** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

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

 

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

 

**Or**

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

 

**Commissionfile number  333-109686**

 

**RockwoodSpecialties Group, Inc.**

(Exact name ofRegistrant as specified in its charter)

 

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

 

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

(Address ofprincipal executive offices) (Zip Code)

 

**(301)470-3366**

(Registrant’stelephone number, including area code)

 

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

 

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

 

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

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

 

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

 

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

 

The Registrant’s commonstock, par value $0.01 per share, is not publicly traded. As of November 3,2009, there were 382,000 outstanding shares of common stock of the Registrant,all of which is held by its parent company Rockwood Specialties International, Inc.

 

 

 

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**TABLEOF CONTENTS**

 

**FORM 10-Q**

 
|    | PART I- FINANCIAL INFORMATION                                                                                     |
|---------|------------------------------------------------------------------------------------------------------------------------|
| Item 1  | Financial Statements  (Unaudited)                                                                                      |
|    | Condensed Consolidated  Statements of Operations for the three and nine months ended  September 30, 2009 and 2008 |
|    | Condensed Consolidated  Balance Sheets as of September 30, 2009 and December 31, 2008                        |
|    | Condensed Consolidated  Statements of Cash Flows for the nine months ended September 30, 2009  and 2008           |
|    | Condensed Consolidated  Statements of Equity for the nine months ended September 30, 2009 and  2008               |
|    | Notes to  Condensed Consolidated Financial Statements                                                                  |
| Item 2  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                            |
| Item 3  | Quantitative  and Qualitative Disclosures about Market Risk                                                            |
| Item 4T | Controls and  Procedures                                                                                               |
|    |                                                                                                                   |
|    | PART II- OTHER  INFORMATION                                                                                       |
| Item 1  | Legal Proceedings                                                                                                      |
| Item 1A | Risk Factors                                                                                                           |
| Item 2  | Unregistered  Sales of Equity Securities and Use of Proceeds                                                           |
| Item 3  | Defaults Upon  Senior Securities                                                                                       |
| Item 4  | Submission of  Matters to a Vote of Security Holders                                                                   |
| Item 5  | Other Information                                                                                                      |
| Item 6  | Exhibits                                                                                                               |
|    |                                                                                                                   |
|    | Signatures                                                                                                             |

 

2

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**PART I — FINANCIAL INFORMATION**

 

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

 

**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**(Dollarsin millions)**

**(Unaudited)**

 
| ** **                                                               | ** ** | **Three months ended** | ** ** | **Nine months ended**  | ** ** |
|--------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                               | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                               | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net sales                                                                |       | $                      | 786.2      |                   | $          | 880.8 |   | $ | 2,176.6 |   | $ | 2,647.8 |   |
| Cost of products sold                                                    |       | 555.0                  |       | 623.3                  |       | 1,560.1 |   | 1,834.5 |   |
| Gross profit                                                             |       | 231.2                  |       | 257.5                  |       | 616.5 |   | 813.3 |   |
| Selling, general and administrative expenses                             |       | 154.8                  |       | 170.3                  |       | 450.9 |   | 512.7 |   |
| Restructuring and other severance costs                                  |       | 4.2                    |       | 3.4                    |       | 16.0 |   | 5.7 |   |
| Gain on sale of assets and other                                         |       | (0.4                   | )          | (2.7                   | )          | (0.3 | ) | (1.8 | ) |
| Operating income                                                         |       | 72.6                   |       | 86.5                   |       | 149.9 |   | 296.7 |   |
| Other expenses, net:                                                     |       |                   |       |                   |       |   |   |   |   |
| Interest expense (a)                                                     |       | (54.0                  | )          | (56.3                  | )          | (132.6 | ) | (139.7 | ) |
| Interest income                                                          |       | 0.4                    |       | 0.6                    |       | 1.2 |   | 4.2 |   |
| Loss on early extinguishment of debt, net                                |       | (0.9                   | )          | —                 |       | (26.6 | ) | — |   |
| Foreign exchange gain (loss), net                                        |       | 4.5                    |       | (26.5                  | )          | 15.4 |   | (12.2 | ) |
| Other, net                                                               |       | —                 |       | 0.2                    |       | 0.4 |   | 0.7 |   |
| Other expenses, net                                                      |       | (50.0                  | )          | (82.0                  | )          | (142.2 | ) | (147.0 | ) |
| Income from continuing operations before taxes                           |       | 22.6                   |       | 4.5                    |       | 7.7 |   | 149.7 |   |
| Income tax provision                                                     |       | 13.0                   |       | 10.3                   |       | 6.9 |   | 50.6 |   |
| Income (loss) from continuing operations                                 |       | 9.6                    |       | (5.8                   | )          | 0.8 |   | 99.1 |   |
| (Loss) income from discontinued operations, net of tax                   |       | (0.1                   | )          | 1.5                    |       | 3.3 |   | 2.9 |   |
| Net income (loss)                                                        |       | 9.5                    |       | (4.3                   | )          | 4.1 |   | 102.0 |   |
| Net loss attributable to noncontrolling interest                         |       | 0.6                    |       | 1.0                    |       | 6.2 |   | 0.4 |   |
| Net income (loss) attributable to Rockwood Specialties  Group, Inc. |       | $                      | 10.1       |                   | $          | (3.3 | ) | $ | 10.3 |   | $ | 102.4 |   |
|                                                                     |       |                   |       |                   |       |   |   |   |   |
| Amounts attributable to Rockwood Specialties Group, Inc.:           |       |                   |       |                   |       |   |   |   |   |
| Income (loss) from continuing operations                                 |       | $                      | 10.2       |                   | $          | (4.8 | ) | $ | 7.0 |   | $ | 99.5 |   |
| (Loss) income from discontinued operations                               |       | (0.1                   | )          | 1.5                    |       | 3.3 |   | 2.9 |   |
| Net income (loss)                                                        |       | $                      | 10.1       |                   | $          | (3.3 | ) | $ | 10.3 |   | $ | 102.4 |   |
|                                                                     |       |                   |       |                   |       |   |   |   |   |
| (a) Interest expense includes:                                      |       |                   |       |                   |       |   |   |   |   |
| Interest expense on debt                                                 |       | $                      | (51.1      | )                      | $          | (43.9 | ) | $ | (127.7 | ) | $ | (125.8 | ) |
| Mark-to-market (losses) gains on interest rate swaps                     |       | (1.3                   | )          | (10.0                  | )          | 1.3 |   | (6.8 | ) |
| Deferred financing costs                                                 |       | (1.6                   | )          | (2.4                   | )          | (6.2 | ) | (7.1 | ) |
| Total                                                                    |       | $                      | (54.0      | )                      | $          | (56.3 | ) | $ | (132.6 | ) | $ | (139.7 | ) |

 

See accompanyingnotes to condensed consolidated financial statements.

 

3

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

**(Unaudited)**

 
| ** **                                                                                      | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                      | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| **ASSETS**                                                                                      |       |                   |       |                  |       |
| Current assets:                                                                                 |       |                   |       |                  |       |
| Cash and cash equivalents                                                                       |       | $                      | 282.1      |                  | $          | 468.7 |   |
| Accounts receivable, net                                                                        |       | 486.3                  |       | 464.6                 |       |
| Inventories                                                                                     |       | 535.9                  |       | 641.0                 |       |
| Deferred income taxes                                                                           |       | 27.0                   |       | 22.2                  |       |
| Prepaid expenses and other current assets                                                       |       | 68.1                   |       | 65.9                  |       |
| Total current assets                                                                            |       | 1,399.4                |       | 1,662.4               |       |
| Property, plant and equipment, net                                                              |       | 1,742.5                |       | 1,752.2               |       |
| Goodwill                                                                                        |       | 959.9                  |       | 917.8                 |       |
| Other intangible assets, net                                                                    |       | 730.4                  |       | 754.8                 |       |
| Deferred  debt issuance costs, net of accumulated amortization of $9.4 and $39.2,  respectively |       | 28.2                   |       | 39.1                  |       |
| Deferred income taxes                                                                           |       | 26.1                   |       | 11.6                  |       |
| Other assets                                                                                    |       | 38.5                   |       | 39.5                  |       |
| Total assets                                                                                    |       | $                      | 4,925.0    |                  | $          | 5,177.4 |   |
| **LIABILITIES**                                                                                 |       |                   |       |                  |       |
| Current liabilities:                                                                            |       |                   |       |                  |       |
| Accounts payable                                                                                |       | $                      | 220.0      |                  | $          | 260.8 |   |
| Income taxes payable                                                                            |       | 4.5                    |       | 4.1                   |       |
| Accrued compensation                                                                            |       | 61.5                   |       | 92.6                  |       |
| Restructuring liability                                                                         |       | 9.3                    |       | 18.9                  |       |
| Accrued expenses and other current liabilities                                                  |       | 233.0                  |       | 215.5                 |       |
| Deferred income taxes                                                                           |       | 8.4                    |       | 9.0                   |       |
| Long-term debt, current portion                                                                 |       | 88.1                   |       | 90.9                  |       |
| Total current liabilities                                                                       |       | 624.8                  |       | 691.8                 |       |
| Long-term debt                                                                                  |       | 2,474.6                |       | 2,720.3               |       |
| Pension and related liabilities                                                                 |       | 373.2                  |       | 352.0                 |       |
| Deferred income taxes                                                                           |       | 96.0                   |       | 97.7                  |       |
| Other liabilities                                                                               |       | 182.2                  |       | 189.8                 |       |
| Total liabilities                                                                               |       | 3,750.8                |       | 4,051.6               |       |
| **EQUITY**                                                                                      |       |                   |       |                  |       |
| Rockwood  Specialties Group, Inc. stockholder’s equity:                               |       |                   |       |                  |       |
| Common  stock ($0.01 par value, 1,000,000 shares authorized, 382,000 shares  outstanding)       |       | —                 |       | —                |       |
| Paid-in capital                                                                                 |       | 1,044.0                |       | 1,044.0               |       |
| Accumulated other comprehensive income                                                          |       | 267.3                  |       | 207.0                 |       |
| Accumulated deficit                                                                             |       | (430.3                 | )          | (440.6                | )          |
| Total Rockwood Specialties Group, Inc. stockholder’s equity                           |       | 881.0                  |       | 810.4                 |       |
| Noncontrolling interest                                                                         |       | 293.2                  |       | 315.4                 |       |
| Total equity                                                                                    |       | 1,174.2                |       | 1,125.8               |       |
| Total liabilities and equity                                                                    |       | $                      | 4,925.0    |                  | $          | 5,177.4 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

4

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(Dollarsin millions)**

**(Unaudited)**

 
| ** **                                                                                              | ** ** | **Nine months ended**  | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                              | ** ** | **September 30,** | ** ** |
| ** **                                                                                              | ** ** | **2009**               | ** ** | **2008** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                               |       |                   |       |   |   |
| Net income                                                                                              |       | $                      | 4.1        |   | $ | 102.0 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities:                      |       |                   |       |   |   |
| Income from discontinued operations, net of tax                                                         |       | (3.3                   | )          | (2.9 | ) |
| Depreciation and amortization                                                                           |       | 208.5                  |       | 190.6 |   |
| Deferred financing costs amortization                                                                   |       | 6.2                    |       | 7.1 |   |
| Loss on early extinguishment of debt, net (a)                                                           |       | 26.6                   |       | — |   |
| Foreign exchange (gain) loss, net                                                                       |       | (15.4                  | )          | 12.2 |   |
| Fair value adjustment of derivatives                                                                    |       | (1.3                   | )          | 6.8 |   |
| Bad debt provision                                                                                      |       | 0.7                    |       | 0.9 |   |
| Acquired in-process research and development                                                            |       | —                 |       | 2.8 |   |
| Stock-based compensation                                                                                |       | 3.1                    |       | 6.3 |   |
| Deferred income taxes                                                                                   |       | (11.5                  | )          | 14.2 |   |
| Gain (loss) on sale of assets and other                                                                 |       | 0.1                    |       | (1.8 | ) |
| Changes in assets and liabilities, net of the effect of foreign  currency translation and acquisitions: |       |                   |       |   |   |
| Accounts receivable                                                                                     |       | (4.6                   | )          | (60.5 | ) |
| Inventories                                                                                             |       | 121.4                  |       | (45.0 | ) |
| Prepaid expenses and other assets                                                                       |       | (0.3                   | )          | 6.4 |   |
| Accounts payable                                                                                        |       | (32.2                  | )          | (29.1 | ) |
| Income taxes payable                                                                                    |       | (0.8                   | )          | 3.4 |   |
| Accrued expenses and other liabilities                                                                  |       | (32.1                  | )          | 26.1 |   |
| Net cash provided by operating activities of continuing operations                                      |       | 269.2                  |       | 239.5 |   |
| Net cash provided by operating activities of discontinued operations                                    |       | —                 |       | 11.9 |   |
| **Net cash provided by operating activities**                                                           |       | 269.2                  |       | 251.4 |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                               |       |                   |       |   |   |
| Acquisitions, including transaction fees and payments for prior  acquisitions, net of cash acquired     |       | (6.4                   | )          | (181.7 | ) |
| Post closing purchase price consideration                                                               |       | —                 |       | 29.1 |   |
| Capital expenditures, excluding capital leases                                                          |       | (116.5                 | )          | (157.1 | ) |
| Contractual advance to Titanium Dioxide Pigments noncontrolling  shareholder                            |       | (16.0                  | )          | — |   |
| Proceeds on sale of assets                                                                              |       | 7.9                    |       | 4.3 |   |
| Net cash used in investing activities of continuing operations                                          |       | (131.0                 | )          | (305.4 | ) |
| Net cash used in investing activities of discontinued operations                                        |       | (0.5                   | )          | (5.1 | ) |
| **Net cash used in investing activities**                                                               |       | (131.5                 | )          | (310.5 | ) |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                               |       |                   |       |   |   |
| Prepayment of 2014 Notes                                                                                |       | (146.8                 | )          | — |   |
| Proceeds from Titanium Dioxide Pigments revolving credit facility                                       |       | 14.1                   |       | — |   |
| Prepayment of senior secured debt                                                                       |       | (102.3                 | )          | — |   |
| Repayment of senior secured debt                                                                        |       | (49.2                  | )          | (68.7 | ) |
| Payments on other long-term debt                                                                        |       | (6.2                   | )          | (30.7 | ) |
| Equity contribution                                                                                     |       | —                 |       | 0.2 |   |
| Deferred financing costs                                                                                |       | (13.8                  | )          | (5.0 | ) |
| Fees related to early extinguishment of debt                                                            |       | (12.0                  | )          | — |   |
| Loan from Viance noncontrolling shareholder                                                             |       | 2.0                    |       | — |   |
| Titanium Dioxide Pigments venture financing                                                             |       | —                 |       | 362.5 |   |
| Payment of assumed debt to Titanium Dioxide Pigments noncontrolling  shareholder                        |       | —                 |       | (141.4 | ) |
| Distribution to noncontrolling shareholder                                                              |       | —                 |       | (3.9 | ) |
| Net cash (used in) provided by financing activities of continuing  operations                           |       | (314.2                 | )          | 113.0 |   |
| Net cash used in financing activities of discontinued operations                                        |       | —                 |       | — |   |
| **Net cash (used in) provided by financing activities**                                                 |       | (314.2                 | )          | 113.0 |   |
| Effect of exchange rate changes on cash and cash equivalents                                            |       | (10.1                  | )          | 4.1 |   |
| Net (decrease) increase in cash and cash equivalents                                                    |       | (186.6                 | )          | 58.0 |   |
| Cash and cash equivalents of continuing operations, beginning of  period                                |       | 468.7                  |       | 346.9 |   |
| Cash and cash equivalents of continuing operations, end of period                                       |       | $                      | 282.1      |   | $ | 404.9 |   |

 

----

(a) Includesthe write-off of deferred financing costs of $20.9 and lender fees related tothe early extinguishment of debt of $12.0, partially offset by a discount onthe prepayment of the 2014 Notes of $6.3.

 
| Supplemental disclosures of cash flow information: |   |   |   |   |   |
|----------------------------------------------------|--------|--------|--------|--------|--------|
| Interest paid                                      |   | $      | 118.1  |   | $      | 104.0 |   |
| Income taxes paid, net of refunds                  |   | 18.9   |   | 32.9   |   |
| Non-cash investing activities:                     |   |   |   |   |   |
| Titanium Dioxide Pigments venture formation, net   |   | — |   | 214.7  |   |
| Acquisition of capital equipment                   |   | 8.1    |   | 8.0    |   |
| Fees related to early extinguishment of debt       |   | 1.6    |   | — |   |
|                                                    |        |        |        |        |        |  |  |

 

See accompanyingnotes to condensed consolidated financial statements.

 

5

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFEQUITY**

**(Dollarsin millions)**

**(Unaudited)**

 
| ** **                                                                                        | ** ** | **2009**               | ** ** | **2008**           | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------------------|------------|--------------------|------------|
| ** **                                                                                        | ** ** | **Rockwood**           | ** ** | ** **         | ** ** | ** ** | ** ** | **Rockwood** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                        | ** ** | **Specialties**        | ** ** | ** **         | ** ** | ** ** | ** ** | **Specialties** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                        | ** ** | **Group, Inc.**   | ** ** | ** **         | ** ** | ** ** | ** ** | **Group, Inc.** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                        | ** ** | **Stockholder’s** | ** ** | **Noncontrolling** | ** ** | **Total** | ** ** | **Stockholder’s** | ** ** | **Noncontrolling** | ** ** | **Total** | ** ** |
| ** **                                                                                        | ** ** | **Equity**             | ** ** | **Interest**       | ** ** | **Equity** | ** ** | **Equity** | ** ** | **Interest** | ** ** | **Equity** | ** ** |
| Balance at January 1                                                                         |       | $                      | 810.4      |               | $          | 315.4 |   | $ | 1,125.8 |   | $ | 1,565.3 |   | $ | 175.3 |   | $ | 1,740.6 |   |
|                                                                                              |       |                   |       |               |       |   |   |   |   |   |   |   |   |
| Net income (loss)                                                                                 |       | 10.3                   |       | (6.2               | )          | 4.1 |   | 102.4 |   | (0.4 | ) | 102.0 |   |
| Other comprehensive income (loss), net of tax                                                     |       | 60.3                   |       | (4.4               | )          | 55.9 |   | (65.4 | ) | — |   | (65.4 | ) |
| Comprehensive income (loss)                                                                       |       | 70.6                   |       | (10.6              | )          | 60.0 |   | 37.0 |   | (0.4 | ) | 36.6 |   |
| Acquisition  of noncontrolling interest in subsidiaries                                           |       | —                 |       | —             |       | — |   | — |   | 210.2 |   | 210.2 |   |
| Change  in estimate of fair value of assets contributed to the Titanium Dioxide Pigments  venture |       | —                 |       | (16.5              | )          | (16.5 | ) | — |   | — |   | — |   |
| Foreign currency translation                                                                      |       | —                 |       | 4.9                |       | 4.9 |   | — |   | (4.0 | ) | (4.0 | ) |
| Distribution  to noncontrolling shareholder                                                       |       | —                 |       | —             |       | — |   | — |   | (3.9 | ) | (3.9 | ) |
| Equity contribution                                                                               |       | —                 |       | —             |       | — |   | 0.2 |   | — |   | 0.2 |   |
| Other                                                                                             |       | —                 |       | —             |       | — |   | (0.3 | ) | — |   | (0.3 | ) |
| Balance at September 30                                                                      |       | $                      | 881.0      |               | $          | 293.2 |   | $ | 1,174.2 |   | $ | 1,602.2 |   | $ | 377.2 |   | $ | 1,979.4 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

6

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

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

 

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

 

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

 

Rockwood was formed inconnection with an acquisition of certain assets, stock and businesses fromLaporte plc (“Laporte”) on November 20, 2000 (the “KKR Acquisition”) byaffiliates of Kohlberg Kravis Roberts & Co. L.P. (“KKR”). Thebusinesses acquired focus on specialty compounds, iron-oxide pigments, timbertreatment chemicals and clay-based additives. The Company is an indirectwholly-owned subsidiary of Rockwood Holdings, Inc. (“Holdings”). EffectiveNovember 2007, affiliates of KKR control less than a majority of thevoting power of Holdings’ outstanding common stock.

