1.1 million in the second quarterof 2009 and was primarily due to the reversal of certain reserves in connectionwith the sale of the Electronics business in December 2007.

 

Netincome attributable to noncontrolling interest of $2.4 million in the secondquarter of 2010 was primarily related to higher volumes in the Titanium DioxidePigments venture in the second quarter of 2010. Net loss attributable tononcontrolling interest of $2.6 million in the second quarter of 2009 wasprimarily related to losses recorded in our Viance and Titanium Dioxide Pigment’sventures.

 

Netincome attributable to Rockwood Specialties Group, Inc. increased $50.7million in the second quarter of 2010 compared with the same period in theprior year due to the reasons noted above.

 

**Net sales**

 

*Specialty Chemicals*.  Netsales increased $51.1 million over the prior year primarily due to highervolumes, partially offset by the negative impact of currency changes of $5.8million. In the Fine Chemicals business, higher volumes of lithium products andmetal sulfide applications were partially offset by lower selling prices ofpotash and lithium carbonate. Net sales in the Surface Treatment business werehigher on increased volumes in all markets, particularly in automotive, generalindustrial and coil/cold forming applications.

 

*Performance Additives*. Net sales increased $19.3 million over the prior year primarily due to highervolumes of coatings and inks and oilfield applications in our Clay-basedAdditives business and higher volumes of specialty and coatings products in ourColor Pigments and Services business. This was partially offset by the negativeimpact of currency changes of $4.3 million.

 

*Titanium Dioxide Pigments*.  Netsales increased $26.0 million over the prior year primarily from higher volumesin all applications, as well as higher selling prices. This was partiallyoffset by the negative impact of currency changes of $13.3 million.

 

*Advanced Ceramics*.  Netsales increased $32.5 million over the prior year primarily from higher volumesin all applications, including medical, automotive, electronic and otherindustrial applications.  This waspartially offset by the negative impact of currency changes of $7.3 million.

 

*Specialty Compounds*.  Netsales increased $14.6 million over the prior year primarily due to highervolumes in most applications, primarily in wire and cable.

 

**Gross profit**

 

Grossprofit increased $78.3 million over the prior year primarily due to the volumeincreases noted above. This was partially offset by the negative impact ofcurrency changes of $9.8 million and lower production volumes due to scheduledmaintenance work. Gross profit as a percentage of net sales were 32.2% and27.8% in the second quarter of 2010 and 2009, respectively.

 

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**Selling, general and administrative expenses**

 

Selling,general and administrative expenses, (“SG&A”) increased $22.5 million over theprior year primarily due to the impact of the higher volumes noted above andhigher incentive compensation-related costs. This was partially offset by theimpact of currency changes of $5.2 million. In addition, SG&A expenses inthe second quarter of 2009 included the reversal of certain long-term incentivecompensation program accruals of $1.4 million for which related targets were nolonger expected to be achieved. However, SG&A expenses as a percentageof net sales decreased to 19.8% in the second quarter of 2010 compared to 20.7%in the second quarter of 2009.

 

**Restructuring and other severance costs**

 

Werecorded restructuring and other severance costs of $1.2 million and $4.0million in the three months ended June 30, 2010 and 2009, respectively, formiscellaneous restructuring activities, including headcount reductions, assetwrite-offs and facility closures. See Note 13, “Restructuring and OtherSeverance Costs,” for further details.

 

**Operating income**

 

*Specialty Chemicals*.  Operatingincome increased $17.3 million over the prior year primarily due to the highervolumes discussed above and lower raw material costs in our Surface Treatmentbusiness, particularly for phosphoric acid. This increase was partiallyoffset by lower selling prices, particularly for potash and lithium carbonatein our Fine Chemicals business, and the negative impact of currency changes of$1.1 million.

 

*Performance Additives*. Operatingincome increased $17.4 million over the prior year primarily due to the highervolumes noted above, lower depreciation and amortization costs of $1.2 millionand lower restructuring and other severance costs of $1.1 million.

 

*Titanium Dioxide Pigments*.  Operatingincome increased $13.1 million over the prior year primarily due to the highervolumes noted above and lower depreciation and amortization costs of $2.7million. This was partially offset by lower production volumes due to scheduledmaintenance work and the negative impact of currency changes of $1.3 million.

 

*Advanced Ceramics*.  Operatingincome increased $17.0 million over the prior year primarily due to the highervolumes noted, lower restructuring and other severance costs of $1.6 millionand lower depreciation and amortization costs of $0.9 million. This waspartially offset by the negative impact of currency changes of $1.7 million.

 

*Specialty Compounds*.  Operatingincome increased $1.9 million over the prior year primarily due to the highervolumes noted above and lower depreciation and amortization costs of $0.6million. This was partially offset by higher raw material costs, primarily PVCresin and plasticizer costs.

 

*Corporate and other*.  Operatingloss increased $8.2 million primarily due to higher incentivecompensation-related costs. Corporate compensation-related costs in the secondquarter of 2009 include the reversal of certain long-term incentivecompensation accruals of $1.4 million related to performance targets that wereno longer expected to be achieved.

 

**Other income (expenses)**

 

*Interest expense, net*.  Interestexpense, net increased $7.8 million in the second quarter of 2010 compared tothe same period in the prior year. The second quarter of 2010 and 2009 includednon-cash gains of $5.6 million and $12.2 million, respectively, representingthe movement in the mark-to-market valuation of our interest rate hedginginstruments. Excluding the impact of these gains, interest expense, netincreased $1.2 million primarily due to higher interest rates related to theamendment of our senior secured credit facility in June 2009, partiallyoffset by the termination of interest rate swaps in November 2009 and debtrepayments.