 

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

 

***Basis of Presentation***—The accompanying condensed financial statements ofRockwood are presented on a consolidated basis. All significant intercompanyaccounts and transactions have been eliminated in consolidation. Certainprior-period amounts related to reporting the sale of the pool and spachemicals business in October 2008 as discontinued operations and theadoption of a recent standard relating to the presentation of noncontrollinginterests in the consolidated financial statements, have been reclassified toconform to the current-year classification.

 

The interim financialstatements included herein are unaudited. The results of operations for theinterim periods are not necessarily indicative of the results of operations forthe full year. The condensed consolidated financial statements arepresented based upon accounting principles generally accepted in the UnitedStates of America (“U.S. GAAP”), except that certain information and footnotedisclosures, normally included in financial statements prepared in accordancewith U.S. GAAP, have been condensed or omitted. The accompanying condensedconsolidated financial statements should be read in conjunction with theconsolidated financial statements and the notes thereto contained in the Company’s2008 Form 10-K. In the opinion of management, this informationcontains all adjustments necessary, consisting of normal and recurringaccruals, for a fair presentation of the results for the periods presented.

 

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

 

Unless otherwise noted, allbalance sheet related items which are denominated in euros are converted at theSeptember 30, 2009 exchange rate of €1.00 = $1.4640.

 

***Stock-Based Compensation***— Holdings has previously granted awards under the2008 Amended and Restated Stock Purchase and Option Plan of Rockwood Holdings, Inc.and Subsidiaries (the “Plan”). Under the Plan, Holdings granted stockoptions, restricted stock and other stock-based awards to the Company’semployees and directors and allowed employees and directors to purchase sharesof its common stock. There were 10,000,000 authorized shares available forgrant under the Plan. However, Holdings will no longer issue equity awardsunder this Plan. In April 2009, Holdings adopted the 2009 StockIncentive Plan (the “New Plan”), which has 11,000,000 authorized shares.

 

The aggregatecompensation cost for stock options, restricted stock units and Holdings’ Boardof Director stock grants recorded under the Plan caused income from continuingoperations before taxes to decrease by $1.6 million and $2.2 million for thethree months ended September 30, 2009 and 2008, respectively and $3.1million and $6.3 million for the nine months ended September 30, 2009 and2008, respectively. The total tax benefit recognized related to stockoptions was $0.2 million and $0.3 million for the three months ended September 30,2009 and 2008, respectively and $0.3 million and $0.7 million for the ninemonths ended September 30, 2009 and 2008, respectively.

 

In December 2008,Holdings approved an award of 606,256 performance restricted stock units tomanagement and key employees which will vest on December 31, 2011 as longas the employee continues to be employed by the Company on this date and uponthe achievement of certain performance targets approved by Holdings’Compensation Committee. The number of shares of the Holdings’ common stockultimately awarded upon vesting is determined based on the achievement ofspecified performance criteria over the 

 

7

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period January 1,2009 through December 31, 2009. However, in accordance with FinancialAccounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)718, *Compensation — Stock Compensation*(formerlyStatement of Financial Accounting Standards (“SFAS”) No. 123R, *Share-Based Payment*)*,*the Companydid not recognize any compensation cost in 2008 for this issuance because theperformance targets that form the basis for vesting of these restricted stockunits were not known as of December 31, 2008. These performance targetswere established on February 20, 2009, when such performance targets wereapproved by Holdings’ Compensation Committee, and as a result, the Companybegan recording compensation cost on a ratable basis over the vesting period.The grant date fair value of these restricted stock units was $7.59 per stockunit.

 

Holdings grantedadditional stock options and restricted stock units to certain employees ofRockwood Corporate Headquarters and its business units. The restricted stockunits contain a provision in which the units shall immediately vest and becomeconverted into the right to receive a cash payment on the vesting date upon achange in control as defined in the equity agreement. As the provisionsfor redemption are outside the control of the Company, the fair value of theseunits as of September 30, 2009 and December 31, 2008 have beenrecorded as mezzanine equity (outside of permanent equity) in the CondensedConsolidated Balance Sheets of Holdings.

 

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

 

In December 2007,the FASB issued SFAS No. 141 (revised 2007),*Business Combinations*, as codified in ASC 805, *Business Combinations.*This statement establishes principlesand requirements for how the acquirer recognizes and measures in its financialstatements the identifiable assets acquired, the liabilities assumed, anynoncontrolling interest in the acquiree and the goodwill acquired. Thisstatement also establishes disclosure requirements to enable users of financialstatements to evaluate the nature and financial effects of the business combination.This statement was adopted as of January 1, 2009 and is effective foracquisitions completed on or after January 1, 2009.

 

In December 2007,the FASB issued SFAS No. 160,*Noncontrolling Interests in Consolidated Financial Statements, an amendment ofARB No. 51,*ascodified in ASC 810, *Consolidation*.This statement pertains to the accounting and reporting for minorityinterests. Minority Interests were recharacterized as noncontrolling interestsand classified as a component of equity (but separate from parent’s equity).This statement also establishes reporting requirements that provide sufficientdisclosures that clearly identify and distinguish between the interests of theparent and the interests of the noncontrolling owners. This statement wasadopted as of January 1, 2009 and primarily relates to the Company’sViance, LLC joint venture and Titanium Dioxide Pigments venture.

 

In February 2008,the FASB issued FASB Staff Position (“FSP”) Financial Accounting Standard (“FAS”)FSP FAS 157-2,*Effective Date of FASBStatement No. 157,*ascodified in ASC 820, *Fair Value Measurementsand Disclosures*. FSP FAS 157-2 delays the effective date of aprevious standard on fair value measurements for all nonfinancial assets andnonfinancial liabilities, except those that are recognized or disclosed at fairvalue in the financial statements on a recurring basis (at leastannually). The Company applied the provisions of this FSP on January 1,2009, and this FSP did not have a material impact on its financial statements.

 

In March 2008, theFASB issued SFAS No. 161,*Disclosuresabout Derivative Instruments and Hedging Activities - an Amendment of FASBStatement 133*, as codified in ASC 815, *Derivativesand Hedging.*This statement changes the disclosure requirements forderivative instruments and hedging activities, including enhanced disclosuresabout (a) how and why an entity uses derivative instruments, (b) howderivative instruments and related hedged items are accounted for, and (c) howderivative instruments and related hedged items affect an entity’s financialposition, financial performance, and cash flows. The Company adopted thisstatement on January 1, 2009. See Note 5, “Derivatives,” for thedisclosure requirements of this new statement.

 

In April 2008, theFASB issued FSP No. 142-3,*Determination of the Useful Life of Intangible Assets*, as codifiedin ASC 350, *Intangibles — Goodwill and Other,*andASC 275, *Risks and Uncertainties.*This FSP amendsthe factors that should be considered in developing renewal or extensionassumptions used to determine the useful life of a recognized intangible assetunder FASB Statement No. 142, *Goodwill and OtherIntangible Assets*. The intent of this FSP is to improve theconsistency between the useful life of a recognized intangible asset and theperiod of expected cash flows used to measure the fair value of the asset. ThisFSP is effective for recognized intangible assets acquired after January 1,2009 and did not have a material impact on the Company’s financial statements.

 

In December 2008,the FASB issued FSP No. 132 (R) — 1,*Employers’ Disclosures about Postretirement Benefit Plan Assets,* as codified by ASC 715, *Compensation — Retirement Benefits.* ThisFSP amends FASB Statement No. 132 (revised 2003),*Employers’ Disclosures about Pensions and OtherPostretirement Benefits*, to provide guidance on an employer’sdisclosures about plan assets of a defined benefit pension or otherpostretirement plan. This includes disclosing objectives about howinvestment allocation decisions are made, the major categories of plan assets,the inputs and valuation techniques used to measure the fair value of planassets, the effect of fair value measurements using significant unobservableinputs (Level 3) on changes in plan assets, and significant concentrations ofrisk within plan assets. The disclosures about plan assets required bythis FSP are effective beginning with the Company’s 2009 Form 10-K.

 

In April 2009, theFASB issued FSP No. 141 (R) — 1,*Accounting for Assets Acquired and Liabilities Assumed in a BusinessCombination That Arise from Contingencies*, as codified by ASC 805, *Business Combinations.*This FSP amends and clarifies SFAS No. 141R to addressapplication issues raised by preparers, auditors, and members of the legalprofession on initial recognition and 

 

8

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measurement, subsequentmeasurement and accounting, and disclosure of assets and liabilities arisingfrom contingencies in a business combination. This FSP was adopted as of January 1,2009 and is effective for acquisitions completed on or after January 1,2009.

 

In April 2009, theFASB issued FSP No. 107-1 and APB 28-1,*Interim Disclosures about Fair Value of Financial Statements,*as codified by ASC 825, *Financial Instruments*. This FSPamends FASB Statement No. 107,*Disclosures about Fair Value of Financial Instruments,*to require disclosures about fairvalue of financial instruments for interim reporting periods of publicly tradedcompanies as well as in annual financial statements. This FSP also amendsAPB Opinion No. 28,*Interim FinancialReporting*, to require disclosures in summarized financialinformation at interim reporting periods. This FSP was effective for theCompany beginning with its Form 10-Q for the period ended June 30,2009 and relates to disclosures made about the fair value of its debtinstruments and cash and cash equivalents.

 

In April 2009, theFASB issued FSP No. 157-4,*DeterminingFair Value When the Volume and Level of Activity for the Asset or Liability HaveSignificantly Decreased and Identifying Transactions That Are Not Orderly,*as codified in ASC 820, *Fair Value Measurements and Disclosures*.This FSP provides additional guidance for estimating fair value in accordancewith FASB Statement No. 157,*Fair ValueMeasurements*, when the volume and level of activity for the asset orliability have significantly decreased. This FSP also includes guidance onidentifying circumstances that indicate a transaction is not orderly. ThisFSP was effective for the Company beginning with its Form 10-Q for theperiod ended June 30, 2009 and did not have a material impact on itsfinancial statements.

 

In May 2009, theFASB issued SFAS No. 165,*SubsequentEvents*, as codified by ASC 855, *Subsequent Events.*Thisstatement establishes general standards of accounting for and disclosure ofevents that occur after the balance sheet date but before financial statementsare issued. This statement applies to both interim and annual financialstatements and was effective for the Company beginning with its Form 10-Qfor the period ended June 30, 2009. The Company has performed anevaluation of subsequent events through November 5, 2009, which is thedate these financial statements were filed with the Securities and ExchangeCommission (“SEC”).

 

In June 2009, theFASB issued SFAS No. 166,*Accountingfor Transfers and Servicing of Financial Assets*. This statementamends SFAS No. 140,*Accounting forTransfers and Servicing of Financial Assets and Extinguishments of Liabilities,*and will require more information about transfers of financial assets,including securitization transactions, and where entities have continuingexposure to the risks related to transferred financial assets. It alsoeliminates the concept of a “qualifying special purpose entity,” changes therequirements for derecognizing financial assets and will require additionaldisclosures. This Statement is effective for financial asset transfersoccurring after January 1, 2010 for the Company. The Company does notexpect this statement to have a material impact on its financial statements.

 

In June 2009, theFASB issued SFAS No. 167,*Amendments toFASB Interpretation No. 46 (R)*. This Statement amends FASBInterpretation 46 (R),*Consolidation ofVariable Interest Entities,* and requires an enterprise to perform ananalysis to determine whether the enterprise’s variable interest entity orinterests give it a controlling financial interest in a variable interestentity. It also will require additional disclosures about involvement with variableinterest entities and any significant changes in risk exposure due to thatinvolvement. This Statement is effective for the Company as of January 1,2010. The Company is currently evaluating the impact this statement willhave on its financial statements primarily relating to its Viance LLC jointventure and its Titanium Dioxide Pigments venture.

 

In June 2009, the FASB issued SFAS No. 168, *The FASB Accounting Standards Codification and theHierarchy of Generally Accepted Accounting Principles, a replacement of FASBStatement No. 162,* as codified by ASC 105, *GenerallyAccepted Accounting Principles*. This Statement establishes theFASB Accounting Standards Codification (“Codification”) as the source ofauthoritative accounting principles recognized by the FASB to be applied tonongovernmental entities in the preparation of financial statements inconformity with GAAP. Rules and interpretative releases of the SEC underauthority of federal securities laws are also sources of authoritativeGAAP.  The Codification does not change current GAAP. Instead, itintroduces a new structure that reorganizes the thousands of U.S. GAAPpronouncements into roughly 90 accounting Topics. The Codificationsupersedes all accounting standards in existing FASB, Emerging Issues TaskForce (“EITF”), American Institute of Certified Public Accountants (“AICPA”),and related standards. This Codification is effective for the Company’sfinancial statements beginning with its Form 10-Q for the period ended September 30,2009.

 

In August 2009, theFASB issued Accounting Standards Update (“ASU”) No. 2009-05, *Measuring Liabilities**at Fair Value.*Thisupdate provides amendments to ASC 820, *Fair Value Measurementsand Disclosure,*for the fair value measurement of liabilities andprovides clarification in circumstances in which a quoted price in an activemarket for the identical liability is not available. This Update is effectivefor the Company in its fourth quarter beginning October 1, 2009. Theadoption of this Update did not have a material impact on the consolidatedfinancial statements.

 

In September 2009,the FASB issued ASU No. 2009-06, *Implementation Guidance onAccounting for Uncertainty in Income Taxes and Disclosure Amendments forNonpublic Entities.*This update provides amendments to ASC 740, *Income Taxes,*and addressed the need for additionalimplementation guidance on accounting for uncertainty in income taxes. ThisUpdate is effective for the 

 

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Company’s financialstatements beginning with its Form 10-Q for the period ended September 30,2009. The adoption of this Update did not have a material impact on the consolidatedfinancial statements.

 

In October 2009, theFASB issued ASU No. 2009-13, *Multiple-DeliverableRevenue Arrangements, a consensus of the FASB Emerging Issues Task Force.*ThisUpdate provides amendments to ASC 605-25, *Revenue Recognition -Multiple Element Arrangements,*and addresses the**accountingfor multiple-deliverable arrangements to enable vendors to account for productsor services separately rather as a combined unit. In addition, the amendmentsin this Update significantly expand the disclosures related to a vendor’smultiple-deliverable arrangements. This Update is effective for the Company inits first quarter beginning January 1, 2011. The Company does not expectthis Update to have a material impact on its financial statements.

 

**2. COMPREHENSIVE INCOME**

 

Comprehensive incomeincludes net income and the other comprehensive income components which includeunrealized gains and losses from foreign currency translation and from certainintercompany transactions that are of a long-term investment nature,pension-related adjustments that are recorded directly into a separate sectionof equity in the balance sheets and net investment and foreign exchange cashflow hedges. Foreign currency translation amounts are not adjusted for incometaxes since they relate to indefinite length investments in non-U.S.subsidiaries and certain intercompany debt.

 

Comprehensive income(loss) is summarized as follows:

 
| ** **                                                                         | ** ** | **Three months ended** | ** ** | **Nine months ended**  | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                         | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| **($ in millions)**                                                           | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net income (loss)                                                                  |       | $                      | 9.5        |                   | $          | (4.3 | ) | $ | 4.1 |   | $ | 102.0 |   |
| Pension related adjustments, net of tax                                            |       | —                 |       | (1.3                   | )          | (0.1 | ) | (0.9 | ) |
| Foreign currency translation                                                       |       | 49.6                   |       | (190.9                 | )          | 57.0 |   | (71.4 | ) |
| Intercompany foreign currency loans                                                |       | 31.6                   |       | (86.6                  | )          | 35.0 |   | (25.1 | ) |
| Net investment hedges, net of tax                                                  |       | (36.3                  | )          | 125.8                  |       | (35.7 | ) | 32.0 |   |
| Foreign exchange contracts, net of tax                                             |       | (0.2                   | )          | —                 |       | (0.3 | ) | — |   |
| Comprehensive income (loss)                                                        |       | 54.2                   |       | (157.3                 | )          | 60.0 |   | 36.6 |   |
| Comprehensive loss attributable to noncontrolling interest                         |       | 0.8                    |       | 1.0                    |       | 10.6 |   | 0.4 |   |
| Comprehensive income (loss) attributable to Rockwood Specialties  Group, Inc. |       | $                      | 55.0       |                   | $          | (156.3 | ) | $ | 70.6 |   | $ | 37.0 |   |

 

**3. DISCONTINUED OPERATIONS:**

 

On October 10, 2008,the Company completed the sale of its pool and spa chemicals business andreceived net proceeds of $122.0 million in cash. The net gain on the pooland spa chemicals business sale recorded in the fourth quarter of 2008 was$40.5 million (net of $25.7 million of taxes). In connection with ASC 360 —*Property, Plant and Equipment*(formerlySFAS No. 144,*Accounting for theImpairment or Disposal of Long-Lived Assets*), the Company’s financial statements have been reclassified toreflect this business as a discontinued operation for all periods presented.

 

For the three monthsended September 30, 2009, loss from discontinued operations, net of tax,was $0.1 million. For the nine months ended September 30, 2009, incomefrom discontinued operations, net of tax, was $3.3 million and was primarilycomprised of income of $2.3 million due to the favorable resolution of a claimagainst the Company’s former Group Novasep business and the Electronicsbusiness reserve reversal of $1.1 million. For the three and nine monthsended September 30, 2008, income from discontinued operations, net of tax,of $1.5 million and $2.9 million, respectively, related to operating the pooland spa chemicals business.

 

**4. SEGMENT INFORMATION:**

 

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

 

Items that cannot bereadily attributed to individual segments have been classified as “Corporateand other.” Corporate and other operating loss primarily represents payroll,professional fees and other operating expenses of centralized functions such astreasury, tax, legal, internal audit and consolidation accounting as well asthe cost of operating the Company’s central offices (including some costsmaintained based on legal or tax considerations). The primary components ofCorporate and other loss, in addition to operating loss, are interest expenseon external debt (including the amortization of deferred financing costs),foreign exchange losses or gains, and mark-to-market gains or losses onderivatives. Major components within the reconciliation of income before taxes(described more fully below) include systems/organization establishmentexpenses, interest expense on external debt, foreign exchange losses or gains,and refinancing expenses related to external debt. Corporate and otheridentifiable assets primarily represent deferred financing 

 

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costs that have beencapitalized in connection with corporate external debt financing, deferredincome tax assets and cash balances maintained in accordance with centralizedcash management techniques. The Corporate and other classification alsoincludes the results of operations, assets (primarily real estate) andliabilities (including pension and environmental) of legacy businesses formerlybelonging to Dynamit Nobel and the wafer reclaim business. The wafer reclaimbusiness works with semiconductor manufacturers to refurbish used test wafers andreturn them to the manufacturer for reuse in test and process monitorapplications.

 

In September 2008,the Company completed the formation of its Titanium Dioxide Pigments venture.The water treatment business, formerly part of the Titanium Dioxide Pigmentssegment, is being reported within the Clay-based Additives business in thePerformance Additives segment. As a result, the Company’s financial statementshave been reclassified to reflect the water treatment business as part of thePerformance Additives segment for the periods presented.

 

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

 
| ** **                                     | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **    | ** ** | ** **           | ** ** |
|------------------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|---------------|------------|----------------------|------------|
| ** **                                     | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | **Corporate** | ** ** | ** **           | ** ** |
| **($ in millions)**                       | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **and other** | ** ** | **Consolidated (a)** | ** ** |
| **Three months ended September 30, 2009** |       |          |       |            |       |         |       |         |       |          |       |          |       |                 |       |
| Net sales                                      |       | $             | 261.5      |            | $          | 182.2        |       | $            | 177.5      |          | $          | 108.6         |       | $                    | 54.8       |   | $ | 1.6 |   | $ | 786.2 |   |
| Total Adjusted EBITDA                          |       | 68.1          |       | 28.3            |       | 24.6         |       | 31.4         |       | 8.8           |       | (10.1         | )          | 151.1                |       |
| **Three months ended September 30, 2008** |       |          |       |            |       |         |       |         |       |          |       |          |       |                 |       |
| Net sales                                      |       | $             | 319.5      |            | $          | 223.2        |       | $            | 140.6      |          | $          | 126.4         |       | $                    | 68.6       |   | $ | 2.5 |   | $ | 880.8 |   |
| Total Adjusted EBITDA                          |       | 78.8          |       | 28.6            |       | 23.9         |       | 38.1         |       | 7.9           |       | (14.1         | )          | 163.2                |       |
| **Nine months ended September 30, 2009**  |       |          |       |            |       |         |       |         |       |          |       |          |       |                 |       |
| Net sales                                      |       | $             | 723.0      |            | $          | 517.6        |       | $            | 480.8      |          | $          | 293.6         |       | $                    | 157.5      |   | $ | 4.1 |   | $ | 2,176.6 |   |
| Total Adjusted EBITDA                          |       | 175.9         |       | 71.2            |       | 65.6         |       | 75.3         |       | 25.5          |       | (27.9         | )          | 385.6                |       |
| **Nine months ended September 30, 2008**  |       |          |       |            |       |         |       |         |       |          |       |          |       |                 |       |
| Net sales                                      |       | $             | 966.7      |            | $          | 676.8        |       | $            | 380.8      |          | $          | 404.9         |       | $                    | 210.8      |   | $ | 7.8 |   | $ | 2,647.8 |   |
| Total Adjusted EBITDA                          |       | 241.4         |       | 99.5            |       | 60.2         |       | 121.5        |       | 26.7          |       | (41.8         | )          | 507.5                |       |

 
| ** **                 | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **        | ** ** | ** **           | ** ** | ** **       | ** ** |
|----------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|-------------------|------------|----------------------|------------|------------------|------------|
| ** **                 | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | **Corporate**     | ** ** | ** **           | ** ** | ** **       | ** ** |
| ** **                 | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **and other (b)** | ** ** | **Eliminations (c)** | ** ** | **Consolidated** | ** ** |
| Identifiable assets as of: |       |          |       |            |       |         |       |         |       |          |       |              |       |                 |       |             |       |
| September 30, 2009    |       | $             | 2,087.4    |            | $          | 785.8        |       | $            | 1,007.3    |          | $          | 859.5             |       | $                    | 139.2      |             | $          | 345.6 |   | $ | (299.8 | ) | $ | 4,925.0 |   |
| December 31, 2008     |       | 2,030.9       |       | 829.8           |       | 990.0        |       | 879.9        |       | 130.2         |       | 541.5             |       | (224.9               | )          | 5,177.4          |       |
|                            |            |               |            |                 |            |              |            |              |            |               |            |                   |            |                      |            |                  |            |  |  |  |  |  |  |  |  |

 

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(a)                This amount does not include $2.7 million and $5.1million of Adjusted EBITDA for the three and nine months ended September 30,2008, respectively, from the pool and spa chemicals business sold in October 2008.

 

(b)               The decrease is primarily related to lower cashbalances as a result of debt payments in 2009.

 

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

 

Geographic informationregarding net sales based on seller’s location and long-lived assets aredescribed in Note 3, “Segment Information,” in the Company’s 2008 Form 10-K.

 

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

 

The following tablepresents a reconciliation of income (loss) from continuing operations beforetaxes to Adjusted EBITDA on a segment GAAP basis:

 

11

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| ** **                                             | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **    | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|---------------|------------|------------------|------------|
| ** **                                             | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | **Corporate** | ** ** | ** **       | ** ** |
| **($ in millions)**                               | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **and other** | ** ** | **Consolidated** | ** ** |
| **Three months ended September 30, 2009**         |       |          |       |            |       |         |       |         |       |          |       |          |       |             |       |
| Income  (loss) from continuing operations before taxes |       | $             | 33.4       |            | $          | 2.0          |       | $            | (2.5       | )             | $          | 8.0           |       | $                | 2.7        |   | $ | (21.0 | ) | $ | 22.6 |   |
| Interest expense (a)                                   |       | 18.9          |       | 8.4             |       | 6.5          |       | 10.0         |       | 2.8           |       | 7.4           |       | 54.0             |       |
| Interest income                                        |       | (0.2          | )          | 0.1             |       | (0.1         | )          | (0.3         | )          | —        |       | 0.1           |       | (0.4             | )          |
| Depreciation and amortization                          |       | 18.3          |       | 15.9            |       | 19.5         |       | 13.4         |       | 3.0           |       | 1.4           |       | 71.5             |       |
| Restructuring and other severance costs                |       | 2.3           |       | 1.0             |       | 0.1          |       | 0.7          |       | 0.1           |       | —        |       | 4.2              |       |
| Systems/organization establishment expenses            |       | 0.2           |       | 0.6             |       | 1.1          |       | 0.1          |       | —        |       | 0.4           |       | 2.4              |       |
| Loss on early extinguishment of debt, net              |       | 1.1           |       | 0.2             |       | —       |       | 0.3          |       | 0.1           |       | (0.8          | )          | 0.9              |       |
| Gain on sale of assets and other                       |       | (0.4          | )          | —          |       | —       |       | —       |       | —        |       | —        |       | (0.4             | )          |
| Foreign exchange (gain) loss, net                      |       | (5.4          | )          | (0.1            | )          | —       |       | (0.8         | )          | —        |       | 1.8           |       | (4.5             | )          |
| Other                                                  |       | (0.1          | )          | 0.2             |       | —       |       | —       |       | 0.1           |       | 0.6           |       | 0.8              |       |
| Total Adjusted EBITDA                                  |       | $             | 68.1       |            | $          | 28.3         |       | $            | 24.6       |          | $          | 31.4          |       | $                | 8.8        |   | $ | (10.1 | ) | $ | 151.1 |   |
| **Three months ended September 30, 2008**         |       |          |       |            |       |         |       |         |       |          |       |          |       |             |       |
| Income  (loss) from continuing operations before taxes |       | $             | 44.5       |            | $          | (5.2         | )          | $            | (1.5       | )             | $          | 17.0          |       | $                | 2.5        |   | $ | (52.8 | ) | $ | 4.5 |   |
| Interest expense (a)                                   |       | 14.6          |       | 7.8             |       | 8.6          |       | 8.5          |       | 2.3           |       | 14.5          |       | 56.3             |       |
| Interest income                                        |       | 1.0           |       | 1.0             |       | (0.1         | )          | 0.1          |       | (0.1          | )          | (2.5          | )          | (0.6             | )          |
| Depreciation and amortization                          |       | 17.8          |       | 17.2            |       | 14.3         |       | 11.8         |       | 2.6           |       | 1.9           |       | 65.6             |       |
| Restructuring and other severance costs                |       | 0.6           |       | 1.6             |       | —       |       | 0.4          |       | 0.4           |       | 0.4           |       | 3.4              |       |
| Systems/organization establishment expenses            |       | 0.6           |       | 1.4             |       | 0.7          |       | 0.1          |       | 0.1           |       | 0.8           |       | 3.7              |       |
| Inventory write-up charges                             |       | 0.1           |       | 1.5             |       | 2.1          |       | —       |       | —        |       | —        |       | 3.7              |       |
| (Gain) loss on sale of assets and other                |       | (0.5          | )          | —          |       | —       |       | 0.1          |       | —        |       | (2.3          | )          | (2.7             | )          |
| Acquired in-process research and development           |       | —        |       | 2.8             |       | —       |       | —       |       | —        |       | —        |       | 2.8              |       |
| Foreign exchange loss (gain), net                      |       | 0.3           |       | 0.3             |       | (0.1         | )          | 0.2          |       | —        |       | 25.8          |       | 26.5             |       |
| Other                                                  |       | (0.2          | )          | 0.2             |       | (0.1         | )          | (0.1         | )          | 0.1           |       | 0.1           |       | —           |       |
| Total Adjusted EBITDA (b)                              |       | $             | 78.8       |            | $          | 28.6         |       | $            | 23.9       |          | $          | 38.1          |       | $                | 7.9        |   | $ | (14.1 | ) | $ | 163.2 |   |
| **Nine months ended September 30, 2009**          |       |          |       |            |       |         |       |         |       |          |       |          |       |             |       |
| Income  (loss) from continuing operations before taxes |       | $             | 59.7       |            | $          | (8.6         | )          | $            | (14.2      | )             | $          | (1.5          | )          | $                | 8.7        |   | $ | (36.4 | ) | $ | 7.7 |   |
| Interest expense (a)                                   |       | 49.5          |       | 22.7            |       | 21.4         |       | 26.3         |       | 7.4           |       | 5.3           |       | 132.6            |       |
| Interest income                                        |       | (0.9          | )          | 0.3             |       | (0.4         | )          | (0.4         | )          | —        |       | 0.2           |       | (1.2             | )          |
| Depreciation and amortization                          |       | 54.9          |       | 46.4            |       | 56.2         |       | 38.1         |       | 8.3           |       | 4.6           |       | 208.5            |       |
| Restructuring and other severance costs                |       | 4.4           |       | 5.6             |       | 0.1          |       | 5.5          |       | 0.2           |       | 0.2           |       | 16.0             |       |
| Systems/organization establishment expenses            |       | 0.6           |       | 1.7             |       | 2.5          |       | 0.3          |       | —        |       | 0.4           |       | 5.5              |       |
| Loss on early extinguishment of debt, net              |       | 11.6          |       | 2.4             |       | —       |       | 7.2          |       | 0.8           |       | 4.6           |       | 26.6             |       |
| Gain on sale of assets and other                       |       | (0.3          | )          | —          |       | —       |       | —       |       | —        |       | —        |       | (0.3             | )          |
| Foreign exchange gain, net                             |       | (6.0          | )          | —          |       | —       |       | (0.2         | )          | —        |       | (9.2          | )          | (15.4            | )          |
| Other                                                  |       | 2.4           |       | 0.7             |       | —       |       | —       |       | 0.1           |       | 2.4           |       | 5.6              |       |
| Total Adjusted EBITDA                                  |       | $             | 175.9      |            | $          | 71.2         |       | $            | 65.6       |          | $          | 75.3          |       | $                | 25.5       |   | $ | (27.9 | ) | $ | 385.6 |   |
| **Nine months ended September 30, 2008**          |       |          |       |            |       |         |       |         |       |          |       |          |       |             |       |
| Income  (loss) from continuing operations before taxes |       | $             | 148.7      |            | $          | 13.1         |       | $            | (9.0       | )             | $          | 59.2          |       | $                | 10.8       |   | $ | (73.1 | ) | $ | 149.7 |   |
| Interest expense (a)                                   |       | 41.0          |       | 22.6            |       | 26.6         |       | 26.4         |       | 6.9           |       | 16.2          |       | 139.7            |       |
| Interest income                                        |       | (0.9          | )          | 1.1             |       | (0.1         | )          | (0.1         | )          | (0.4          | )          | (3.8          | )          | (4.2             | )          |
| Depreciation and amortization                          |       | 51.0          |       | 50.9            |       | 39.3         |       | 35.6         |       | 8.3           |       | 5.5           |       | 190.6            |       |
| Restructuring and other severance costs                |       | 0.8           |       | 3.2             |       | —       |       | 0.9          |       | 0.4           |       | 0.4           |       | 5.7              |       |
| Systems/organization establishment expenses            |       | 1.4           |       | 3.6             |       | 0.7          |       | 0.3          |       | 0.3           |       | 0.8           |       | 7.1              |       |
| Inventory write-up charges                             |       | 0.6           |       | 1.5             |       | 2.1          |       | —       |       | —        |       | —        |       | 4.2              |       |
| (Gain) loss on sale of assets and other                |       | (0.5          | )          | —          |       | 0.8          |       | 0.2          |       | —        |       | (2.3          | )          | (1.8             | )          |
| Acquired in-process research and development           |       | —        |       | 2.8             |       | —       |       | —       |       | —        |       | —        |       | 2.8              |       |
| Foreign exchange loss (gain), net                      |       | —        |       | 0.1             |       | (0.1         | )          | (0.9         | )          | —        |       | 13.1          |       | 12.2             |       |
| Other                                                  |       | (0.7          | )          | 0.6             |       | (0.1         | )          | (0.1         | )          | 0.4           |       | 1.4           |       | 1.5              |       |
| Total Adjusted EBITDA (b)                              |       | $             | 241.4      |            | $          | 99.5         |       | $            | 60.2       |          | $          | 121.5         |       | $                | 26.7       |   | $ | (41.8 | ) | $ | 507.5 |   |

 

----

| (a)    | Includes losses of $1.3  million and $10.0 million for the three months ended September 30, 2009  and 2008, respectively, and gains of $1.3 million and losses of $6.8 million  for the nine months ended September 30, 2009 and 2008, respectively,  representing the movement in the mark-to-market valuation of the Company’s  interest rate and cross-currency hedging instruments. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                   |
| (b)    | This amount does not  include $2.7 million and $5.1 million of Adjusted EBITDA for the three and  nine months ended September 30, 2008 from the pool and spa chemicals  business sold in October 2008.                                                                                                                                                                                       |

 

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

 

12

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*Itemsexcluded from Adjusted EBITDA*

 

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

 

·                  *Restructuring and other severance costs*:  Restructuring and other severancecosts of $4.2 million and $3.4 million were recorded in the three months ended September 30,2009 and 2008, respectively, and $16.0 million and $5.7 million were recordedin the nine months ended September 30, 2009 and 2008, respectively, formiscellaneous restructuring activities, including headcount reductions andfacility closures (see Note 14, “Restructuring and Other Severance Costs,” forfurther details).

 

·                  *Systems/organization establishmentexpenses*: For the three and nine months ended September 30, 2009, expenses of $2.4million and $5.5 million, respectively, were recorded related to theintegration of businesses acquired, primarily related to the completion of theTitanium Dioxide Pigments venture in September 2008 and the acquisition ofthe Elementis plc business in the Performance Additives segment in August 2007. Forthe three and nine months ended September 30, 2008, expenses of $3.7million and $7.1 million, respectively, were recorded related to theintegration of businesses acquired, primarily related to the acquisition of theElementis plc business in the Performance Additives segment and the completionof the Titanium Dioxide Pigments venture.

 

·                  *Inventory write-up charges*: Under ASC 805, *Business Combinations*(formerly SFAS No. 141, *Business Combinations*), all inventories acquired in anacquisition must be revalued to “fair value.” In connection with acquisitions,the Company allocates a portion of the total purchase price to inventory toreflect manufacturing profit in inventory at the date of theacquisitions. This resulted in a reduction of gross profit of $3.7 millionand $4.2 million for the three and nine months ended September 30, 2008,respectively, primarily related to the acquisition of Holliday Pigments in August 2008in the Performance Additives segment and the completion of the Titanium DioxidePigments venture in September 2008.

 

·                  *Loss on early extinguishment ofdebt, net*: For the three months ended September 30, 2009, the Company recorded a losson early extinguishment of debt, net of $0.9 million primarily related tolender fees to extend the maturity of its revolving credit facility. For thenine months ended September 30, 2009, the Company recorded a loss on earlyextinguishment of debt, net of $26.6 million related to the write-off ofdeferred financing costs of $20.9 million and lender fees related to the earlyextinguishment of debt of $12.0 million, partially offset by a discount of $6.3million related to the repurchase of $153.2 million in aggregate principalamount of the 2014 Notes.

 

·                  *(Gain) l**oss on sale of assetsand other*: For the three and nine months ended September 30, 2009, the Companyrecorded gains on the sale of assets of $0.4 million and $0.3 million,respectively. The Company recorded a gain on the sale of assets and other of$2.7 million for the three months ended September 30, 2008 primarilyrelated to the sale of land that was acquired as part of the acquisition ofDynamit Nobel in 2004. For the nine months ended September 30, 2008, again of $1.8 million was recorded related to the sale of land discussed above,partially offset by the liquidation of a joint venture in the Titanium DioxidePigments segment.

 

·                  *Acquired in-process research anddevelopment*: For the three and nine months ended September 30, 2008, the Companyexpensed $2.8 million of in-process research and development related to theacquisition of Holliday Pigments in August 2008 in the PerformanceAdditives segment.

 

·                  *Foreign exchange (gain) loss, net*:  For the three months ended September 30,2009, the Company recorded foreign exchange gains of $4.5 million primarily dueto the impact of the stronger euro as of September 30, 2009 versus June 30,2009 in connection with non-operating Euro-denominated transactions. For thenine months ended September 30, 2009, the Company recorded foreignexchange gains of $15.4 million primarily due to the impact of the strongerpound sterling as of September 30, 2009 versus December 31, 2008 inconnection with non-operating Euro-denominated transactions. For the threeand nine months ended September 30, 2008, losses of $26.5 million and$12.2 million, respectively, were recorded due to the impact of the weaker eurorelated to non-operating Euro-denominated transactions and intercompanyfinancing arrangements.

 

·                  *Other*:  For the nine months ended September 30,2009, the Company recorded expenses of $5.6 million primarily related to anincrease in reserves covering legacy obligations assumed in connection with theKKR acquisition in 2000 and the acquisition of the Dynamit Nobel businesses in2004.