 

*Loss on early extinguishment of debt*. In the second quarter of 2009, we recorded a loss on earlyextinguishment of debt of $27.9 million primarily related to the amendment ofour senior secured credit facility on June 15, 2009. This included thewrite-off of $19.5 million of deferred financing costs and $11.1 million oflender fees that were expensed. This was partially offset by a discount of$2.7 million related to the repurchase of $137.7 million in aggregate principalamount of our Euro-denominated 2014 Notes.

 

*Foreign exchange, net*. Inthe 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.

 

**Provision for income taxes**

 

Werecorded an income tax provision of $15.2 million in the second quarter of 2010on income from continuing operations before 

 

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taxesof $70.0 million. The income tax provision in the second quarter of 2010 wasfavorably impacted by domestic income that was not tax effected due to theutilization of net operating losses for which the Company had provided avaluation allowance and the favorable settlement of certain tax positions.

 

Werecorded an income tax provision of $10.6 million in the second quarter of 2009on income from continuing operations before taxes of $8.6 million. The incometax benefit in the second quarter of 2009 was positively impacted by $2.0million of nonrecurring items primarily related to foreign taxes and negativelyimpacted by $6.6 million of domestic tax costs allocated from other comprehensiveincome and the domestic valuation allowance.

 

**Income (loss) from continuing operations**

 

Incomefrom continuing operations for the second quarter of 2010 was $54.8 million ascompared to a loss from continuing operations of $2.0 million for the secondquarter of 2009 for the reasons described above.

 

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

 

Incomefrom discontinued operations, net of tax was $1.1 million in the second quarterof 2009 and was primarily due to the reversal of certain reserves in connectionwith the sale of the Electronics business in December 2007.

 

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

 

Netincome attributable to noncontrolling interest of $2.4 million in the secondquarter of 2010 was primarily related to higher volumes in the Titanium DioxidePigments venture in the second quarter of 2010. Net loss attributable tononcontrolling interest of $2.6 million in the second quarter of 2009 wasprimarily related to losses recorded in our Viance and Titanium Dioxide Pigment’sventures.

 

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

 

Netincome attributable to Rockwood Specialties Group, Inc. for the secondquarter of 2010 was $52.4 million as compared to net income attributable toRockwood Specialties Group, Inc. of $1.7 million for the same period inthe prior year for the reasons described above.

 

**Adjusted EBITDA**

 

*Specialty Chemicals*.  AdjustedEBITDA increased $15.9 million over the prior year primarily due to the highervolumes discussed above and lower raw material costs in our Surface Treatmentbusiness, particularly for phosphoric acid. This increase was partially offsetby lower selling prices, particularly for potash and lithium carbonate in ourFine Chemicals business, and the negative impact of currency changes of $1.7million.

 

*Performance Additives*. AdjustedEBITDA increased $14.7 million over the prior year primarily due to the highervolumes noted above.

 

*Titanium Dioxide Pigments*.  AdjustedEBITDA increased $10.1 million over the prior year primarily due to the highervolumes noted above. This was partially offset by lower production volumes dueto scheduled maintenance work and the negative impact of currency changes of$2.4 million.

 

*Advanced Ceramics*.  AdjustedEBITDA increased $14.5 million over the prior year primarily due to the highervolumes noted. This was partially offset by the negative impact of currencychanges of $2.4 million.

 

*Specialty Compounds*.  AdjustedEBITDA increased $1.2 million over the prior year primarily due to the highervolumes noted above.  This was partiallyoffset by higher raw material costs, primarily PVC resin and plasticizer costs.

 

*Corporate and other*.  AdjustedEBITDA loss increased $9.5 million primarily due to higher incentivecompensation-related costs. Corporate compensation-related costs in the secondquarter of 2009 include the reversal of certain long-term incentivecompensation accruals of $1.4 million related to performance targets that wereno longer expected to be achieved.

 

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***Six months ended June 30, 2010compared to six months ended June 30, 2009***

 

**Overview**

 

Netsales increased $318.0 million in the six months ended June 30, 2010compared with the same period in the prior year primarily due to higher volumesand the positive impact of currency changes of $10.4 million, partially offsetby decreased selling prices. See further discussion by segment below.

 

Operatingincome and Adjusted EBITDA increased in the six months ended June 30, 2010compared with the same period in the prior year primarily due to higher salesvolumes, lower raw material costs and the positive impact of currency changes.This was partially offset by lower selling prices and higherincentive-compensation related costs.

 

Netincome from continuing operations increased $100.3 million compared with thesame period in the prior year primarily due to the reasons noted above and aloss on early extinguishment of debt of $25.7 million recorded in the sixmonths ended June 30, 2009. This was partially offset by decreased foreignexchange gains on financing activities.

 

Incomefrom discontinued operations, net of tax was $3.4 million in the six monthsended June 30, 2009 and was primarily due to the favorable resolution of aclaim against the Company’s former Groupe Novasep business and the reversal ofcertain reserves in connection with the sale of the Electronics business inDecember 2007.

 

Netincome attributable to noncontrolling interest of $2.2 million in the sixmonths ended June 30, 2010 was primarily related to higher volumes in theTitanium Dioxide Pigments venture in the second quarter of 2010, partiallyoffset by losses recorded in our Viance venture. Net loss attributable tononcontrolling interest of $5.6 million in the six months ended June 30,2009 was due to losses recorded in our Viance and Titanium Dioxide Pigment’sventures.

 

Netincome attributable to Rockwood Specialties Group, Inc. increased $89.1million in the six months ended June 30, 2010 compared with the sameperiod in the prior year due to the reasons noted above.