 

**5. DERIVATIVES:**

 

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

 

13

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**InterestRate Risk**

 

The Company had $1,902.2million ($1,516.5 million of which is subject to a Libor or Euribor floor of2.00%) and $2,007.9 million of variable rate debt outstanding as of September 30,2009 and December 31, 2008, respectively. Any borrowings under the seniorsecured revolving credit facility and the Titanium Dioxide Pigments venturerevolving credit facility are at a variable rate (with the senior securedrevolving credit facility subject to a Libor or Euribor floor of 2.00%). As of September 30,2009, the Company had €10.0 million ($14.6 million) outstanding under theTitanium Dioxide Pigments venture revolving credit facility. There were nooutstanding borrowings under the senior secured revolving credit facility as ofSeptember 30, 2009. Historically, the Company has entered into interestrate swaps to manage its exposure to changes in interest rates related tovariable rate debt. As of September 30, 2009, these contracts covernotional amounts of $610.0 million (at interest rates ranging from 4.864% to5.038%) and €486.4 million (at interest rates ranging from 2.995% to 4.416%).These derivative contracts effectively convert a majority of the senior securedcredit obligations and the obligations under the Titanium Dioxide Pigments termloan facility to fixed rate obligations. These swaps will mature between November 2009and July 2012. The Company may allow all or a portion of these swaps tolapse, enter into replacement swaps or settle these swaps prior to expiration. TheCompany has elected not to apply hedge accounting for these interest rate swapsand has recorded the mark-to-market of these derivatives as a component ofinterest expense in the Condensed Consolidated Statements of Operations.

 

During 2003, theCompany entered into a cross-currency interest rate swap with a notional amountof $20.3 million that effectively converted $20.3 million U.S. dollarborrowings into euro-based obligations at an effective interest rate of Euriborplus 4.00%. As of September 30, 2009, the notional amounts of thiscross-currency interest rate hedge were $19.2 million and €16.9 million. Thiscontract has a final maturity date of July 2010. The Company has electednot to apply hedge accounting for this cross-currency interest rate swap andhas recorded the mark-to-market of this derivative as a component of interestexpense in the Condensed Consolidated Statements of Operations.

 

**ForeignCurrency Risk**

 

In December 2008,the Company entered into foreign currency forward contracts to manage itsexposure to fluctuations in currency rates on certain forecasted salesdenominated in a currency other than the functional currency of the legalentity. The instruments were designated as foreign exchange cash flow hedgesand are effective at generating offsetting changes in the fair value or cashflows of the hedged item or transaction. As of September 30, 2009, theCompany had notional amounts outstanding for these foreign currency forwardcontracts of $3.0 million. It is expected that cumulative losses of $0.2million as of September 30, 2009 will be reclassified into earnings withinthe next three months. There was no gain or loss reclassified from accumulatedother comprehensive income into earnings as a result of the discontinuance ofcash flow hedges due to the probability of the original forecasted transactionnot occurring. As of September 30, 2009, the maximum length of timeover which the Company has hedged its exposure to movements in foreign exchangerates for forecasted transactions is three months.

 

In March 2009, theCompany entered into foreign currency forward contracts to manage its exposureto fluctuations in currency rates on forecasted sales denominated in a currencyother than the functional currency of the legal entity. As of September 30,2009, the Company had notional amounts outstanding for these foreign currencyforward contracts of $1.3 million. The Company has elected not to applyhedge accounting for these foreign currency forward contracts.

 

In connection with the offeringof the 2014 Notes, the Company entered into a cross-currency interest rate swapwith a five-year term expiring in November 2009 and a notional amount of€155.6 million that effectively converts the U.S. dollar fixed rate debt inrespect of the 2014 dollar-denominated notes sold into euro fixed rate debt.The Company may either renew or settle this swap upon or prior to expiration. TheCompany designated this contract as a hedge of the foreign currency exposure ofits net investment in its Euro-denominated operations. There was no ineffectiveportion of the net investment hedge as of September 30, 2009. In addition,the Company has designated a portion of its Euro-denominated debt that isrecorded on its U.S. books as a net investment hedge of its Euro-denominatedinvestments (Euro debt of €437.1 million at September 30, 2009; $639.9million). In the third quarter of 2009, the Company dedesignated a portion ofits euro-denominated debt (€77.0 million). Any foreign currency gains andlosses resulting from the designated portion of Euro-denominated debt discussedabove is accounted for as a component of accumulated other comprehensive incomefor as long as the hedge remains effective. There was no ineffective portion ofthe net investment hedge as of September 30, 2009.

 

14

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The following tableprovides the fair value and balance sheet location of the Company’s derivativeinstruments as of September 30, 2009 and December 31, 2008:

 
| ** **                                                               | ** ** | ** **                                      | ** ** | **Asset  Derivatives**       | ** ** | **Liability  Derivatives**  | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                               | ** ** | ** **                                      | ** ** | **Fair Value as  of**        | ** ** | **Fair Value as  of**       | ** ** |
| **(in millions)**                                                        | ** ** | **Balance Sheet  Location**                     | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
| **Derivatives designated as hedging****instruments  under ASC 815:**     |       |                                            |       |                         |       |                        |       |   |   |   |   |
| Foreign exchange contracts                                               |       | Prepaid  expenses and other current assets      |       | $                            | 0.4        |                        | $          | 1.1 |   | $ | — |   | $ | — |   |
| Cross-currency  interest rate swaps - net investment hedge               |       | Accrued  expenses and other current liabilities |       | —                       |       | —                      |       | 28.4 |   | 16.4 |   |
| Total  derivatives designated as hedging instruments under ASC 815       |       |                                            |       | $                            | 0.4        |                        | $          | 1.1 |   | $ | 28.4 |   | $ | 16.4 |   |
|                                                                     |       |                                            |       |                         |       |                        |       |   |   |   |   |
| **Derivatives not designated as hedging****instruments  under ASC 815:** |       |                                            |       |                         |       |                        |       |   |   |   |   |
| Interest rate swaps                                                      |       | Accrued  expenses and other current liabilities |       | $                            | —     |                        | $          | — |   | $ | 8.3 |   | $ | 6.5 |   |
|                                                                     |       | Other liabilities                               |       | —                       |       | —                      |       | 62.0 |   | 58.9 |   |
| Cross-currency interest rate swaps                                       |       | Accrued  expenses and other current liabilities |       | —                       |       | —                      |       | 5.7 |   | 0.1 |   |
|                                                                     |       | Other liabilities                               |       | —                       |       | —                      |       | — |   | 4.7 |   |
| Total  derivatives not designated as hedging instruments under ASC 815   |       |                                            |       | $                            | —     |                        | $          | — |   | $ | 76.0 |   | $ | 70.2 |   |
| **Total derivatives**                                                    |       |                                            |       | $                            | 0.4        |                        | $          | 1.1 |   | $ | 104.4 |   | $ | 86.6 |   |

 

The following tableprovides the gains and losses reported in “Other Comprehensive Income” (“OCI”)within Equity for the three and nine months ended September 30, 2009 and2008:

 
| ** **                                                                                           | ** ** | **Amount of Gain  or (Loss) Recognized in OCI on Derivatives** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                                           | ** ** | **and Other  Financial Instruments (Effective Portion)**       | ** ** |
| ** **                                                                                           | ** ** | **Three months  ended**                                        | ** ** | **Nine months  ended** | ** ** |
| ** **                                                                                           | ** ** | **September 30,**                                         | ** ** | **September 30,** | ** ** |
| **(in millions)**                                                                                    | ** ** | **2009**                                                       | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Derivatives in ASC 815****Cash Flow Hedging Relationships:**                                       |       |                                                           |       |   |   |   |   |   |   |
| Foreign exchange contracts                                                                           |       | $                                                              | —     |   | $ | — |   | $ | (0.2 | ) | $ | — |   |
|                                                                                                 |       |                                                           |       |   |   |   |   |   |   |
| **Derivatives and Other Financial Instruments in ASC 815****Net Investment  Hedging Relationships:** |       |                                                           |       |   |   |   |   |   |   |
| Cross-currency interest rate swaps - net investment hedge                                            |       | $                                                              | (9.5       | ) | $ | 22.7 |   | $ | (11.6 | ) | $ | 6.8 |   |
| Euro-denominated debt                                                                                |       | (28.2                                                          | )          | 110.5 |   | (24.1 | ) | 32.6 |   |
|                                                                                                 |       | $                                                              | (37.7      | ) | $ | 133.2 |   | $ | (35.7 | ) | $ | 39.4 |   |

 

In the nine months ended September 30,2009 and 2008, no gains or losses were reclassified from accumulated othercomprehensive income into income.

 

The following tableprovides the gains and losses reported in the Condensed Consolidated Statementsof Operations for the three and nine months ended September 30, 2009 and2008:

 
| ** **                                                           | ** ** | **Amount of Gain  or (Loss) Recognized in Income on Derivatives** | ** ** | ** **             | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                           | ** ** | **Three months  ended**                                           | ** ** | **Nine months  ended** | ** ** | **Location of  Gain or (Loss)** | ** ** |
| ** **                                                           | ** ** | **September 30,**                                            | ** ** | **September 30,** | ** ** | **Recognized in  Income on** | ** ** |
| **(in millions)**                                                    | ** ** | **2009**                                                          | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** | **Derivatives** | ** ** |
| **Derivatives Not Designated as Hedging Instruments under ASC  815** | ** ** | ** **                                                        | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                           |
| Interest rate contracts                                              |       | $                                                                 | (0.1       | )                      | $          | (12.3 | ) | $ | 1.9 |   | $ | (7.3 | ) | Interest expense |   |
| Cross-currency interest rate swaps                                   |       |                                                              | (1.2       | )                      |       | 2.3 |   |   | (0.6 | ) |   | 0.5 |   | Interest expense |   |
|                                                                 |       | $                                                                 | (1.3       | )                      | $          | (10.0 | ) | $ | 1.3 |   | $ | (6.8 | ) |   |   |

 

15

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**6. FAIR VALUE MEASUREMENTS:**

 

On January 1, 2008,the Company adopted SFAS No. 157,*FairValue Measurements*(included in ASC 820 — *Fair Value Measurementsand Disclosures*), for financial assets and liabilities, as well asfor any other assets and liabilities that are carried at fair value on arecurring basis in the financial statements. Under ASC 825, *Financial Instruments* (formerly SFAS No. 159,*The Fair Value Option for Financial Assets andFinancial Liabilities — Including an Amendment of FASB Statement No. 115*), entities are permitted to chooseto measure many financial instruments and certain other items at fairvalue. The Company has elected not to measure any additional instrumentsat fair value under ASC 825, *Financial Instruments*.

 

As of September 30,2009, the only assets and liabilities that the Company currently measures atfair value on a recurring basis are derivatives and marketable securities. TheCompany’s financial assets and liabilities are measured using inputs from thethree levels of the fair value hierarchy. The three levels are as follows:

 

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

 

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

 

Level 3 — Inputs areunobservable inputs that are used to measure fair value to the extentobservable inputs are not available. The Company does not have anyfinancial assets or liabilities that are classified as Level 3 inputs as of September 30,2009 or December 31, 2008.

 

In accordance with thefair value hierarchy, the following table provides the fair value of theCompany’s financial assets and liabilities that are required to be measured atfair value as of September 30, 2009 and December 31, 2008:

 
| ** **                                                          | ** ** | **As of**                   | ** ** | **Fair Value Measurements** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **(in millions)**                                                   | ** ** | **September 30, 2009** | ** ** | **Level 1**                 | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Assets                                                              | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Marketable securities (a)                                           |       | $                           | 180.7      |                        | $          | 180.7 |   | $ | — |   | $ | — |   |
| Foreign exchange contracts (b)                                      |       | 0.4                         |       | —                      |       | 0.4 |   | — |   |
| Total assets at fair value                                          |       | $                           | 181.1      |                        | $          | 180.7 |   | $ | 0.4 |   | $ | — |   |
|                                                                |       |                        |       |                        |       |   |   |   |   |
| Liabilities                                                         | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest rate swaps (b)                                             |       | $                           | 70.3       |                        | $          | — |   | $ | 70.3 |   | $ | — |   |
| Cross-currency interest rate swaps (b)                              |       | 5.7                         |       | —                      |       | 5.7 |   | — |   |
| Cross-currency  interest rate swaps - net investment hedge (b) |       | 28.4                        |       | —                      |       | 28.4 |   | — |   |
| Total liabilities at fair value                                     |       | $                           | 104.4      |                        | $          | — |   | $ | 104.4 |   | $ | — |   |

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

 

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

 

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

 

16

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

 

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

 

***Debt*****-**The Company estimates that its debt under the seniorsecured credit facility and Titanium Dioxide Pigments venture facilityagreement, based on current interest rates and terms, approximates fairvalue. Based on quoted market prices at September 30, 2009, theCompany estimates the fair value of its 2014 Notes approximated $562.2million. As of September 30, 2009, the aggregate principal carryingamount of the 2014 Notes was $566.1 million.

 

***Cash and Cash Equivalents*****-**All highly liquidinstruments and money market funds with an original maturity of three months orless are considered to be cash equivalents. The carrying amountapproximates fair value because of the short maturities of these instruments.

 

**7. ACQUISITIONS:**

 

Pursuant to the Company’sbusiness strategy of achieving profitable growth through selectiveacquisitions, the Company has acquired several businesses in recent years. Inaccordance with ASC 350 — *Intangibles—Goodwill andOther* (formerly SFAS No. 142, *Goodwilland Other Intangible Assets*), any goodwill resulting fromacquisitions is tested for impairment at least annually.

 

On August 11, 2008,the Company completed the acquisition of Holliday Pigments, the leading globalmanufacturer of technical grade ultramarine blue and manganese violet pigments,from Yule Catto & Co. plc for a purchase price of approximately €46.0million ($68.6 million using an August 11, 2008 exchange rate of $1.4909).Holliday Pigments manufactures inorganic ultramarine pigments for a wide rangeof applications, including plastics, cosmetics, coatings and inks. HollidayPigments was incorporated into the Color Pigments and Services business, whichis part of the Performance Additives segment. The allocation of the purchaseprice to the identifiable assets acquired is complete.

 

On September 1, 2008,the Company completed the formation of a venture with Kemira that focuses onspecialty titanium dioxide pigments. The venture combines the Company’stitanium dioxide pigments and functional additives businesses, which are partof the Titanium Dioxide Pigments segment, including its production facility inDuisburg, Germany, and Kemira’s titanium dioxide business, including Kemira’stitanium dioxide plant in Pori, Finland. The Company has consolidated thisventure and has reported Kemira’s interest as noncontrolling interest in thecondensed consolidated financial statements. The Company owns 61% of theventure with Kemira owning the remaining portion. The venture’sacquisition of the shares of the Rockwood and Kemira entities was facilitatedby the borrowings under a term loan of €250.0 million on September 3, 2008($362.5 million using a September 3, 2008 exchange rate of$1.4498). The venture made a payment of €97.5 million ($141.4 millionusing a September 3, 2008 exchange rate) to the venture’s noncontrollingshareholder. In addition, the venture obtained a €30.0 million ($43.9 million)revolving credit facility to finance its operations and the venture has assumeddebt of €23.8 million ($34.8 million) from Kemira, primarily due to a definedbenefit pension plan. The Company estimates that the potential exposure rangefor assumed environmental liabilities is from $13.5 million to $25.3 million.At September 30, 2009, $13.5 million of related reserves were recorded.The allocation of the purchase price to the identifiable assets acquired iscomplete.

 

On September 4,2008, the Company completed the acquisition of Nalco Holdings, Inc.’s (“Nalco”)Finishing Technologies business for a purchase price of approximately $75.0million. Nalco’s Finishing Technologies business provides chemicals andservices for pre-treating of metal and is part of the Surface Treatmentbusiness within the Specialty Chemicals segment. The allocation of thepurchase price to the identifiable assets acquired is complete.

 

In addition to theacquisitions described above, the Company had completed other smalleracquisitions in 2008. Depending on the timing and complexity involved, thepurchase price allocation to the net assets acquired for certain acquisitionscompleted within the last year was preliminary as of September 30, 2009.

 

The above acquisitionswere not material on an individual basis, or in the aggregate.

 

17

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**8. INVENTORIES:**

 

Inventories are comprisedof the following:

 
| ** **               | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------|------------|------------------------|------------|-----------------------|------------|
| **($ in millions)** | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| Raw materials            |       | $                      | 170.5      |                  | $          | 203.8 |   |
| Work-in-process          |       | 72.3                   |       | 74.2                  |       |
| Finished goods           |       | 286.0                  |       | 355.3                 |       |
| Packaging materials      |       | 7.1                    |       | 7.7                   |       |
| Total                    |       | $                      | 535.9      |                  | $          | 641.0 |   |

 

**9.  GOODWILL:**

 

Below are goodwillbalances and activity by segment:

 
| ** **                   | ** ** | **Specialty** | ** ** | **Advanced** | ** ** | ** ** | ** ** |
|------------------------------|------------|---------------|------------|--------------|------------|------------|------------|
| **($ in millions)**     | ** ** | **Chemicals** | ** ** | **Ceramics** | ** ** | **Total**  | ** ** |
| Balance,  December 31, 2008  |       | $             | 648.0      |         | $          | 269.8      |       | $ | 917.8 |   |
| Acquisitions                 |       | (1.1          | )          | 0.6          |       | (0.5       | )          |
| Foreign  exchange            |       | 29.4          |       | 13.2         |       | 42.6       |       |
| Balance,  September 30, 2009 |       | $             | 676.3      |         | $          | 283.6      |       | $ | 959.9 |   |

 

**10. OTHER INTANGIBLE ASSETS:**

 

Other intangible assets,net consist of:

 
| ** **                               | ** ** | **As of September 30, 2009** | ** ** | **As of December 31, 2008** | ** ** |
|------------------------------------------|------------|-----------------------------------|------------|----------------------------------|------------|
| ** **                               | ** ** | **Gross**                         | ** ** | ** **                       | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Carrying**                      | ** ** | **Accumulated**                  | ** ** | ** ** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| **($ in millions)**                 | ** ** | **Amount**                        | ** ** | **Amortization**                 | ** ** | **Net** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Patents  and other intellectual property |       | $                                 | 431.7      |                             | $          | (169.9 | ) | $ | 261.8 |   | $ | 411.9 |   | $ | (142.0 | ) | $ | 269.9 |   |
| Trade  names and trademarks              |       | 149.1                             |       | (33.3                            | )          | 115.8 |   | 141.5 |   | (27.1 | ) | 114.4 |   |
| Customer  relationships                  |       | 387.0                             |       | (107.7                           | )          | 279.3 |   | 372.2 |   | (79.1 | ) | 293.1 |   |
| Supply  agreements                       |       | 60.0                              |       | (10.9                            | )          | 49.1 |   | 57.3 |   | (6.3 | ) | 51.0 |   |
| Other                                    |       | 66.4                              |       | (42.0                            | )          | 24.4 |   | 61.7 |   | (35.3 | ) | 26.4 |   |
| Total                                    |       | $                                 | 1,094.2    |                             | $          | (363.8 | ) | $ | 730.4 |   | $ | 1,044.6 |   | $ | (289.8 | ) | $ | 754.8 |   |

 

Amortization of otherintangible assets was $20.6 million and $20.3 million for the three monthsended September 30, 2009 and 2008, respectively, and $60.1 million and$58.8 million for the nine months ended September 30, 2009 and 2008,respectively.

 

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

 
| **($ in millions)** | ** ** | **Amortization** | ** ** |
|--------------------------|------------|------------------|------------|
| **Year ended**           | ** ** | **Expense**      | ** ** |
| 2009                     |       | $                | 80.6       |   |
| 2010                     |       | 81.3             |       |
| 2011                     |       | 79.0             |       |
| 2012                     |       | 75.8             |       |
| 2013                     |       | 74.8             |       |
|                          |            |                  |            |  |

 

18

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**11. LONG-TERM DEBT**

 

Long-term debt and loanspayable are summarized as follows:

 
| ** **                                                                                               | ** ** | **September 30,** | ** **    | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------------------|---------------|-----------------------|------------|
| **($ and € in millions)**                                                                      | ** ** | **2009**               | ** **    | **2008**              | ** ** |
| Senior  secured credit facilities:                                                                       |       |                   |          |                  |       |
| Tranche  A-1 term loans (€4.2 and €22.8, respectively)                                         |       | $                      | 6.1           |                  | $          | 31.9 |   |
| Tranche  A-2 term loans (€36.5 and €99.4, respectively)                                        |       | 53.4                   |          | 138.9                 |       |
| Tranche  E term loans                                                                                    |       | 139.4                  |          | 1,104.9               |       |
| Tranche  G term loans (€65.1 and €265.2, respectively)                                         |       | 95.3                   |          | 370.5                 |       |
| Tranche  H term loans                                                                                    |       | 937.2                  |          | —                |       |
| Tranche  I term loans (€194.7 as of September 30, 2009)                                        |       | 285.0                  |          | —                |       |
| 2014  Notes (€250.1 and $200.0 and €364.0 and $200.0, respectively)                            |       | 566.1                  |          | 708.5                 |       |
| Titanium  Dioxide Pigments venture term loans (€245.0 and €250.0, respectively)                |       | 358.7                  |          | 349.3                 |       |
| Titanium  Dioxide Pigments venture revolving credit facility (€10.0 as of September 30,  2009) |       | 14.6                   |          | —                |       |
| Capitalized  lease obligations (€32.5 and €34.3, respectively)                                 |       | 47.6                   |          | 47.9                  |       |
| Other  loans                                                                                             |       | 59.3                   |          | 59.3                  |       |
|                                                                                                     |       | 2,562.7                |          | 2,811.2               |       |
| Less  current maturities                                                                                 |       | (88.1                  | )             | (90.9                 | )          |
|                                                                                                     |       | $                      |  2,474.6 |                  | $          | 2,720.3 |   |

 

In the first half of2009, the Company voluntarily repurchased at a discount €113.9 million inaggregate principal amount ($153.2 million based on the exchange rates ineffect on the dates of repurchase) of its Euro-denominated senior subordinatednotes due in 2014, and voluntarily prepaid €63.2 million ($85.1 million basedon the exchange rate in effect on the date of payment) and $17.2 million of itssenior secured term loans.

 

On June 15, 2009,the Company entered into the amended and restated credit agreement (“RestatedCredit Agreement”), which amended and restated in its entirety the Company’ssenior secured credit agreement. The Restated Credit Agreement extendedthe maturity of certain term loans by providing for (i) approximately$942.0 million of new tranche H term loans with a maturity date of May 15,2014, the aggregate amount of which is deemed to convert a like amount ofoutstanding principal of existing tranche E term loans (that had a maturitydate of July 30, 2012) under the existing credit agreement and (ii) approximately€195.6 million ($270.0 million using the exchange rate on the date ofamendment, June 15, 2009, of $1.3803) of new tranche I term loans with amaturity date of May 15, 2014, the aggregate amount of which is deemed toconvert a like amount of outstanding principal of existing tranche G term loans(that had a maturity date of July 30, 2012) under the existing creditagreement. In the third quarter of 2009, the Company extended the maturity of$180 million of availability under the revolving credit facility from 2010 to2012 bearing interest at its option of either (i) Libor (subject to Liborfloor of 2.00%) plus 4.50% or (ii) ABR plus 3.25%. There were nooutstanding borrowings under this revolving credit facility as of September 30,2009.

 

The Restated CreditAgreement also provides for a Libor (Euribor for Euro-denominated tranches)floor of 2.00% applicable to all senior secured credit facilities subject topricing based on Libor or Euribor with the following applicable margins aboveLibor or Euribor: applicable margins for Tranches A-1 and A-2 of 3.00%; TrancheE of 2.75%; Tranche G of 3.00%; Tranche H of 4.25%; and Tranche I of 4.50%, ineach case per annum, each with a 0.25% reduction for achieving a designatedcredit rating, with the exception of Tranches A-1 and A-2. As of September 30,2009, the Company continued to qualify for the 0.25% interest rate reduction asthe designated credit ratings were achieved.

 

In addition, the RestatedCredit Agreement replaced the consolidated total debt to consolidated AdjustedEBITDA ratio covenant with a senior secured debt to consolidated AdjustedEBITDA ratio covenant such that the Company may not permit its senior secureddebt ratio to exceed 4.40 to 1.00 on the last day of any fiscal quarter throughand including March 31, 2010, 4.25 to 1.00 on the last day of any fiscalquarter thereafter through and including September 30, 2010, and 4.00 to1.00 on the last day of any fiscal quarter thereafter. The Restated CreditAgreement also reset the asset sales basket, increased the available amountbasket that applies to certain investment, debt and capital expenditurenegative covenants and certain other baskets.

 

**12. INCOME TAXES:**

 

The effective tax ratefor the nine months ended September 30, 2009 and 2008 was 89.6% and 33.8%,respectively. The increase in the effective tax rate from the prior year isprimarily related to the mix of domestic losses and foreign income in 2009compared to 2008. In both periods, there is an absence of a tax benefit for theCompany’s domestic losses as a result of a full valuation allowance. Thedifference between the effective rate and the U.S. statutory rate of 35.0% inthe nine months ended September 30, 2009 primarily 

 

19

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relates to the domesticvaluation allowance partially offset by a nonrecurring tax benefit related toforeign currency changes. The difference between the effective tax rate and theU.S. statutory rate of 35.0% for the nine months ended September 30, 2008is primarily a function of favorable foreign rate differentials, the impact ofthe valuation allowance on domestic losses and the allocation of benefits tocontinuing operations primarily from other comprehensive income.

 

In the nine months ended September 30,2009, the Company increased its worldwide valuation allowances by $40.4million. The increase in the valuation allowance was due to domestic andforeign losses and losses recorded in other comprehensive income. The change inthe valuation allowance for the nine months ended September 30, 2009increased the tax provision by $25.8 million. The following table reflects theactivity in the valuation allowance for worldwide net operating losses andother deferred income tax assets:

 
| ** **                                   | ** ** | **Valuation** | ** ** |
|----------------------------------------------|------------|---------------|------------|
| **($ in millions)**                     | ** ** | **Allowance** | ** ** |
| Balance  as of December 31, 2008        |       | $             | 84.9       |   |
| Increase  as reflected in income tax expense |       | 25.8          |       |
| Other  increase (a)                          |       | 14.6          |       |
| Balance  as of September 30, 2009       |       | $             | 125.3      |   |

 

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

 

In the nine months ended September 30,2009, based on the Company’s policy and review of available information,including the Company’s steady-state analysis, it was determined that there wasnot sufficient positive evidence of future taxable income to release the U.S.Federal valuation allowance that has been recorded. During the nine monthsended September 30, 2009, the Company’s net U.S. Federal deferred taxassets and liabilities were maintained at a zero level, other than a noncurrentdeferred tax liability relating to goodwill with an indefinite reversal periodand a noncurrent deferred tax asset relating to a Federal AMT Credit. It is theCompany’s policy that the valuation allowance is reversed in the yearmanagement determines it is more likely than not that the deferred tax assetswill be realized.

 

Unrecognized tax benefitsat September 30, 2009 were $27.7 million. This includes $27.3 million oftax benefits that, if recognized, would affect the effective tax rate, and $0.4million of tax benefits that, if recognized, would result in an adjustment to othertax accounts.

 

The Company recognizesinterest and penalties related to unrecognized tax benefits in its income taxprovision. The Company had accrued $7.1 million for interest and penalties at December 31,2008. During the nine months ended September 30, 2009, the accrual forinterest and penalties was increased by $1.3 million to $8.4 million.

 

During the next twelvemonths, it is reasonably possible that resolution of uncertain tax liabilitiescould result in a benefit of up to $11.6 million or a cost of up to $18.6million. Audit outcomes and the timing of audit settlements are subject tosignificant uncertainty.

 

The Company is subject totaxation in the U.S., various states, and foreign jurisdictions. The Company’stax filings in major jurisdictions are open to investigation by taxauthorities; in the U.S. from 2005, in the U.K. from 2006, and in Germany from2000.

 

**13. EMPLOYEE BENEFIT PLANS:**

 

The following tablerepresents the net periodic benefit costs and related components in accordancewith ASC 715, *Compensation — Retirement Benefits (*formerlySFAS No. 158,*Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans, an amendment of FASBStatements No. 87, 88, 106 and 132 (R))*:

 
| ** **                            | ** ** | **Three months ended** | ** ** | **Nine months ended**  | ** ** |
|---------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                            | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| **($ in millions)**              | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Service  cost                         |       | $                      | 2.3        |                   | $          | 2.0 |   | $ | 6.5 |   | $ | 5.7 |   |
| Interest  cost                        |       | 9.1                    |       | 7.7                    |       | 26.3 |   | 22.0 |   |
| Expected  return on assets            |       | (4.0                   | )          | (3.4                   | )          | (11.4 | ) | (8.9 | ) |
| Net  amortization of actuarial losses |       | 0.1                    |       | —                 |       | 0.5 |   | (0.1 | ) |
| Net  periodic pension cost            |       | 7.5                    |       | 6.3                    |       | 21.9 |   | 18.7 |   |
| Settlement/curtailment                |       | (0.1                   | )          | —                 |       | (0.3 | ) | — |   |
| Total  pension cost                   |       | $                      | 7.4        |                   | $          | 6.3 |   | $ | 21.6 |   | $ | 18.7 |   |

 

20

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

 

The Company recordsrestructuring liabilities that represent charges incurred in connection withconsolidations and cessations of certain of its operations, includingoperations from acquisitions, as well as headcount reduction programs. Thesecharges consist primarily of severance and facility closure costs, in somecases including asset write-offs and impairments. Severance charges are basedon various factors including the employee’s length of service, contractprovisions, salary levels and local governmental legislation. At the time arelated charge is recorded, the Company calculates its best estimate based upondetailed analysis. Although significant changes are not expected, actual costsmay differ from these estimates.

 

During the three and ninemonths ended September 30, 2009, the Company expensed $1.7 million and$4.4 million, respectively, of restructuring charges. In addition, “restructuringand other severance costs” in the Condensed Consolidated Statements ofOperations for the three and nine months ended September 30, 2009 includedother severance-related costs of $2.5 million and $11.6 million, respectively,related to headcount reductions undertaken throughout the Company.

 

For the nine months endedSeptember 30, 2009, the Company expensed $4.4 million of restructuringcharges. In the Specialty Chemicals segment, $0.4 million of asset write-offswere recorded in the nine months ended September 30, 2009 as part ofrestructuring plans in 2008 and 2007. In the Color Pigments and Services businesswithin the Performance Additives segment, $0.2 million of asset write-offs wererecorded in the nine months ended September 30, 2009 related to a 2009restructuring plan. In the Performance Additives segment, the Companyrecorded $1.4 million primarily related to a restructuring plan implemented in2008 in the Color Pigments and Services business in connection with theintegration of the businesses acquired from Elementis plc, which included thereorganization and relocation of the North American Finance and IT services,and the closure of three manufacturing facilities in 2008. In the SpecialtyChemicals segment, $2.0 million was recorded in the nine months ended September 30,2009 primarily for headcount reduction and facility closure costs as part ofrestructuring plans in 2008 and 2007. In addition, $0.2 million was recorded inthe Specialty Chemicals segment related to facility closures in connection witha 2009 restructuring plan. Headcount reduction and facility closure costs of$0.2 million were recorded in the nine months ended September 30, 2009 atCorporate related to a 2007 restructuring plan.

 

During the three and ninemonths ended September 30, 2008, the Company expensed $3.4 million and$5.7 million, respectively, of restructuring charges. In the PerformanceAdditives segment, the Company implemented a restructuring plan in its ColorPigments and Services business in connection with the integration of thebusiness acquired from Elementis plc. For the nine months ended September 30,2008, the Company recorded $2.3 million of severance costs and $0.5 million ofasset write-offs related to this restructuring plan. In the Timber TreatmentChemicals business, $0.4 million was recorded for miscellaneous headcountreductions. In the Advanced Ceramics, Specialty Chemicals and SpecialtyCompounds segments, $0.9 million, $0.8 million and $0.4 million, respectively,were recorded in the nine months ended September 30, 2008 formiscellaneous headcount reductions. In the Corporate and other segment, facilityclosure costs of $0.4 million were recorded related to the restructuring of thewafer reclaim business.

 

In 2007, the Companyrecorded restructuring charges for miscellaneous restructuring items, includingmiscellaneous headcount reductions, facility closure and severance costs.

 

In 2006, the Companyrecorded restructuring charges for miscellaneous restructuring items, includingmiscellaneous headcount reductions and the closure of an administrative officein the Specialty Chemicals segment. In the Corporate and other segment, chargeswere recorded primarily related to the restructuring of the wafer reclaimbusiness. This included severance and related costs for employees in connectionwith the closure of two wafer reclaim facilities. The Company closed a waferreclaim facility in the U.K. in January 2006 and one of the facilities inthe U.S. in March 2006. In addition, charges were recorded in thePerformance Additives and Advanced Ceramics segments primarily formiscellaneous headcount reductions.

 

Selected information forthe 2009 restructuring actions follows:

 
| ** **                                  | ** ** | **Facility** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|--------------|------------|------------|------------|
| **($ in millions)**                    | ** ** | **Closure**  | ** ** | **Total**  | ** ** |
| Liability  balance, December 31, 2008  |       | $            | —     |       | $          | — |   |
| Restructuring  charge in 2009               |       | 0.2          |       | 0.2        |       |
| Utilized                                    |       | (0.1         | )          | (0.1       | )          |
| Foreign  exchange and other                 |       | —       |       | —     |       |
| Liability  balance, September 30, 2009 |       | $            | 0.1        |       | $          | 0.1 |   |

 

21

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Selected information forthe 2008 restructuring actions follows:

 
| ** **                                  | ** ** | ** **    | ** ** | **Facility** | ** ** | ** **     | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|---------------|------------|--------------|------------|----------------|------------|------------|------------|
| **($ in millions)**                    | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Relocation** | ** ** | **Total**  | ** ** |
| Liability  balance, December 31, 2008  |       | $             | 13.2       |         | $          | 0.1            |       | $          | 0.2        |   | $ | 13.5 |   |
| Restructuring  charge in 2009               |       | 1.3           |       | 0.8          |       | —         |       | 2.1        |       |
| Utilized                                    |       | (10.2         | )          | (0.7         | )          | (0.1           | )          | (11.0      | )          |
| Foreign  exchange and other                 |       | 0.5           |       | —       |       | —         |       | 0.5        |       |
| Liability  balance, September 30, 2009 |       | $             | 4.8        |         | $          | 0.2            |       | $          | 0.1        |   | $ | 5.1 |   |

 

These actions areexpected to be completed during 2009.

 

Selected information forthe 2007 restructuring actions follows:

 
| ** **                                  | ** ** | ** **    | ** ** | **Facility** | ** ** | ** **     | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|---------------|------------|--------------|------------|----------------|------------|------------|------------|
| **($ in millions)**                    | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Relocation** | ** ** | **Total**  | ** ** |
| Liability  balance, December 31, 2008  |       | $             | 1.3        |         | $          | 1.5            |       | $          | 0.2        |   | $ | 3.0 |   |
| Restructuring  charge in 2009               |       | 1.0           |       | 0.4          |       | —         |       | 1.4        |       |
| Utilized                                    |       | (1.3          | )          | (0.8         | )          | (0.2           | )          | (2.3       | )          |
| Foreign  exchange and other                 |       | —        |       | (0.2         | )          | —         |       | (0.2       | )          |
| Liability  balance, September 30, 2009 |       | $             | 1.0        |         | $          | 0.9            |       | $          | —     |   | $ | 1.9 |   |

 

These actions areexpected to be completed during 2009.

 

Selected information forthe 2006 restructuring actions follows:

 
| ** **                                  | ** ** | ** **    | ** ** | **Facility** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|---------------|------------|--------------|------------|------------|------------|
| **($ in millions)**                    | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Total**  | ** ** |
| Liability  balance, December 31, 2008  |       | $             | 0.1        |         | $          | 2.3        |       | $ | 2.4 |   |
| Restructuring  charge in 2009               |       | —        |       | 0.1          |       | 0.1        |       |
| Utilized                                    |       | (0.1          | )          | (0.5         | )          | (0.6       | )          |
| Foreign  exchange and other                 |       | —        |       | 0.3          |       | 0.3        |       |
| Liability  balance, September 30, 2009 |       | $             | —     |         | $          | 2.2        |       | $ | 2.2 |   |

 

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

 

Restructuring reserves bysegment are as follows:

 
| ** **                 | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------|------------|------------------------|------------|-----------------------|------------|
| **($ in millions)**   | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| Specialty  Chemicals       |       | $                      | 4.1        |                  | $          | 8.1 |   |
| Performance  Additives     |       | 1.2                    |       | 2.3                   |       |
| Titanium  Dioxide Pigments |       | 0.8                    |       | 1.4                   |       |
| Advanced  Ceramics         |       | 0.8                    |       | 4.5                   |       |
| Specialty  Compounds       |       | 0.2                    |       | 0.5                   |       |
| Corporate  and other       |       | 2.2                    |       | 2.1                   |       |
|                       |       | $                      |  9.3  |                  | $          | 18.9 |   |

 

**15. COMMITMENTS AND CONTINGENCIES:**

 

***Legal Proceedings***—The Company is involved in various legal proceedings,including commercial, intellectual property, product liability andenvironmental matters of a nature considered normal to its business. It is theCompany’s policy to accrue for amounts related to these matters in accordancewith ASC 450 — *Contingencies*(formerly SFAS No. 5,*Accounting forContingencies*), ifit is probable that a liability has been incurred and an amount can bereasonably estimated. It is the Company’s policy to disclose such matters whenthere is at least a reasonable possibility that a material loss may have beenincurred.

 

22

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**HospiraMatter**

 

In April 2005,Hospira Incorporated filed suit in Mecklenburg County, North Carolina SuperiorCourt against one of the Company’s wholly-owned subsidiaries in its SpecialtyCompounds segment alleging claims for negligence, negligent misrepresentation,estoppel, fraud, third party beneficiary breach of contract and unfair tradepractices as a result of the subsidiary providing PVC compound to its customer.Hospira is seeking damages of approximately $16.0 million for costs allegedlyrelated to its recall and destruction of intravenous administration kits thatincorporated components made with this compound, and further seeks trebledamages of approximately $48.0 million, plus attorneys’ fees and interest,under the North Carolina unfair trade practice statute. The Court dismissedHospira’s negligence and estoppel claims, but initially denied the subsidiary’smotion to dismiss the other claims. Following discovery, the Company’ssubsidiary filed a motion for summary judgment to dismiss the remaining claimsand, on November 9, 2007, the trial court granted the Company’s motion forsummary judgment and dismissed all of the plaintiff’s claims. The plaintiffappealed this decision and, in early 2009, the appellate court affirmed on allcounts with the exception of the negligence claim, which it reversed andremanded to the trial court. The Company’s subsidiary filed a petition with theNorth Carolina Supreme Court for review of the appellate court’s ruling, whichwas denied. The parties recently reached a tentative settlement in thismatter, which is subject to executing a mutually agreed settlement agreement.The Company had previously accrued for this matter and does not believe thatresolution of this matter will have a material adverse effect on its businessor financial condition.