 

**Net sales**

 

*Specialty Chemicals*.  Netsales increased $115.4 million over the prior year primarily due to highervolumes and the positive impact of currency changes of $11.5 million. Inthe Fine Chemicals business, higher volumes of lithium products and metalsulfide applications were partially offset by lower selling prices of potashand lithium carbonate. Net sales in the Surface Treatment business were higheron increased volumes in all markets, particularly in automotive, coil/coldforming and general industrial applications.

 

*Performance Additives*.  Netsales increased $41.2 million over the prior year primarily due to highervolumes of coatings and inks and oilfield applications in our Clay-basedAdditives business and higher volumes primarily related to coatingsapplications in our Color Pigments and Services business.

 

*Titanium Dioxide Pigments*.  Netsales increased $68.1 million over the prior year primarily from higher volumesin all applications, as well as higher selling prices. This was partiallyoffset by the negative impact of currency changes of $3.1 million.

 

*Advanced Ceramics*.  Netsales increased $69.3 million over the prior year primarily from higher volumesin all applications, particularly medical, electronics and mechanical systemsand applications. This was partially offset by lower selling prices.

 

*Specialty Compounds*.  Netsales increased $23.3 million over the prior year primarily due to highervolumes in most applications, particularly in wire and cable andconsumer/industrial applications, and the positive impact of currency changesof $1.7 million.

 

**Gross profit**

 

Grossprofit increased $162.9 million over the prior year primarily due to the volumeincreases noted above, lower raw material costs and the positive impact ofcurrency changes of $4.1 million.  Gross profit as a percentage of netsales were 32.1% and 27.7% in the six months ended June 30, 2010 and 2009,respectively.

 

**Selling, general and administrative expenses**

 

Selling,general and administrative expenses (“SG&A”) increased $46.7 million overthe prior year primarily due to the impact of the higher volumes noted above,higher incentive compensation-related costs and the impact of currency changesof $3.4 million. In addition, SG&A expenses in the six months ended June 30,2009 include the reversal of discretionary profit-sharing plan accruals of $2.6million and the reversal of certain long-term incentive compensation programaccruals of $2.7 million for which related targets were no longer expected tobe achieved. However, SG&A expenses as a percentage of net salesdecreased to 20.1% in the six months ended June 30, 2010 from 21.3% in thesame period in the prior year.

 

44

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**Restructuring and other severance costs**

 

Werecorded restructuring and other severance costs of $3.4 million in the sixmonths ended June 30, 2010 for miscellaneous restructuring activities,including headcount reductions, asset write-offs and facilityclosures. For the six months ended June 30, 2009, we recordedrestructuring and other severance costs of $11.8 million primarily related toheadcount reductions as part of our global cost initiatives. See Note 13, “Restructuringand Other Severance Costs,” for further details.

 

**Operating income**

 

*Specialty Chemicals*.  Operatingincome increased $43.2 million over the prior year primarily due to the highervolumes discussed above, lower raw material costs in our Surface Treatmentbusiness, particularly for phosphoric acid, and lower restructuring and otherseverance costs of $1.5 million. This increase was partially offset bylower selling prices, particularly for potash and lithium carbonate in our FineChemicals business.

 

*Performance Additives*. Operatingincome increased $27.9 million over the prior year primarily due to the highervolumes noted above, lower restructuring and other severance costs of $2.0million and lower depreciation and amortization costs of $1.6 million. Thisincrease was partially offset by higher raw material costs, primarily forquarternary amine (“quat”) in our Clay-based Additives business.

 

*Titanium Dioxide Pigments*.  Operatingincome increased $23.5 million over the prior year primarily due to the highervolumes noted above, lower depreciation and amortization costs of $2.9 millionand lower systems/organization establishment expenses of $1.1 million relatedto the formation of the venture completed in September 2008. This waspartially offset by lower production volumes due to scheduled maintenance work.In addition, operating income in the six months ended June 30, 2009included the termination of a long-term incentive plan of $2.6 million and thereceipt of a vendor rebate related to prior years of $1.7 million.

 

*Advanced Ceramics*.  Operatingincome increased $38.7 million over the prior year primarily due to the highervolumes noted above and decreased restructuring and other severance costs of$4.7 million. This increase was partially offset by lower selling prices.

 

*Specialty Compounds*.  Operatingincome increased $3.8 million over the prior year primarily due to the highervolumes noted above and lower depreciation and amortization costs of $1.2million. This was partially offset by higher raw material costs, primarily PVC resinand plasticizer costs.

 

*Corporate and other*.  Operatingloss increased $12.5 million primarily due to higher incentivecompensation-related costs. Corporate compensation-related costs in the sixmonths ended June 30, 2009 included the reversal of certain long-termincentive compensation accruals of $2.7 million related to performance targetsthat were no longer expected to be achieved.

 

**Other income (expenses)**

 

*Interest expense, net*.  Interestexpense, net increased $0.3 million in the six months ended June 30, 2010compared to the same period in the prior year. The six months ended June 30,2010 and 2009 included non-cash gains of $7.7 million and $2.6 million,respectively, representing the movement in the mark-to-market valuation of ourinterest rate hedging instruments. Excluding the impact of these gains,interest expense, net increased $5.4 million primarily due to higher interestrates related to the amendment of our senior secured credit facility inJune 2009, partially offset by the termination of interest rate swaps inNovember 2009 and debt repayments.

 

*Loss on early extinguishment of debt*. For the six months ended June 30, 2009, we recorded a loss onearly extinguishment of debt of $25.7 million primarily related to thewrite-off of deferred financing costs of $20.9 million and lender fees relatedto the early extinguishment of debt of $11.1 million, partially offset by adiscount of $6.3 million related to the repurchase of $153.2 million inaggregate principal amount of the 2014 Notes.

 

*Foreign exchange, net*.  Forthe 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.

 

**Provision for income taxes**

 

Werecorded an income tax provision of $32.7 million in the six months ended June 30,2010 on income from continuing operations before taxes of $124.2 million. Theincome tax provision was favorably impacted by domestic income that was not taxeffected due to a valuation allowance and the favorable settlement of certaintax positions. As a result of these benefits and geographic earnings mix, 

 

45

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theeffective tax rate was 26.3% for the period.

 

Forthe six months ended June 30, 2009, the effective tax rate was 40.9% andan income tax benefit of $6.1 million was recorded. The effective income taxrate compared to the federal statutory rate primarily relates to a nonrecurringtax benefit related to functional currency changes offset by the domesticvaluation allowance.

 

**Income (loss) from continuing operations**

 

Incomefrom continuing operations for the six months ended June 30, 2010 was$91.5 million as compared to a loss from continuing operations of $8.8 millionfor the six months ended June 30, 2009 for the reasons described above.

 

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

 

Incomefrom discontinued operations, net of tax was $3.4 million in the six monthsended June 30, 2009 and was primarily due to the favorable resolution of aclaim against the Company’s former Groupe Novasep business and the reversal ofcertain reserves in connection with the sale of the Electronics business inDecember 2007.

 

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

 

Netincome attributable to noncontrolling interest of $2.2 million in the sixmonths ended June 30, 2010 was primarily related to higher volumes in theTitanium Dioxide Pigments venture in the six months ended June 30, 2010,partially offset by losses recorded in our Viance venture. Net lossattributable to noncontrolling interest of $5.6 million in the six months endedJune 30, 2009 was due to losses recorded in our Viance and TitaniumDioxide Pigment’s ventures.

 

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

 

Netincome attributable to Rockwood Specialties Group, Inc. for the six monthsended June 30, 2010 and 2009 was $89.3 million and $0.2 million,respectively, for the reasons described above.

 

**Adjusted EBITDA**

 

*Specialty Chemicals*. AdjustedEBITDA increased $39.4 million over the prior year primarily due to the highervolumes discussed above, lower raw material costs in our Surface Treatmentbusiness, particularly for phosphoric acid, and the positive impact of currencychanges of $1.9 million. This increase was partially offset by lowerselling prices, particularly for potash and lithium carbonate, in our FineChemicals business

 

*Performance Additives*. AdjustedEBITDA increased $23.6 million over the prior year primarily due to the highervolumes noted above. This increase was partially offset by higher raw materialcosts, primarily for quat in our Clay-based Additives business.

 

*Titanium Dioxide Pigments*.  AdjustedEBITDA increased $19.3 million over the prior year primarily due to the highersales volumes noted above. This was partially offset by lower productionvolumes due to scheduled maintenance work. In addition, operating income in thesix months ended June 30, 2009 included the termination of a long-termincentive plan of $2.6 million and the receipt of a vendor rebate related toprior years of $1.7 million.

 

*Advanced Ceramics*.  AdjustedEBITDA increased $33.7 million over the prior year primarily due to the highervolumes noted above. This increase was partially offset by lower sellingprices.

 

*Specialty Compounds*.  AdjustedEBITDA increased $2.5 million over the prior year primarily due to the highervolumes noted above. This was partially offset by higher raw material costs,primarily PVC resin and plasticizer costs.

 

*Corporate and other*.  AdjustedEBITDA increased $15.8 million primarily due to higher incentivecompensation-related costs. Corporate compensation-related costs in the sixmonths ended June 30, 2009 included the reversal of certain long-termincentive compensation accruals of $2.7 million related to performance targetsthat were no longer expected to be achieved.

 

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***Reconciliation of Net Income Attributable toRockwood******Specialties Group******, Inc. to Adjusted EBITDA***

 

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

 
| ** **                                                        | ** ** | **Three months  ended** | ** ** | **Six months ended** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------|------------|----------------------|------------|
| ** **                                                        | ** ** | **June 30,**       | ** ** | **June 30,**    | ** ** |
| **($ in millions)**                                          | ** ** | **2010**                | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net income attributable to  Rockwood Specialties Group, Inc. |       | $                       | 52.4       |                 | $          | 1.7 |   | $ | 89.3 |   | $ | 0.2 |   |
| Net income (loss) attributable to  noncontrolling interest        |       | 2.4                     |       | (2.6                 | )          | 2.2 |   | (5.6 | ) |
| Net income (loss)                                                 |       | 54.8                    |       | (0.9                 | )          | 91.5 |   | (5.4 | ) |
| Income tax provision (benefit)                                    |       | 15.2                    |       | 10.6                 |       | 32.7 |   | (6.1 | ) |
| Income from discontinued  operations, net of tax                  |       | —                  |       | (1.1                 | )          | — |   | (3.4 | ) |
| Income (loss) from continuing  operations before taxes            |       | 70.0                    |       | 8.6                  |       | 124.2 |   | (14.9 | ) |
| Interest expense, net (a)                                         |       | 36.3                    |       | 28.5                 |       | 78.1 |   | 77.8 |   |
| Depreciation and amortization                                     |       | 63.0                    |       | 68.9                 |       | 129.9 |   | 137.0 |   |
| Restructuring and other severance  costs                          |       | 1.2                     |       | 4.0                  |       | 3.4 |   | 11.8 |   |
| Systems/organization establishment  expenses                      |       | 0.5                     |       | 1.0                  |       | 1.4 |   | 3.1 |   |
| Acquisition and disposal costs                                    |       | 0.4                     |       | —               |       | 0.6 |   | — |   |
| Loss on early extinguishment of  debt                             |       | —                  |       | 27.9                 |       | — |   | 25.7 |   |
| Loss on sale of assets and other                                  |       | 0.1                     |       | —               |       | 0.1 |   | 0.1 |   |
| Foreign exchange loss (gain), net                                 |       | 0.4                     |       | (16.5                | )          | 0.1 |   | (10.9 | ) |
| Other                                                             |       | 0.3                     |       | 2.9                  |       | (0.6 | ) | 4.8 |   |
| Total Adjusted EBITDA                                             |       | $                       | 172.2      |                 | $          | 125.3 |   | $ | 337.2 |   | $ | 234.5 |   |