 

**AdvertisingMatter**

 

On March 3, 2009,Osmose, Inc. (“OI”) filed an action against Viance LLC (“Viance”), thejoint venture in the Timber Treatment Chemicals business, Rockwood Holdings, Inc.,and certain individuals, in the U.S. District Court, Northern District ofGeorgia, claiming that recent advertisements by Viance comparing its ACQproduct and OI’s MCQ product were false and misleading in violation of theLanham Act, constituted unfair competition, violated the Georgia DeceptiveTrade Practices Act, were defamatory and that Viance tortiously interfered withOI’s business relationships. OI is seeking damages related to their attorney’sfees and costs and punitive damages. OI also sought a temporary restrainingorder (“TRO”) and a preliminary injunction prohibiting Viance from continuingto make certain claims in advertisements related to their MCQ product.  OnMarch 20, 2009, the district court granted Osmose’s motion for aTRO. Viance raised certain counterclaims related to OI’s advertisementsand both parties’ claims were heard at a recent hearing. In September 2009,the district court issued a preliminary injunction prohibiting Viance frommaking certain claims related to MCQ in its advertisements and denied Viance’s requestfor a preliminary injunction related to certain claims in Osmose’sadvertisements. The Company expects the matter to proceed to a full trial onthe merits of the claims. The Company will continue to vigorously defend thismatter. While the Company believes the defendants have meritoriousdefenses against OI’s claims and does not believe that resolution of thismatter will have a material adverse effect on its business or financialcondition, the Company cannot predict the ultimate outcome of this litigation,and the resolution of this matter may have a material adverse effect on itsresults of operations or cash flows in any quarterly or annual reportingperiod.

 

**CeramicHips**

 

In the first quarter of2009, a customer of the Company’s Advanced Ceramics segment initiated a globalvoluntary recall of a specific model of ceramic ballheads manufactured byAdvanced Ceramics, and in July 2009, another customer initiated a recallof certain ceramic components.  The first recall was initiated afterreceiving reports of ceramic fractures and it relates only to the specificcustomers’ designs and no other product of this segment. The subsidiary iscooperating with its customers in investigating these matters. Althoughthe Company does not believe these recalls will have a material adverse effecton its business or financial condition, the Company cannot predict the ultimateoutcome of these matters, and the resolution of these matters may have amaterial adverse effect on its results of operations or cash flows in anyquarterly or annual reporting period.

 

**EC HeatStabilizers Investigation**

 

The European Commission (“EC”)is investigating possible infringement of certain antitrust regulations in themarket for heat stabilizers from 1986 until at least 2000 by certain industryparticipants, which included a business sold by a subsidiary in the SpecialtyChemicals segment in 2000. On March 23, 2009, the EC confirmed thatit commenced a proceeding against certain participants in the heat stabilizersmarket, including the business formerly owned by this subsidiary and theCompany’s subsidiary. Neither the Company nor any of its subsidiaries areactive in the market for heat stabilizers; however, the business sold in 2000was active in this market. In June 2009, the EC held a hearing onthis matter. The Company expects a decision by the EC in late2009. The Company will vigorously defend this matter. While theCompany believes its subsidiary has meritorious defenses against these claimsand does not believe that resolution of this matter will have a materialadverse effect on its business or financial condition, the Company cannotpredict the ultimate outcome of this proceeding and resolution of this mattermay have a material adverse effect on its results of operations or cash flowsin any quarterly or annual reporting period.

 

**FormerGlass Sealants Business**

 

A subsidiary in theSpecialty Chemicals segment that formerly manufactured sealants for insulatingglass and resins for laminated glass prior to and after the sale of thisbusiness has been named as a defendant in several lawsuits relating to allegednegligent manufacturing of those products. Pursuant to the sale and purchaseagreement with respect to the divested “glass” business, this 

 

23

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subsidiary may berequired to pay indemnity claims related to these lawsuits. Although theCompany expects its subsidiary to have coverage under its product liabilityinsurance policies should damages ultimately be awarded or agreed to, in suchan event, its insurance may not cover such claims and, if not, its subsidiarymay not have sufficient cash flow to pay these claims. Although the Companydoes not believe that resolution of these matters will have a material adverseeffect on its business or financial condition, the Company cannot predict theultimate outcome of these claims, and the resolution of one or more of theseclaims may have a material adverse effect on its results of operations or cashflows in any quarterly or annual reporting period.

 

**OtherMatters**

 

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

 

Reserves in connectionwith product liability matters do not individually exceed $1.5 million and inthe aggregate $6.6 million as of September 30, 2009. The Company’s reserveestimates are based on available facts, including damage claims and input fromits internal and external legal counsel, past experience, and, in someinstances where defense costs are being paid by its insurer, known insurancerecoveries. The Company is unable to estimate the amount or range of anypotential incremental charges should facts and circumstances change and may inthe future revise its estimates based on new information becoming available.Further, the Company cannot predict the outcome of any litigation or thepotential for future litigation.

 

***Indemnity Matters***— The Company may be indemnified by third parties inconnection with certain matters related to acquired businesses. Althoughthe Company has no reason to believe that the financial condition of thoseparties who may have indemnification obligations to the Company is other thansound, in the event the Company seeks indemnity under any of these agreementsor through other means, there can be no assurance that any party who may haveobligations to indemnify the Company will adhere to their obligations and theCompany may have to resort to legal action to enforce its rights under the indemnities.In cases where the Company’s indemnification claims to such third parties areuncontested, the Company expects to realize recoveries within the short term.

 

In addition, the Companymay be subject to indemnity claims relating to properties or businesses itdivested. The Company has agreed to indemnify the buyer of its formerElectronics business, Groupe Novasep segment and pool and spa chemicalsbusiness. For example, the Company is required to indemnify the buyer of itsElectronics business for certain known and unknown environmental actions whichmay arise in the future that relate to the period prior to the closing.

 

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

 

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

 

**General**

 

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

 

**Safety,Health and Environmental Management Systems**

 

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

 

24

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**SHECapital Expenditures**

 

The Company may incurfuture costs for capital improvements and general compliance under SHE laws.For the year ended December 31, 2008, the capital expenditures for SHEmatters totaled $28.1 million, excluding costs to maintain and repair pollutioncontrol equipment. For 2009, the Company estimates capital expenditures forcompliance with SHE laws to be at similar levels; however, because capitalexpenditures for these matters are subject to changes in existing and new SHElaws, the Company cannot provide assurance that its recent expenditures will beindicative of future amounts required to comply with these laws.

 

**RegulatoryDevelopments**

 

On June 1, 2007, theRegistration, Evaluation and Authorization of Chemicals (“REACH”) legislationbecame effective in the EU. REACH requires manufacturers and importers ofcertain chemicals to register those chemicals, perform health and environmentalrisk analyses of those chemicals, and in certain instances, obtainauthorizations for the use of the chemicals. Covered substances werepre-registered by November 30, 2008. REACH is expected to be implementedin three phases over an eleven year period based on known product hazardsand/or volume of product in commerce. Under REACH, where warranted by a riskassessment, specified uses of some hazardous substances may be restricted. As aspecialty chemicals company, it is possible that the Company is the onlymanufacturer of one or more substances to be regulated under REACH and thuscould potentially bear the full cost of compliance with REACH for some or allof the Company’s products. The Company estimates it has approximately 350products that are subject to REACH. The Company is taking steps to comply 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.

 

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

 

**RemediationLiabilities**

 

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

 

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

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

 

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(a)                The Company is currently operating groundwatermonitoring and/or remediation systems at these locations.

 

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

 

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

 

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

 

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

 

The Company is alsoresponsible for environmental matters at some of its former off-site disposallocations owned by third parties. These sites are considered Superfund sites asdefined by the EPA or state regulatory authority. The Company is a potentiallyresponsible party or*de minimis*participant at the following Superfund locations: Casmalia, CA; Laurel, MD;Niagara Falls, NY; South Gate, CA; and Whittier, CA and has reserves for thesematters totaling $4.3 million at September 30, 2009. In addition, theGerman authorities have ordered the Company to investigate and, depending onthe results, potentially remediate a portion of a former site in Liebenau,Germany. The Company is currently in the process of gathering additionalinformation regarding the site and cannot predict the potential scope of anysuch remediation.

 

Although the Companycannot provide assurances in this regard, the Company does not believe thatthese issues will have a material adverse effect on its business or financialcondition, but may have a material adverse effect on the results of operationsor cash flows in any given quarterly or annual reporting period. Nonetheless,the discovery of contamination arising from present or historical industrialoperations at some of the Company’s or its predecessor’s former and presentproperties and/or at sites where the Company and its predecessor disposedwastes could expose the Company to cleanup obligations and other damages in thefuture.

 

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

 

During the course of theCompany’s business, the Company may receive notices of violation, enforcementand other complaints from regulatory agencies alleging non-compliance withapplicable SHE laws. During 2008, the Company’s Timber Treatment Chemicalssubsidiary was cited by the U.S. EPA for failure to report hazardous materialproduction quantities under the Toxic Substances Control Act - 2005 InventoryUpdate Rule. The business has subsequently provided the requiredinformation; however, the business paid a fine of $0.1 million as a result ofthis violation.

 

In September 2009, asubsidiary of the Company’s Specialty Chemicals segment was cited by the U.S.EPA for failure to report hazardous material production quantities under theToxic Substances Control Act - 2005 Inventory Update Rule. The business hasprovided the required information; however, the business expects to pay a fineas a result of this violation. The Company does not believe, based uponcurrently available information, that this issue will have a material adverseimpact on its results of operations, financial position or liquidity.

 

***Environmental Reserves***

 

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

 

The Company’s liabilityestimates are based upon available facts, existing technology, indemnities fromthird parties, past experience and, in some instances, insurance recoverieswhere the remediation costs are being paid by its insurers, and are generatedby several means, including State-mandated schedules, environmental consultantsand internal experts, depending on the circumstances. On a consolidated basis,the Company has accrued $61.9 million and $55.1 million for known environmentalliabilities as of September 30, 2009 and December 31, 2008,respectively. As of September 30, 2009 and December 31, 2008,$55.8 million and $55.1 million, respectively, were classified as othernon-current liabilities in the Condensed Consolidated Balance Sheets. Theincrease in the reserve was primarily due to unanticipated cost increases at aState Superfund remediation project in Laurel, MD related to legacy obligationsassumed in connection with the acquisition of Laporte, plc in 2000. Forthis Superfund project, the Company expects to be indemnified by EvonikDegussa, as successor to Laporte, for most of this reserve and has recorded areceivable of $5.0 million as of September 30, 2009. Included in the$61.9 million as of September 30, 2009 is $22.3 million that is discountedusing discount rates ranging from 5.0% to 7.5%, with the undiscounted amount ofthese reserves equaling $32.1 million. Included in the $55.1 million as of December 31,2008 is $21.4 million that is discounted using discount rates ranging from 5.0%to 7.5%, with the undiscounted amount of these reserves equaling $30.9 million.In certain cases, the Company’s remediation liabilities are payable overperiods of up to 30 years. At a number of the sites described above, the extentof contamination has not yet been fully investigated or the final scope ofremediation is not yet determinable and could potentially affect the range. TheCompany estimates that the potential range for such environmental matters as ofSeptember 30, 2009 is from $61.9 million to $107.1 million. For the ninemonths ended September 30, 2009, the Company recorded charges of $4.8million ($9.8 million increase to the environmental reserve less the $5.0million receivable recorded as noted above) to increase its environmentalliabilities and made payments of $5.1 million for clean-up and remediationcosts, which reduced its environmental liabilities. For the nine months ended September 30,2009, the recurring cost of managing hazardous substances for ongoingoperations is $33.6 million.

 

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

 

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

 

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**16.  CONSOLIDATING FINANCIALINFORMATION:**

 

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

** **

**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGSTATEMENT OF OPERATIONS**

**THREEMONTHS ENDED SEPTEMBER 30, 2009**

**(Dollarsin millions)**

 
| ** **                                                               | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                               | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| Net  sales                                                               |       | $           | —     |             | $          | 168.1             |       | $                | 618.1      |   | $ | 786.2 |   |
| Cost  of products sold                                                   |       | —      |       | 126.5            |       | 428.5             |       | 555.0            |       |
| Gross  profit                                                            |       | —      |       | 41.6             |       | 189.6             |       | 231.2            |       |
| Selling,  general and administrative expenses                            |       | —      |       | 32.6             |       | 122.2             |       | 154.8            |       |
| Restructuring  and other severance costs                                 |       | —      |       | 0.7              |       | 3.5               |       | 4.2              |       |
| Gain  on sale of assets                                                  |       | —      |       | (0.4             | )          | —            |       | (0.4             | )          |
| Operating  income                                                        |       | —      |       | 8.7              |       | 63.9              |       | 72.6             |       |
| Other  expenses, net:                                                    |       |        |       |             |       |              |       |             |       |
| Intergroup  interest, net                                                |       | 33.9        |       | (15.7            | )          | (18.2             | )          | —           |       |
| Interest  expense                                                        |       | (43.2       | )          | (0.4             | )          | (10.4             | )          | (54.0            | )          |
| Interest  income                                                         |       | —      |       | —           |       | 0.4               |       | 0.4              |       |
| Intergroup  other, net                                                   |       | —      |       | 2.1              |       | (2.1              | )          | —           |       |
| Gain  (loss) on early extinguishment of debt, net                        |       | 0.7         |       | (0.7             | )          | (0.9              | )          | (0.9             | )          |
| Foreign  exchange gain, net                                              |       | —      |       | —           |       | 4.5               |       | 4.5              |       |
| Other,  net                                                              |       | (0.1        | )          | 0.1              |       | —            |       | —           |       |
| Other  expenses, net                                                     |       | (8.7        | )          | (14.6            | )          | (26.7             | )          | (50.0            | )          |
| (Loss)  income from continuing operations before taxes                   |       | (8.7        | )          | (5.9             | )          | 37.2              |       | 22.6             |       |
| Income  tax provision (benefit)                                          |       | 7.7         |       | (3.3             | )          | 8.6               |       | 13.0             |       |
| (Loss)  income from continuing operations                                |       | (16.4       | )          | (2.6             | )          | 28.6              |       | 9.6              |       |
| (Loss)  income from discontinued operations, net of tax                  |       | (0.2        | )          | 0.1              |       | —            |       | (0.1             | )          |
| Net  (loss) income                                                       |       | (16.6       | )          | (2.5             | )          | 28.6              |       | 9.5              |       |
| Net  loss attributable to the noncontrolling interest                    |       | —      |       | —           |       | 0.6               |       | 0.6              |       |
| Net  (loss) income attributable to Rockwood Specialties Group, Inc. |       | $           | (16.6      | )                | $          | (2.5              | )          | $                | 29.2       |   | $ | 10.1 |   |

 

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGSTATEMENT OF OPERATIONS**

**NINEMONTHS ENDED SEPTEMBER 30, 2009**

**(Dollarsin millions)**

 
| ** **                                                               | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                               | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| Net  sales                                                               |       | $           | —     |             | $          | 480.1             |       | $                | 1,696.5    |   | $ | 2,176.6 |   |
| Cost  of products sold                                                   |       | —      |       | 365.5            |       | 1,194.6           |       | 1,560.1          |       |
| Gross  profit                                                            |       | —      |       | 114.6            |       | 501.9             |       | 616.5            |       |
| Selling,  general and administrative expenses                            |       | 0.1         |       | 99.9             |       | 350.9             |       | 450.9            |       |
| Restructuring  and other severance costs                                 |       | —      |       | 3.8              |       | 12.2              |       | 16.0             |       |
| Gain  on sale of assets                                                  |       | —      |       | (0.3             | )          | —            |       | (0.3             | )          |
| Operating  (loss) income                                                 |       | (0.1        | )          | 11.2             |       | 138.8             |       | 149.9            |       |
| Other  income (expenses), net:                                           |       |        |       |             |       |              |       |             |       |
| Intergroup  interest, net                                                |       | 87.6        |       | (40.4            | )          | (47.2             | )          | —           |       |
| Interest  expense                                                        |       | (99.7       | )          | (1.1             | )          | (31.8             | )          | (132.6           | )          |
| Interest  income                                                         |       | 0.7         |       | (0.2             | )          | 0.7               |       | 1.2              |       |
| Intergroup  other, net                                                   |       | 155.3       |       | (147.4           | )          | (7.9              | )          | —           |       |
| Gain  (loss) on early extinguishment of debt, net                        |       | 5.2         |       | (6.9             | )          | (24.9             | )          | (26.6            | )          |
| Foreign  exchange (loss) gain, net                                       |       | (3.3        | )          | (0.1             | )          | 18.8              |       | 15.4             |       |
| Other,  net                                                              |       | (0.5        | )          | 0.5              |       | 0.4               |       | 0.4              |       |
| Other  income (expenses), net                                            |       | 145.3       |       | (195.6           | )          | (91.9             | )          | (142.2           | )          |
| Income  (loss) from continuing operations before taxes                   |       | 145.2       |       | (184.4           | )          | 46.9              |       | 7.7              |       |
| Income  tax provision (benefit)                                          |       | 6.9         |       | 1.3              |       | (1.3              | )          | 6.9              |       |
| Income  (loss) from continuing operations                                |       | 138.3       |       | (185.7           | )          | 48.2              |       | 0.8              |       |
| Income  from discontinued operations, net of tax                         |       | 1.0         |       | 0.2              |       | 2.1               |       | 3.3              |       |
| Net  income (loss)                                                       |       | 139.3       |       | (185.5           | )          | 50.3              |       | 4.1              |       |
| Net  loss attributable to the noncontrolling interest                    |       | —      |       | —           |       | 6.2               |       | 6.2              |       |
| Net  income (loss) attributable to Rockwood Specialties Group, Inc. |       | $           | 139.3      |             | $          | (185.5            | )          | $                | 56.5       |   | $ | 10.3 |   |

 

29

----

 