 

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(a)               Includesgains of $5.6 million and $12.2 million for the three months ended June 30,2010 and 2009, respectively, and gains of $7.7 million and $2.6 million for thesix months ended June 30, 2010 and 2009, respectively, representing themovement in the mark-to-market valuation of the Company’s interest rate andcross-currency hedging instruments.

 

**Liquidity and Capital Resources**

 

**Cash Flows**

 

*Operating Activities*.  Netcash provided by operating activities was $176.5 million and $130.6 million forthe six months ended June 30, 2010 and 2009, respectively. Net cash fromoperating activities increased primarily due to higher net income, partiallyoffset by the higher use of operating cash from working capital changes.

 

*Investing Activities*.  Netcash used in investing activities decreased to $71.0 million for the six monthsended June 30, 2010 from $76.4 million for the six months ended June 30,2009 primarily due to lower capital expenditures.

 

*Financing Activities*.  Netcash used in financing activities was $42.2 million and $311.3 million for thesix months ended June 30, 2010 and 2009, respectively, and includedscheduled payments for long-term debt and revolver payments. In the six monthsended June 30, 2009, we used $146.8 million of cash to prepay, at adiscount, $153.2 million in aggregate principal amount of our Euro-denominatedsenior subordinated notes due in 2014, $102.3 million to prepay our seniorsecured term loans, and $22.0 million related to the amendment of the seniorsecured credit facility in June 2009.

 

**Liquidity**

 

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

 

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Inaddition, our liquidity may be negatively impacted due to funding obligationsrelated to certain pension plans. We have several pension plans located inGermany, Finland, the United Kingdom and the United States, which wereadversely impacted by market conditions in late 2008 and early 2009. Althoughrecent investment performance of assets in pension plans covering our employeesin these countries has reduced the amount of any immediate funding obligationsand we have entered into long-term funding arrangements for pension planslocated in Germany and the U.K., we may have to make a significant one-timepayment and/or enter into a long-term funding arrangement for the Finnish Plan.However, our funding obligations could change significantly based on the investmentperformance of the pension plan assets and changes in actuarial assumptions forlocal statutory funding valuations. Any deterioration of the capital markets orreturns available in such markets may adversely impact our pension plan assetsand increase our funding obligations for one or more of these plans andadversely impact our liquidity. We cannot predict the impact of this or anyfurther market disruption on our pension funding obligations.

 

Asof June 30, 2010, we had actual total indebtedness of $2,309.6 million.Our $250.0 million revolving credit facility under our senior secured creditfacility provided for additional borrowings of up to $224.9 million as of June 30,2010. There were no outstanding borrowings under this revolving credit facilityas of June 30, 2010, although we had outstanding letters of credit of$25.1 million that reduced our availability under the senior secured creditfacility. In July 2010, the availability under the revolving creditfacility was reduced to $180.0 million (excluding outstanding letters ofcredit). The €30.0 million ($36.7 million) revolving credit facility underthe Titanium Dioxide Pigments venture facility provided for additionalborrowings of up to €12.9 million ($15.8 million) as of June 30, 2010after an outstanding bank guarantee of €17.1 million ($20.9 million) related toa defined benefit pension obligation reduced availability under this facility.

 

Asof June 30, 2010, we had cash and cash equivalents of $363.6 million. Wemay use available cash to reduce our term debt or repurchase additional 2014Notes at any time, subject to certain limitations contained in our seniorsecured credit facility. As discussed in Note 16, “Subsequent Events,” wevoluntarily prepaid $200.0 million of our senior secured term loans on July 29,2010. This includes $22.5 million of our tranche E term loans, €5.0 million($6.5 million using the exchange rate in effect at the time of the transaction)of our tranche G terms loans, $151.5 million of our tranche H term loans, and€15.0 million ($19.5 million using the exchange rate in effect at the time ofthe transaction) of our tranche I term loans. These amounts have beenclassified as “long-term debt, current portion” as of June 30, 2010 in theCondensed Consolidated Balance Sheet. This prepayment was funded with availablecash and cash equivalents.

 

*Senior secured credit facilities. *As of June 30, 2010 the senior secured credit facilities, as amended,consisted of:

 

·                  trancheA-1 term loans in an aggregate principal amount of €3.8 million ($4.6 million)and tranche A-2 term loans in an aggregate principal amount of €32.8 million($40.2 million), each maturing on July 30, 2011 and bearing interest at aEuribor floor of 2.00% plus 3.00% (Euribor is the Euro inter-bank offeredrate);

 

·                  trancheE term loans in an aggregate principal amount of $138.7 million, maturing onJuly 30, 2012 and bearing interest at a Libor floor of 2.00% plus 2.50%(Libor is the London inter-bank offered rate);

 

·                  trancheG term loans in an aggregate principal amount of €64.8 million ($79.3 million)maturing on July 30, 2012 and bearing interest at a Euribor floor of 2.00%plus 2.75%;

 

·                  trancheH term loan in an aggregate principal amount of $932.5 million maturing onMay 15, 2014 and bearing interest at a Libor floor of 2.00% plus 4.00%;

 

·                  trancheI term loan in an aggregate principal amount of €193.7 million ($237.0 million)maturing on May 15, 2014 and bearing interest at a Euribor floor of 2.00%plus 4.25%; and

 

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

 

ABRis the alternate base rate, which is the greater of (a) Credit Suisse’sPrime Rate, (b) the Federal Funds Effective Rate plus 0.50% or(c) the Eurodollar Rate for a one-month interest period plus 1.00%.Tranche A-1 and A-2 term loans are payable in January andJuly of each year at escalating percentages of the amended principalamount. Tranches E, G, H and I are payable in January andJuly of each year at amounts equal to 0.50% of the amended principalamount as of June 30, 2010, with the remainder due at the final maturitydate.

 

TheCompany’s borrowings and the borrowings of our wholly-owned subsidiary RockwoodSpecialties Limited under the senior 

 

48

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securedcredit facilities are guaranteed and secured by certain assets and pledges ofcapital stock.

 

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

 

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

 

Thesenior secured credit agreement also contains the following financial covenantsthat are determined based on our Adjusted EBITDA (including certain adjustmentsfor acquisitions and related synergies), which reflects management’sinterpretations thereof:

 

·                  aleverage ratio: for the twelve-month period ended June 30, 2010, netsenior secured debt (senior secured debt plus capital lease obligations, minuscash up to a maximum of $100.0 million) to Adjusted EBITDA must be less than4.25 to 1; for such period, our ratio equaled 2.79 to 1; and

 

·                  aninterest coverage ratio: for the twelve-month period ended June 30, 2010,Adjusted EBITDA to cash interest expense (interest expense, net excludingdeferred debt issuance cost amortization and the movements in the mark-tomarket value of our interest rate and cross-currency interest rate derivatives)must be at least 2.00 to 1; for such period, our ratio equaled 3.55 to 1.

 

Thesenior secured credit agreement, as amended, replaced the total debt toconsolidated Adjusted EBITDA ratio covenant with a senior secured debt toconsolidated Adjusted EBITDA ratio covenant such that the Company may notpermit its senior secured debt ratio to exceed 4.25 to 1.00 on the last day ofany fiscal quarter through and including September 30, 2010, and 4.00 to1.00 on the last day of any fiscal quarter thereafter. The senior securedcredit agreement, as amended, also reset the asset sales basket and modifiedcertain other baskets.

 

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

 

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

 

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

 

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

 

*2014 Notes.*  Asof June 30, 2010, the 2014 Notes have an aggregate principal amount of€250.1 million ($306.1 million) in the case of the Euro notes and $200.0million in the case of the U.S. Dollar notes, and mature on November 15,2014. Interest on the 2014 Notes is payable semi-annually on May 15 andNovember 15 and accrues at the rate of 7.625% in the case of the Euronotes and 7.500% in the case of the U.S. Dollar notes. Certain of our domesticsubsidiaries guarantee the 2014 Notes on a senior subordinated unsecured basis(see Note 15 “Consolidating Financial Information,” for furtherdetails). In the first half of 2009, we repurchased at a discount 

 

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€113.9million ($153.2 million) in aggregate principal amount of our 2014Notes. We may use available cash to repurchase additional 2014 Notes atany time, subject to certain limitations contained in our senior secured creditfacility.

 

The2014 Notes contain various affirmative and restrictive covenants. Therestrictive covenants limit our ability, and the ability of our restrictedsubsidiaries, to, among other things, incur or guarantee additional indebtedness(as described below), pay dividends or make other equity distributions orrepurchase capital stock, make investments or other restricted payments, createliens, transfer or sell assets, restrict dividends or other payments to us,engage in transactions with affiliates, and merge or consolidate with othercompanies or sell substantially all of our assets.

 

Theindenture governing the 2014 Notes prohibits us from incurring additional debt,subject to certain permitted incurrences, unless the fixed charge coverageratio, which is the ratio of Adjusted EBITDA (as defined therein excludingcertain adjustments permitted under the senior secured credit agreement) tofixed charges (as defined therein), for the most recently ended four fiscalquarters is at least 2.00 to 1. In addition, the indenture prohibits us frommaking restricted payments (such as dividends or other equity distributions,repurchases of capital stock or restricted investments), subject to certainpermitted payments, unless, among other things, the fixed charge coverage ratiofor the most recently ended four fiscal quarters is at least 2.00 to 1. For thefour-fiscal quarter period ended June 30, 2010, the fixed charge coverageratio equaled 3.55 to 1. This covenant is a material term of the indenturegoverning the 2014 Notes.

 

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

 

*Titanium Dioxide Pigments venture term loans, revolvingcredit facility and assumed debt.*  Asof June 30, 2010, the Titanium Dioxide Pigments venture had €230.0 million($281.5 million) outstanding under the term loans of its facility agreement.The facility also provides for a revolving credit facility of €30.0 million($36.7 million). This facility provided for additional borrowings of up to€12.9 million ($15.8 million) as of June 30, 2010 after an outstandingbank guarantee of €17.1 million ($20.9 million) related to a defined benefitpension obligation reduced availability under this facility. Both the term loanand revolving credit facility mature in June 2013.

 

Asof June 30, 2010, the interest rate on the term loan and revolving creditfacility is Euribor (or Libor if the currency is in USD) plus 2.50%, subject toa step down determined by reference to a leverage ratio test. The term loan ispayable in installments over a five-year period from the date of the facilityagreement, with payments commencing twelve months from such date and theremainder due at the final maturity date. The term loan and revolving creditfacility may be repaid in advance without penalty.