**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGSTATEMENT OF OPERATIONS**

**THREEMONTHS ENDED SEPTEMBER 30, 2008**

**(Dollarsin millions)**

 
| ** **                                                               | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                               | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| Net  sales                                                               |       | $           | —     |             | $          | 204.0             |       | $                | 676.8      |   | $ | 880.8 |   |
| Cost  of products sold                                                   |       | —      |       | 152.6            |       | 470.7             |       | 623.3            |       |
| Gross  profit                                                            |       | —      |       | 51.4             |       | 206.1             |       | 257.5            |       |
| Selling,  general and administrative expenses                            |       | —      |       | 40.0             |       | 130.3             |       | 170.3            |       |
| Restructuring  and other severance costs                                 |       | —      |       | 0.2              |       | 3.2               |       | 3.4              |       |
| Loss  (gain) on sale of assets                                           |       | —      |       | 0.1              |       | (2.8              | )          | (2.7             | )          |
| Operating  income                                                        |       | —      |       | 11.1             |       | 75.4              |       | 86.5             |       |
| Other  expenses, net:                                                    |       |        |       |             |       |              |       |             |       |
| Intergroup  interest, net                                                |       | 28.3        |       | (10.3            | )          | (18.0             | )          | —           |       |
| Interest  expense                                                        |       | (49.0       | )          | (0.3             | )          | (7.0              | )          | (56.3            | )          |
| Interest  income                                                         |       | 4.2         |       | (2.9             | )          | (0.7              | )          | 0.6              |       |
| Intergroup  other, net                                                   |       | 0.9         |       | 2.7              |       | (3.6              | )          | —           |       |
| Foreign  exchange (loss) gain, net                                       |       | (28.4       | )          | 0.1              |       | 1.8               |       | (26.5            | )          |
| Other,  net                                                              |       | —      |       | 0.2              |       | —            |       | 0.2              |       |
| Other  expenses, net                                                     |       | (44.0       | )          | (10.5            | )          | (27.5             | )          | (82.0            | )          |
| (Loss)  income from continuing operations before taxes                   |       | (44.0       | )          | 0.6              |       | 47.9              |       | 4.5              |       |
| Income  tax (benefit) provision                                          |       | (8.7        | )          | 1.8              |       | 17.2              |       | 10.3             |       |
| (Loss)  income from continuing operations                                |       | (35.3       | )          | (1.2             | )          | 30.7              |       | (5.8             | )          |
| Income  from discontinued operations, net of tax                         |       | —      |       | 1.5              |       | —            |       | 1.5              |       |
| Net  (loss) income                                                       |       | (35.3       | )          | 0.3              |       | 30.7              |       | (4.3             | )          |
| Net  loss attributable to the noncontrolling interest                    |       | —      |       | —           |       | 1.0               |       | 1.0              |       |
| Net  (loss) income attributable to Rockwood Specialties Group, Inc. |       | $           | (35.3      | )                | $          | 0.3               |       | $                | 31.7       |   | $ | (3.3 | ) |

 

30

----

 

**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGSTATEMENT OF OPERATIONS**

**NINEMONTHS ENDED SEPTEMBER 30, 2008**

**(Dollarsin millions)**

 
| ** **                                                               | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                               | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| Net  sales                                                               |       | $           | —     |             | $          | 594.2             |       | $                | 2,053.6    |   | $ | 2,647.8 |   |
| Cost  of products sold                                                   |       | —      |       | 440.0            |       | 1,394.5           |       | 1,834.5          |       |
| Gross  profit                                                            |       | —      |       | 154.2            |       | 659.1             |       | 813.3            |       |
| Selling,  general and administrative expenses                            |       | 0.1         |       | 120.2            |       | 392.4             |       | 512.7            |       |
| Restructuring  and other severance costs                                 |       | —      |       | 0.7              |       | 5.0               |       | 5.7              |       |
| Loss  (gain) on sale of assets                                           |       | —      |       | 0.1              |       | (1.9              | )          | (1.8             | )          |
| Operating  (loss) income                                                 |       | (0.1        | )          | 33.2             |       | 263.6             |       | 296.7            |       |
| Other  expenses, net:                                                    |       |        |       |             |       |              |       |             |       |
| Intergroup  interest, net                                                |       | 84.3        |       | (29.2            | )          | (55.1             | )          | —           |       |
| Interest  expense                                                        |       | (115.7      | )          | (1.2             | )          | (22.8             | )          | (139.7           | )          |
| Interest  income                                                         |       | 8.2         |       | (3.0             | )          | (1.0              | )          | 4.2              |       |
| Intergroup  other, net                                                   |       | 0.9         |       | 6.8              |       | (7.7              | )          | —           |       |
| Foreign  exchange (loss) gain, net                                       |       | (9.0        | )          | (0.2             | )          | (3.0              | )          | (12.2            | )          |
| Other,  net                                                              |       | (0.4        | )          | 0.6              |       | 0.5               |       | 0.7              |       |
| Other  expenses, net                                                     |       | (31.7       | )          | (26.2            | )          | (89.1             | )          | (147.0           | )          |
| (Loss)  income from continuing operations before taxes                   |       | (31.8       | )          | 7.0              |       | 174.5             |       | 149.7            |       |
| Income  tax (benefit) provision                                          |       | (7.8        | )          | 6.4              |       | 52.0              |       | 50.6             |       |
| (Loss)  income from continuing operations                                |       | (24.0       | )          | 0.6              |       | 122.5             |       | 99.1             |       |
| Income  from discontinued operations, net of tax                         |       | —      |       | 2.9              |       | —            |       | 2.9              |       |
| Net  (loss) income                                                       |       | (24.0       | )          | 3.5              |       | 122.5             |       | 102.0            |       |
| Net  loss attributable to the noncontrolling interest                    |       | —      |       | —           |       | 0.4               |       | 0.4              |       |
| Net  (loss) income attributable to Rockwood Specialties Group, Inc. |       | $           | (24.0      | )                | $          | 3.5               |       | $                | 122.9      |   | $ | 102.4 |   |

 

31

----

 

**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGBALANCE SHEET**

**SEPTEMBER30, 2009**

**(Dollarsin millions)**

 
| ** **                                                             | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                                             | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                                             |       |        |       |             |       |              |       |             |       |             |       |
| Current  assets:                                                       |       |        |       |             |       |              |       |             |       |             |       |
| Cash  and cash equivalents                                             |       | $           | 36.3       |             | $          | 14.9              |       | $                | 230.9      |             | $          | — |   | $ | 282.1 |   |
| Accounts  receivable, net                                              |       | —      |       | 92.4             |       | 393.9             |       | —           |       | 486.3            |       |
| Inventories                                                            |       | —      |       | 112.1            |       | 423.8             |       | —           |       | 535.9            |       |
| Deferred  income taxes                                                 |       | 3.7         |       | 11.8             |       | 11.5              |       | —           |       | 27.0             |       |
| Prepaid  expenses and other current assets                             |       | 0.4         |       | 20.9             |       | 46.8              |       | —           |       | 68.1             |       |
| Total  current assets                                                  |       | 40.4        |       | 252.1            |       | 1,106.9           |       | —           |       | 1,399.4          |       |
| Property,  plant and equipment, net                                    |       | —      |       | 279.7            |       | 1,462.8           |       | —           |       | 1,742.5          |       |
| Investment  in subsidiary                                              |       | 1,423.2     |       | 90.7             |       | —            |       | (1,513.9         | )          | —           |       |
| Goodwill                                                               |       | —      |       | 17.2             |       | 942.7             |       | —           |       | 959.9            |       |
| Intergroup  receivable                                                 |       | 2,094.3     |       | 207.2            |       | 3,701.9           |       | (6,003.4         | )          | —           |       |
| Other  intangible assets, net                                          |       | —      |       | 99.6             |       | 630.8             |       | —           |       | 730.4            |       |
| Deferred  debt issuance costs, net                                     |       | 1.5         |       | 6.3              |       | 20.4              |       | —           |       | 28.2             |       |
| Deferred  income taxes                                                 |       | —      |       | —           |       | 26.1              |       | —           |       | 26.1             |       |
| Other  assets                                                          |       | —      |       | 1.4              |       | 37.1              |       | —           |       | 38.5             |       |
| Total  assets                                                          |       | $           | 3,559.4    |             | $          | 954.2             |       | $                | 7,928.7    |             | $          | (7,517.3 | ) | $ | 4,925.0 |   |
| **LIABILITIES**                                                        |       |        |       |             |       |              |       |             |       |             |       |
| Current  liabilities:                                                  |       |        |       |             |       |              |       |             |       |             |       |
| Accounts  payable                                                      |       | $           | —     |             | $          | 44.6              |       | $                | 175.4      |             | $          | — |   | $ | 220.0 |   |
| Income  taxes payable                                                  |       | —      |       | (1.6             | )          | 6.1               |       | —           |       | 4.5              |       |
| Accrued  compensation                                                  |       | —      |       | 8.1              |       | 53.4              |       | —           |       | 61.5             |       |
| Restructuring  liability                                               |       | —      |       | 1.2              |       | 8.1               |       | —           |       | 9.3              |       |
| Accrued  expenses and other current liabilities                        |       | 59.4        |       | 50.1             |       | 123.5             |       | —           |       | 233.0            |       |
| Deferred  income taxes                                                 |       | —      |       | —           |       | 8.4               |       | —           |       | 8.4              |       |
| Long-term  debt, current portion                                       |       | 15.9        |       | —           |       | 72.2              |       | —           |       | 88.1             |       |
| Total  current liabilities                                             |       | 75.3        |       | 102.4            |       | 447.1             |       | —           |       | 624.8            |       |
| Long-term  debt                                                        |       | 2,013.3     |       | —           |       | 461.3             |       | —           |       | 2,474.6          |       |
| Pension  and related liabilities                                       |       | —      |       | 15.7             |       | 357.5             |       | —           |       | 373.2            |       |
| Intergroup  payable                                                    |       | 87.4        |       | 1,274.1          |       | 4,641.9           |       | (6,003.4         | )          | —           |       |
| Deferred  income taxes                                                 |       | 5.1         |       | 4.4              |       | 86.5              |       | —           |       | 96.0             |       |
| Other  liabilities                                                     |       | 65.2        |       | 25.9             |       | 91.1              |       | —           |       | 182.2            |       |
| Total  liabilities                                                     |       | 2,246.3     |       | 1,422.5          |       | 6,085.4           |       | (6,003.4         | )          | 3,750.8          |       |
| **EQUITY**                                                             |       |        |       |             |       |              |       |             |       |             |       |
| Rockwood  Specialties Group, Inc. stockholder’s equity:      |       |        |       |             |       |              |       |             |       |             |       |
| Common  stock                                                          |       | —      |       | 190.6            |       | 164.7             |       | (355.3           | )          | —           |       |
| Paid-in  capital                                                       |       | 1,044.0     |       | 104.7            |       | 1,053.9           |       | (1,158.6         | )          | 1,044.0          |       |
| Accumulated  other comprehensive income                                |       | 18.6        |       | (6.6             | )          | 255.3             |       | —           |       | 267.3            |       |
| Retained  earnings (deficit)                                           |       | 250.5       |       | (757.0           | )          | 76.2              |       | —           |       | (430.3           | )          |
| Total  Rockwood Specialties Group, Inc. stockholder’s equity |       | 1,313.1     |       | (468.3           | )          | 1,550.1           |       | (1,513.9         | )          | 881.0            |       |
| Noncontrolling  interest                                               |       | —      |       | —           |       | 293.2             |       | —           |       | 293.2            |       |
| Total  equity                                                          |       | 1,313.1     |       | (468.3           | )          | 1,843.3           |       | (1,513.9         | )          | 1,174.2          |       |
| Total  liabilities and equity                                          |       | $           | 3,559.4    |             | $          | 954.2             |       | $                | 7,928.7    |             | $          | (7,517.3 | ) | $ | 4,925.0 |   |

 

32

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGBALANCE SHEET**

**DECEMBER31, 2008**

**(Dollarsin millions)**

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

 

33

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGSTATEMENT OF CASH FLOWS**

**NINEMONTHS ENDED SEPTEMBER 30, 2009**

**(Dollarsin millions)**

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

 

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(a)          Includes the write-off of deferredfinancing costs of $20.9 and lender fees related to the early extinguishment ofdebt of $12.0, partially offset by a discount on the prepayment of the 2014Notes of $6.3.

 

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGSTATEMENT OF CASH FLOWS**

**NINEMONTHS ENDED SEPTEMBER 30, 2008**

**(Dollarsin millions)**

 
| ** **                                                                                               | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                               | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                                |       |        |       |             |       |              |       |             |       |
| Net  income                                                                                              |       | $           | (24.0      | )                | $          | 3.5               |       | $                | 122.5      |   | $ | 102.0 |   |
| Adjustments  to reconcile net income to net cash (used in) provided by operating  activities:            |       |        |       |             |       |              |       |             |       |
| Income  from discontinued operations, net of tax                                                         |       | —      |       | (2.9             | )          | —            |       | (2.9             | )          |
| Depreciation  and amortization                                                                           |       | —      |       | 34.1             |       | 156.5             |       | 190.6            |       |
| Deferred  financing costs amortization                                                                   |       | 0.3         |       | 0.7              |       | 6.1               |       | 7.1              |       |
| Foreign  exchange loss, net                                                                              |       | 9.0         |       | 0.2              |       | 3.0               |       | 12.2             |       |
| Fair  value adjustment of derivatives                                                                    |       | 5.6         |       | —           |       | 1.2               |       | 6.8              |       |
| Bad  debt provision                                                                                      |       | —      |       | (0.3             | )          | 1.2               |       | 0.9              |       |
| Acquired  in-process research and development                                                            |       | —      |       | —           |       | 2.8               |       | 2.8              |       |
| Stock-based  compensation                                                                                |       | —      |       | 4.1              |       | 2.2               |       | 6.3              |       |
| Deferred  income taxes                                                                                   |       | (8.2        | )          | 5.4              |       | 17.0              |       | 14.2             |       |
| Loss  (gain) on sale of assets and other                                                                 |       | —      |       | 0.2              |       | (2.0              | )          | (1.8             | )          |
| Changes  in assets and liabilities, net of the effect of foreign currency translation  and acquisitions: |       |        |       |             |       |              |       |             |       |
| Accounts  receivable                                                                                     |       | —      |       | (27.8            | )          | (32.7             | )          | (60.5            | )          |
| Inventories                                                                                              |       | —      |       | (16.6            | )          | (28.4             | )          | (45.0            | )          |
| Prepaid  expenses and other assets                                                                       |       | 4.0         |       | (0.9             | )          | 3.3               |       | 6.4              |       |
| Accounts  payable                                                                                        |       | —      |       | (1.1             | )          | (28.0             | )          | (29.1            | )          |
| Income  taxes payable                                                                                    |       | (0.6        | )          | (1.0             | )          | 5.0               |       | 3.4              |       |
| Accrued  expenses and other liabilities                                                                  |       | 10.3        |       | (6.3             | )          | 22.1              |       | 26.1             |       |
| Intercompany  operating activities, net                                                                  |       | 37.0        |       | (33.5            | )          | (3.5              | )          | —           |       |
| Net  cash provided by (used in) operating activities of continuing operations                            |       | 33.4        |       | (42.2            | )          | 248.3             |       | 239.5            |       |
| Net  cash provided by operating activities of discontinued operations                                    |       | —      |       | 11.9             |       | —            |       | 11.9             |       |
| **Net cash provided by (used in) operating activities**                                                  |       | 33.4        |       | (30.3            | )          | 248.3             |       | 251.4            |       |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                                |       |        |       |             |       |              |       |             |       |
| Acquisitions,  including transaction fees paid, net of cash acquired                                     |       | —      |       | (97.4            | )          | (84.3             | )          | (181.7           | )          |
| Acquisitions,  related intercompany                                                                      |       | (96.0       | )          | 96.0             |       | —            |       | —           |       |
| Post  closing purchase price consideration                                                               |       | —      |       | —           |       | 29.1              |       | 29.1             |       |
| Post  closing purchase price consideration, related intercompany                                         |       | 10.0        |       | —           |       | (10.0             | )          | —           |       |
| Capital  expenditures, excluding capital leases                                                          |       | —      |       | (22.8            | )          | (134.3            | )          | (157.1           | )          |
| Proceeds  on sale of assets                                                                              |       | —      |       | 2.2              |       | 2.1               |       | 4.3              |       |
| Net  cash used in investing activities of continuing operations                                          |       | (86.0       | )          | (22.0            | )          | (197.4            | )          | (305.4           | )          |
| Net  cash used in investing activities of discontinued operations                                        |       | —      |       | (5.0             | )          | (0.1              | )          | (5.1             | )          |
| **Net cash used in investing activities**                                                                |       | (86.0       | )          | (27.0            | )          | (197.5            | )          | (310.5           | )          |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                                |       |        |       |             |       |              |       |             |       |
| Titanium  Dioxide Pigments venture financing                                                             |       | —      |       | 3.3              |       | 359.2             |       | 362.5            |       |
| Payment  of assumed debt to Titanium Dioxide Pigments venture minority shareholder                       |       | —      |       | (2.2             | )          | (139.2            | )          | (141.4           | )          |
| Repayment  of senior secured credit facilities                                                           |       | (25.6       | )          | —           |       | (43.1             | )          | (68.7            | )          |
| Payments  on other long-term debt                                                                        |       | —      |       | —           |       | (30.7             | )          | (30.7            | )          |
| Equity  contributions                                                                                    |       | 0.2         |       | —           |       | —            |       | 0.2              |       |
| Deferred  financing costs                                                                                |       | —      |       | —           |       | (5.0              | )          | (5.0             | )          |
| Distribution  to noncontrolling shareholder                                                              |       | —      |       | —           |       | (3.9              | )          | (3.9             | )          |
| Intercompany  financing related activity                                                                 |       | 124.2       |       | (55.6            | )          | (68.6             | )          | —           |       |
| Net  cash provided by (used in) financing activities of continuing operations                            |       | 98.8        |       | (54.5            | )          | 68.7              |       | 113.0            |       |
| Net  cash used in financing activities of discontinued operations                                        |       | —      |       | —           |       | —            |       | —           |       |
| **Net cash provided by (used in) financing activities**                                                  |       | 98.8        |       | (54.5            | )          | 68.7              |       | 113.0            |       |
| Effect  of exchange rate changes on cash and cash equivalents                                            |       | (0.9        | )          | (2.3             | )          | 7.3               |       | 4.1              |       |
| Net  increase (decrease) in cash and cash equivalents                                                    |       | 45.3        |       | (114.1           | )          | 126.8             |       | 58.0             |       |
| Cash  and cash equivalents of continuing operations, beginning of period                                 |       | 370.7       |       | (84.3            | )          | 60.5              |       | 346.9            |       |
| Cash  and cash equivalents of continuing operations, end of period                                       |       | $           | 416.0      |             | $          | (198.4            | )          | $                | 187.3      |   | $ | 404.9 |   |

 

35

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

 

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

 

*Thefollowing discussion contains forward-looking statements that involve numerousrisks and uncertainties. Our actual results could differ materially from thosediscussed in the forward-looking statements as a result of these risks anduncertainties, including those set forth in “Forward-Looking Statements” at theend of this Management Discussion and Analysis section and the risk factorssection of the Company’s 2008 Form 10-K. You should read the followingdiscussion and analysis together with our condensed consolidated financialstatements and the notes to those statements that appear elsewhere in thisQuarterly Report. Amounts may not recalculate due to rounding differences.*

 

*Unlessotherwise noted, all balance sheet related items which are denominated in eurosare converted at the September 30, 2009 exchange rate of €1.00 = $1.4640.*

 

**General**

 

We are a globaldeveloper, manufacturer and marketer of technologically advanced, highvalue-added specialty chemicals and advanced materials. We serve more than60,000 customers across a wide variety of industries and geographic areas. Weoperate through five business segments: (1) Specialty Chemicals; (2) PerformanceAdditives; (3) Titanium Dioxide Pigments; (4) Advanced Ceramics; and (5) SpecialtyCompounds.