 

Inaddition, the Titanium Dioxide Pigments venture has other debt of €24.2 million($29.6 million), primarily due to a defined benefit plan, at interest ratesranging from 3.65% to 5.00%.

 

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

 

·                  Aleverage coverage ratio: for the twelve-month period ended June 30, 2010,net debt to EBITDA, subject to certain adjustments (which is substantiallysimilar to the definition of Adjusted EBITDA in our senior secured creditagreement) must be less than 3.50 to 1; for such period, our ratio equaled 2.55to 1;

 

·                  Aninterest coverage ratio: for the twelve-month period ended June 30, 2010,EBITDA, subject to certain adjustments, (which is substantially similar to thedefinition of Adjusted EBITDA in our senior secured credit agreement) to cashinterest expense (net of interest income), must be greater than 3.50 to 1; forsuch period, our ratio equaled 5.67 to 1; and

 

·                  Cashflow coverage ratio: for the twelve-month period ended June 30, 2010, cashgenerated for financing activities (EBITDA, subject to certain adjustments,less working capital changes, capital expenditures and interest) to debtservice (interest expense and amortization of debt) must be greater than 1.10;for such period, our ratio equaled 2.70 to 1.

 

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

 

Theloans are secured by the assets of the venture. In the event that either Kemira’sor Rockwood’s ownership interest changes, any 

 

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lendermay cancel its commitment and demand repayment of its respective portion of theloans, including accrued and unpaid interest. The facility agreement containscustomary events of default, subject to remedy periods, thresholds andexceptions. Upon the occurrence of an event of default under the facilityagreement, the lenders can terminate the commitments and declare all amounts,including accrued and unpaid interest, to be due and payable.

 

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

 
| ** **                                                                                                             | ** ** | **Six months ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                                             | ** ** | **June 30,**    | ** ** |
| **($ in millions)**                                                                                               | ** ** | **2010**             | ** ** | **2009** | ** ** |
| Net cash provided by operating  activities from continuing operations                                                  |       | $                    | 176.5      |   | $ | 130.6 |   |
| Changes in assets and liabilities,  net of the effect of foreign currency translation and acquisitions                 |       | 58.5                 |       | (1.6 | ) |
| Current portion of income tax  provision                                                                               |       | 14.0                 |       | 10.3 |   |
| Interest expense, net, excluding  amortization of deferred financing costs and unrealized losses/gains on  derivatives |       | 82.7                 |       | 75.8 |   |
| Restructuring and other severance  costs                                                                               |       | 3.4                  |       | 11.8 |   |
| Systems/organization establishment  expenses                                                                           |       | 1.4                  |       | 3.1 |   |
| Acquisition and disposal costs                                                                                         |       | 0.6                  |       | — |   |
| Bad debt provision                                                                                                     |       | 0.6                  |       | (0.4 | ) |
| Loss on sale of assets and other                                                                                       |       | 0.1                  |       | 0.1 |   |
| Other                                                                                                                  |       | (0.6                 | )          | 4.8 |   |
| Total Adjusted EBITDA                                                                                                  |       | $                    | 337.2      |   | $ | 234.5 |   |

 

***Contractual Obligations***

 

TheCompany is obligated to make future payments under various contracts such asdebt agreements (including scheduled cash interest payments), operating leaseagreements, and unconditional purchase obligations. A discussion of thesecontractual obligations is included in the Company’s 2009Form 10-K. As noted above, we voluntarily prepaid $200.0 million ofour senior secured term loans on July 29, 2010. Except for this debtprepayment, there have not been significant changes to these contractualobligations as of June 30, 2010.

 

***Capital Expenditures***

 

Rockwood’scapital expenditures for the six months ended June 30, 2010 consistedprimarily of replacements of worn, obsolete or damaged equipment as well asinvestments in new equipment. For the six months ended June 30, 2010 and2009, our capital expenditures, excluding capital leases, were $71.9 millionand $81.2 million, respectively. Capital expenditures for each of our reportingsegments 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,  2010 |       | $             | 17.8       |            | $          | 10.7         |       | $            | 27.4       |          | $          | 12.6              |       | $                | 2.9        |   | $ | 0.5 |   | $ | 71.9 |   |
| Six months ended June 30,  2009 |       | 26.3          |       | 12.2            |       | 20.8         |       | 17.4         |       | 3.8           |       | 0.7               |       | 81.2             |       |
|                                      |            |               |            |                 |            |              |            |              |            |               |            |                   |            |                  |            |  |  |  |  |  |  |  |

 

Wewill incur future costs for capital improvements and general compliance underSHE laws. For the year ended December 31, 2009, our capital expendituresfor SHE matters totaled $17.9 million, excluding costs to maintain and repairpollution control equipment. For 2010, we estimate capital expenditures forcompliance with SHE laws to be at similar levels; however, because capitalexpenditures for these matters are subject to changes in and new SHE laws, wecannot provide assurance that our recent expenditures will be indicative of futureamounts required to comply with these laws, including the EU’s REACHlegislation. See Note 15, “Commitments and Contingencies,” “RegulatoryDevelopments” for a discussion of REACH.

 

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***Foreign currency related transactions***

 

Asof June 30, 2010, $1,023.9 million of the debt outstanding is denominatedin Euros.

 

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**Recent Accounting Standards**

 

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

 

**Off-Balance Sheet Arrangements**

 

Inthe normal course of business, the Company incurs obligations which includeguarantees related to contract completion, regulatory compliance and productperformance. Under certain circumstances, these obligations are supportedthrough the issuance of letters of credit and other bank guarantees. As of June 30,2010, the Company had approximately $28.5 million of letters of credit andother bank guarantees, of which $28.0 million will expire in 2009 through 2014.The remaining guarantees have no specified expiration date. This amountincludes outstanding letters of credit of $25.1 million that reduced ouravailability under our senior secured credit facility. In the opinion ofmanagement, such obligations will not significantly affect the Company’sfinancial position, results of operations or cash flows as the Companyanticipates fulfilling its performance obligations.

 

**Commitments and Contingencies**

 

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

 

**Critical Accounting Policies and Estimates**

 

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

 

·                  theuse and recoverability of inventory;

 

·                  thevaluation of deferred tax assets;

 

·                  theamount of unrecognized tax benefits;

 

·                  impairmentof goodwill, property, plant and equipment and other intangible assets;

 

·                  theuseful lives of tangible and intangible assets: and

 

·                  thefair values of assets acquired and liabilities assumed in businesscombinations.

 

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

 

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

 

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

 

**Forward-Looking Statements**

 

Thisdocument contains forward-looking statements. Forward-looking statements withinthe context of the Private Securities 

 

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LitigationReform Act of 1995 are not statements of historical fact and may involve anumber of risks and uncertainties.

 

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

 
| · | our  business strategy;                                                                                                            |
|--------|------------------------------------------------------------------------------------------------------------------------------------|
| · | changes  in the general economic conditions in North America and Europe and in other  locations in which we currently do business; |
| · | competitive  pricing or product development activities affecting demand for our products;                                          |
| · | technological  changes affecting production of our materials;                                                                      |
| · | fluctuations  in interest rates, exchange rates and currency values;                                                               |
| · | availability  and pricing of raw materials;                                                                                        |
| · | governmental  and environmental regulations and changes in those regulations;                                                      |
| · | fluctuations  in energy prices;                                                                                                    |
| · | changes  in the end-use markets in which our products are sold;                                                                    |
| · | our  ability to access capital markets;                                                                                            |
| · | hazards  associated with chemicals manufacturing;                                                                                  |
| · | our  high level of indebtedness;                                                                                                   |
| · | risks  associated with negotiating, consummating and integrating acquisitions;                                                     |
| · | risks  associated with competition and the introduction of new competing products,  especially from the Asia-Pacific region; and   |
| · | risks  associated with international sales and operations.                                                                         |

 

Youshould keep in mind that any forward-looking statements made by us in thisdocument or elsewhere speak only as of the date on which we make them. Newrisks and uncertainties come up from time to time, and it is impossible for usto predict these events or how they may affect us. We disclaim any obligationto update or revise any forward-looking statements, whether as a result of newinformation, future events or otherwise.

 

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

 

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

 

**Item 4T.  Controls and Procedures**

 

Ourmanagement, with the participation of our Chief Executive Officer and ChiefFinancial Officer, evaluated the effectiveness of the design and operation ofour disclosure controls and procedures as of June 30, 2010 and concluded thatour disclosure 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 2010.

 

**PART II — OTHER INFORMATION**

 

**Item 1.  Legal Proceedings.**

 

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

 

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In September 2009, the district court issued a preliminary injunctionprohibiting Viance from making certain claims related to MCQ in itsadvertisements and denied Viance’s request for a preliminary injunction relatedto certain claims in Osmose’s advertisements, which Viance subsequentlyappealed. The U.S. Court of Appeals, Eleventh Circuit heard oral arguments onMay 20, 2010 and rendered its decision on July 30, 2010 remanding in part,affirming in part, and vacating in part the preliminary injunction.

 

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

 

**Item 1A. Risk Factors.**

 

Adiscussion of the Company’s risk factors is included in the Company’sForm 10-K for the year ended December 31, 2009. There have been nomaterial changes to these risk factors.

 

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

 

None.

 

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

 

None.

 

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

 

**Item 5.  Other Information.**

 

None.

 

**Item 6.  Exhibits**

 

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

 

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**SIGNATURES**

 

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

 
|   | ROCKWOOD  SPECIALTIES GROUP, INC. |
|--------|----------------------------------------|
|   |                                   |   |
|   |                                   |   |
|   | By:                                    | /s/  SEIFI GHASEMI |
|   |                                   | Seifi  Ghasemi |
|   |                                   | Chairman  and Chief Executive Officer |
|   |                                   | Date:  August 6, 2010 |
|   |                                   |   |
|   |                                   |   |
|   | ROCKWOOD  SPECIALTIES GROUP, INC. |
|   |                                   |
|   |                                   |   |
|   | By:                                    | /s/  ROBERT J. ZATTA |
|   |                                   | Robert  J. Zatta |
|   |                                   | Senior  Vice President and Chief Financial Officer |
|   |                                   | Date:  August 6, 2010 |

 

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**Exhibit Index**

 
| **Exhibit No.** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                              |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **           | ** ** | ** **                                                                                                                                                                                                                                                                                                                        |
| 31.1*                |       | Rule 13a-14(a)/15d-14(a) Certification  of Chief Executive Officer.                                                                                                                                                                                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                                              |
| 31.2*                |       | Rule 13a-14(a)/15d-14(a) Certification  of Chief Financial Officer.                                                                                                                                                                                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                                              |
| 32.1                 |       | Section 1350  Certification of Chief Executive Officer. This certification accompanies this  report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and  shall not be deemed filed by the Company for purposes of Section 18 or  any other provision of the Securities Exchange Act of 1934, as amended. |
|                 |       |                                                                                                                                                                                                                                                                                                                              |
| 32.2                 |       | Section 1350  Certification of Chief Financial Officer. This certification accompanies this  report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and  shall not be deemed filed by the Company for purposes of Section 18 or  any other provision of the Securities Exchange Act of 1934, as amended. |

 

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*              Filed herewith.

 

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