 

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

 

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

 

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

 

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

 

·                  We have cut costs, reduced overhead and eliminatedduplicative positions in both acquired and existing businesses. In the fourthquarter of 2008, a restructuring plan was implemented in our SurfaceTreatment business within our Specialty Chemicals segment which includedheadcount reductions and the closure of two manufacturing facilities. Further,during 2009, our Specialty Chemicals segment implemented additional restructuringactions that included headcount reductions and the closure of three additionalmanufacturing facilities;

 

·                  In the fourth quarter of 2008, we reducedoverhead and eliminated duplicative positions throughout the Company as part ofour global cost control initiatives. To cope with the downturn in theeconomy, we have continued this activity in the first nine months of 2009, andwe remain focused on reducing costs, improving productivity, and conservingcash by controlling working capital and capital spending;

 

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

 

·                  We completed the Titanium Dioxide Pigments venturewith Kemira in September 2008. See Note 7, “Acquisitions,” for furtherdetails;

 

·                  In October 2008, we completed the sale of ourpool and spa chemicals business; and

 

·                  In the first half of 2009, we repurchased a portion ofour Euro-denominated senior subordinated notes due in 2014, voluntarily 

 

36

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prepaid a portion of oursenior secured term loans and amended our senior secured creditagreement. See discussion below in “Liquidity and Capital Resources” forfurther details.

 

**FactorsWhich Affect Our Results of Operations**

 

**OurMarkets**

 

Because the businesses inour segments generally serve many unrelated end-use markets, we discuss theprincipal market conditions on a segment basis rather than a consolidatedbasis. A continued economic slowdown could have a negative impact on theresults of our businesses for the remainder of 2009. The principal marketconditions in our segments and regions in which we operate that impacted ourresults of operations during the periods presented include the following:

 

***Specialty Chemicals***

 

·                  Demand for Surface Treatment products in our SpecialtyChemicals segment generally follows the activity levels of metal processingmanufacturers, including the automotive supply, steel and aerospace industries.Sales growth in the Surface Treatment business occurred in 2008 in most marketsand regions served, primarily aerospace, general industrial and Europeanautomotive industries. This growth was driven by price increases and theimpact of bolt-on acquisitions that offset raw material cost increases and lowervolumes from a slowdown in the automotive markets. In the first ninemonths of 2009, results declined on lower volumes in most businesses.

 

·                  Demand for our lithium carbonate products in the FineChemicals business line of our Specialty Chemicals segment is generally drivenby demand in industrial applications, the aluminum business, glass ceramics,cement and the general demand in China. Sales of lithium products specificallyused in life science applications depend on the trends in drug development andgrowth in pharmaceuticals markets as well as generic competition. Growthin the Fine Chemicals business occurred in 2008 in most market segments, drivenby price increases and higher volumes of lithium applications.  In thefirst nine months of 2009, lower volumes in most applications, particularly inlithium and metal sulfide applications, had a negative impact on results.

 

***Performance Additives***

 

·                  Generally, a trend towards the increased use ofcolored concrete products in the construction market has historically had apositive effect on our Color Pigments and Services business line. However,a general slowdown in the construction market negatively impacted constructionsales. North American and European volumes were lower in 2008 and continuedto decline in the first nine months of 2009.

 

·                  Demand for our wood protection products, in particularalkaline copper quaternary, or ACQ, is generally driven by new construction, aswell as repairs and remodeling. The market position of ACQ was negativelyimpacted in 2008 and the first nine months of 2009 by customer shifts tosubstitute products, a general slowdown in the construction market and the useof wood substitutes. These trends are expected to continue for the remainder of2009. In 2008, we introduced our newest*Ecolife* system which utilizes*Ecovance*, a high-performance non-metallic preservative with enhancedenvironmental benefits. Commercialization began in 2008, but did not have asignificant impact in 2008 or the first nine months of 2009. We do notexpect these products to have a significant impact for the remainder of theyear.

 

·                  In the Clay-based Additives business, net salesincreased in 2008 as increased selling prices and volumes for oilfieldapplications and increased selling prices of coatings and inks were partiallyoffset by lower volumes of coatings and carbonless applications.  In thefirst nine months of 2009, net sales decreased as lower volumes in mostapplications were partially offset by increased selling prices and cost controlmeasures.

 

·                  Raw material costs have decreased in the first ninemonths of 2009 driven by lower copper and monoethanoline (“MEA”) prices in ourTimber Treatment Chemicals business, and are expected to be lower for theremainder of 2009 compared to the prior year.

 

***Titanium Dioxide Pigments***

 

·                  Demand for our titanium dioxide products in anatasegrade is driven mainly by demand in the synthetic fiber industry, while demandfor titanium dioxide products in rutile grade and our functional additives isdriven by demand in the coatings, construction, cosmetics, pharmaceutical,food, paper and plastics industries. Market conditions, including pricingpressure and current industry overcapacity, have continued to negatively impactthis segment. Volumes and selling prices in fiber anatase applicationsdecreased in 2008. In the first nine months of 2009, net sales decreasedas lower volumes of fiber anatase applications were partially offset byincreased selling prices. Sales of titanium dioxide products in rutilegrade were down in 2008 due to lower selling prices, partially offset byslightly higher volumes. In the first nine months of 2009, sales of rutileapplications were up due to higher volumes as a result of the venture withKemira that was completed on September 1, 2008, and higher selling 

 

37

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prices. Ourfunctional additives sales were down in 2008 on lower volumes, partially offsetby increased selling prices. In the first nine months of 2009, functionaladditives sales were down as lower volumes were partially offset by higherselling prices.

 

***Advanced Ceramics***

 

·                  Demand for our ceramic medical devices is mainly tiedto the aging population in Europe and the United States. Although the volume ofour products used in medical device applications sold experienced double-digitgrowth each year from 2001 through 2005, in 2006 some customers in the U.S.reduced their demand due to high inventory levels and delayed approvalsresulting in lower volumes. However, sales of our medical device applicationsincreased in 2008 on higher volumes and continued to increase in the first ninemonths of 2009.

 

·                  Despite the negative impact of pricing pressure fromAsian competitors, sales of ceramic products for use in cutting tool productswere up slightly in 2008 on higher volumes. However, sales of theseapplications were lower in the first nine months of 2009. Sales of mechanicalsystems and applications, electronic applications and multi-functionalapplications were down in 2008 and in the first nine months of 2009 from lowervolumes, particularly related to the economic downturn in the automotiveindustry.

 

***Specialty Compounds***

 

·                  Our largest product line in the Specialty Compoundssegment is wire and cable compounds. Sales within this product line aredependent upon the telecommunications market and related sectors, specificallydemand for high-end voice and data communication wire and cable, for which ourSpecialty Compounds segment is a significant provider of sheathing materials.Newly developed non-halogen products for wire and cable data communication,military and other applications have expanded business in North America forthose applications and created opportunities in Europe. However, as aresult of a general downturn in the wire and cable market, volumes of wire andcable products were down in 2008 and in the first nine months of 2009.

 

·                  Most of the other end-use markets for which SpecialtyCompounds’ products are used generally track growth of gross domesticproduct, but many are also application specific, such as automotive. We arefocusing more of our efforts towards increasing high margin specialty products,in particular, thermoplastic elastomers, and less of our efforts in automotiveand footwear. Our net sales in consumer/industrial thermoplastic elastomerswere flat in 2008, but were lower in the first nine months of 2009. Netsales of regulated packaging were lower in 2008 and in the first nine months of2009.

 

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

 

**GlobalExposure**

 

We operate ageographically diverse business. Of our 2008 net sales, 54% were shipments toEurope, 29% to North America (predominantly the United States) and 17% to therest of the world. For a geographic description of the origin of our net salesand location of our long-lived assets, see Note 3, “Segment Information” in our2008 Form 10-K.

 

We estimate that we soldto customers in more than 60 countries during this period. Currently, we serveour diverse and extensive customer base with 91 manufacturing facilities in 25countries. Consequently, we are exposed to global economic and politicalchanges, particularly currency fluctuations that could impact our profitabilityand demand for our products.

 

Our sales and productioncosts are mainly denominated in U.S. dollars or euros. Our results ofoperations and financial condition have been historically impacted by thefluctuation of the euro against our reporting currency, the U.S. dollar. Forthe three and nine months ended September 30, 2009, the average exchangerate of the euro against the U.S. dollar was lower compared to the same periodin 2008. 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.

 

**RawMaterials**

 

Raw materials constitutedapproximately 52% of our 2008 cost of products sold. We have a broad rawmaterial base, with the cost of no single raw material representing more than3% of our cost of products sold in 2008. Nonetheless, the significant pricefluctuations our raw materials have experienced in the past during periods ofhigh demand have had an adverse impact on our results of operations. We cannotaccurately predict the impact of any future price increases for raw materialsor any raw material shortages on our business as a whole or in specificgeographic regions. In addition, we may not be able to pass on raw materialprice increases to our customers. See details of our ten most significantraw materials (in terms of dollars) in 2008 in Item 1, “Business — RawMaterials” in our 2008 Form 10-K.

 

38

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**EnergyCosts**

 

In 2008, energy purchasesrepresented approximately 7% of our cost of products sold. However, withincertain business lines, such as our Titanium Dioxide Pigments segment and theColor Pigments and Services and Clay-based Additives businesses of ourPerformance Additives segment, energy costs are more significant. The cost ofproducts sold for certain of our businesses, including Color Pigments andServices and Clay-based Additives, increases when the price of natural gas inNorth America rises. Natural gas prices in North America were higher during2008, but were down in the first nine months of 2009. Natural gas pricesin Europe have historically been relatively stable, although prices were higherin 2008 and the first nine months of 2009.

 

**IncomeTaxes**

 

We recorded an income taxprovision of $13.0 million in the third quarter of 2009 on income fromcontinuing operations before taxes of $22.6 million. The income tax provisionin the third quarter of 2009 was negatively impacted by the absence of a taxbenefit for the Company’s domestic losses as a result of a full valuationallowance.

 

In the third quarter of2009, the worldwide valuation allowance increased by $24.4 million. This wasprimarily due to an increase of $8.5 million related to net operating lossesand a $15.1 million increase due to domestic losses in other comprehensiveincome. Of the $24.4 million increase in the valuation allowance for the thirdquarter of 2009, $8.5 million impacted the tax provision.

 

**Acquisitions**

 

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

 

**SpecialCharges and Credits**

 

During the periodspresented, we incurred certain special charges that included systems/organizationestablishment expenses, restructuring and other severance costs, foreignexchange gains and losses and a loss on the early extinguishment of debt, net.See “Items excluded from Adjusted EBITDA” section in Note 4, “SegmentInformation,” for a discussion of special charges and credits recorded in thethree and nine months ended September 30, 2009 and 2008.

 

**SpecialNote Regarding Non-GAAP Financial Measures**

 

A non-GAAP financialmeasure is generally defined by the SEC as one that purports to measure historicalor future financial performance, financial position or cash flows but excludesor includes amounts that would not be so adjusted in the most comparable U.S.GAAP measure. From time to time in this management’s discussion and analysis,we disclose non-GAAP financial measures, primarily Adjusted EBITDA, as definedbelow.

 

**Definitionof Adjusted EBITDA**

 

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

 

·                  interest expense;

·                  depreciation expense;

·                  amortization expense, including amortization ofdeferred financing fees;

·                  extraordinary losses and non-recurring charges;

·                  non-cash charges;

·                  losses on asset sales;

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

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

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

·                  any fees and expenses related to permittedacquisitions;

 

39

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·                  any deduction for noncontrolling interest expense; and

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

 

less:

 

·                  extraordinary gains and non-recurring gains;

·                  non-cash gains; and

·                  gains on asset sales,

 

in all cases, subject tocertain exclusions.

 

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

 

**Management’sUses**

 

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

 

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

 

We also use AdjustedEBITDA on a segment basis as the primary measure used by our chief operatingdecision maker, our Chief Executive Officer, to evaluate the ongoingperformance of our business segments and reporting units. On a segment basis,we define Adjusted EBITDA as operating income excluding depreciation andamortization, certain non-cash gains and charges, certain other special gainsand charges determined by our senior management to be non-recurring gains andcharges and certain items deemed by our senior management to have little or nobearing on the day-to-day operating performance of our business segments and reportingunits. The adjustments made to operating income directly correlate with theadjustments to net income in calculating Adjusted EBITDA on a consolidatedbasis pursuant to the senior secured credit agreement, which reflectsmanagement’s interpretations thereof.

 

**Limitations**

 

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

 

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

 

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

 

40

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

 

An investor or potentialinvestor may find any one or all of these items important in evaluating ourperformance, results of operations, financial position and liquidity.Management compensates for the limitations of using non-GAAP financial measuresby using them only to supplement our U.S. GAAP results to provide a morecomplete understanding of the factors and trends affecting ourbusiness. Adjusted EBITDA is not an alternative to net income (loss) orincome (loss) from continuing operations before taxes or operating income orcash flows from operating activities as calculated and presented in accordancewith U.S. GAAP. You should not rely on Adjusted EBITDA as a substitute for anysuch U.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 Form 10-Q. Wealso strongly urge you not to rely on any single financial measure to evaluateour business. Our measure of Adjusted EBITDA may not be comparable to those ofother companies.

 

**Resultsof Operations**

 

**ActualResults of Operations**

 

The following tablepresents the major components of our operations on an actual basis and AdjustedEBITDA (the reconciliation to net income is set forth in—Reconciliation of NetIncome (Loss) Attributable to Rockwood Specialties Group, Inc. to AdjustedEBITDA for the three and nine months ended September 30, 2009 and 2008),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.

 

41

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| ** **                                                               | ** ** | **Three months ended** | ** ** | **Nine months ended**  | ** ** |
|--------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                               | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| **($ in millions)**                                                 | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Statement of operations data:**                                        |       |                   |       |                   |       |   |   |   |   |
| **Net sales:**                                                           |       |                   |       |                   |       |   |   |   |   |
| Specialty  Chemicals                                                     |       | $                      | 261.5      |                   | $          | 319.5 |   | $ | 723.0 |   | $ | 966.7 |   |
| Performance  Additives                                                   |       | 182.2                  |       | 223.2                  |       | 517.6 |   | 676.8 |   |
| Titanium  Dioxide Pigments                                               |       | 177.5                  |       | 140.6                  |       | 480.8 |   | 380.8 |   |
| Advanced  Ceramics                                                       |       | 108.6                  |       | 126.4                  |       | 293.6 |   | 404.9 |   |
| Specialty  Compounds                                                     |       | 54.8                   |       | 68.6                   |       | 157.5 |   | 210.8 |   |
| Corporate  and other                                                     |       | 1.6                    |       | 2.5                    |       | 4.1 |   | 7.8 |   |
| Total  net sales                                                         |       | 786.2                  |       | 880.8                  |       | 2,176.6 |   | 2,647.8 |   |
|                                                                     |       |                   |       |                   |       |   |   |   |   |
| Gross  profit                                                            |       | 231.2                  |       | 257.5                  |       | 616.5 |   | 813.3 |   |
|                                                                     |       | 29.4                   | %          | 29.2                   | %          | 28.3 | % | 30.7 | % |
| Selling,  general and administrative expenses                            |       | 154.8                  |       | 170.3                  |       | 450.9 |   | 512.7 |   |
|                                                                     |       | 19.7                   | %          | 19.3                   | %          | 20.7 | % | 19.4 | % |
| Restructuring  and other severance costs                                 |       | 4.2                    |       | 3.4                    |       | 16.0 |   | 5.7 |   |
| Gain  on sale of assets and other                                        |       | (0.4                   | )          | (2.7                   | )          | (0.3 | ) | (1.8 | ) |
| **Operating income (loss):**                                             |       |                   |       |                   |       |   |   |   |   |
| Specialty  Chemicals                                                     |       | 47.7                   |       | 60.3                   |       | 113.9 |   | 188.2 |   |
|                                                                     |       | 18.2                   | %          | 18.9                   | %          | 15.8 | % | 19.5 | % |
| Performance  Additives                                                   |       | 10.6                   |       | 4.0                    |       | 16.8 |   | 36.9 |   |
|                                                                     |       | 5.8                    | %          | 1.8                    | %          | 3.2 | % | 5.5 | % |
| Titanium  Dioxide Pigments                                               |       | 4.0                    |       | 7.0                    |       | 6.8 |   | 17.4 |   |
|                                                                     |       | 2.3                    | %          | 5.0                    | %          | 1.4 | % | 4.6 | % |
| Advanced  Ceramics                                                       |       | 17.1                   |       | 25.6                   |       | 31.3 |   | 84.5 |   |
|                                                                     |       | 15.7                   | %          | 20.3                   | %          | 10.7 | % | 20.9 | % |
| Specialty  Compounds                                                     |       | 5.6                    |       | 4.8                    |       | 16.9 |   | 17.4 |   |
|                                                                     |       | 10.2                   | %          | 7.0                    | %          | 10.7 | % | 8.3 | % |
| Corporate  and other                                                     |       | (12.4                  | )          | (15.2                  | )          | (35.8 | ) | (47.7 | ) |
| Total  operating income                                                  |       | 72.6                   |       | 86.5                   |       | 149.9 |   | 296.7 |   |
| **Other expenses, net:**                                                 |       |                   |       |                   |       |   |   |   |   |
| Interest  expense                                                        |       | (54.0                  | )          | (56.3                  | )          | (132.6 | ) | (139.7 | ) |
| Interest  income                                                         |       | 0.4                    |       | 0.6                    |       | 1.2 |   | 4.2 |   |
| Loss  on early extinguishment of debt, net                               |       | (0.9                   | )          | —                 |       | (26.6 | ) | — |   |
| Foreign  exchange gain (loss), net                                       |       | 4.5                    |       | (26.5                  | )          | 15.4 |   | (12.2 | ) |
| Other,  net                                                              |       | —                 |       | 0.2                    |       | 0.4 |   | 0.7 |   |
| Other  expenses, net                                                     |       | (50.0                  | )          | (82.0                  | )          | (142.2 | ) | (147.0 | ) |
| **Income from continuing operations before taxes**                       |       | 22.6                   |       | 4.5                    |       | 7.7 |   | 149.7 |   |
| Income  tax provision                                                    |       | 13.0                   |       | 10.3                   |       | 6.9 |   | 50.6 |   |
| Income  (loss) from continuing operations                                |       | 9.6                    |       | (5.8                   | )          | 0.8 |   | 99.1 |   |
| (Loss)  income from discontinued operations, net of tax                  |       | (0.1                   | )          | 1.5                    |       | 3.3 |   | 2.9 |   |
| Net  income (loss)                                                       |       | 9.5                    |       | (4.3                   | )          | 4.1 |   | 102.0 |   |
| Net  loss attributable to the noncontrolling interest                    |       | 0.6                    |       | 1.0                    |       | 6.2 |   | 0.4 |   |
| Net  income (loss) attributable to Rockwood Specialties Group, Inc. |       | $                      | 10.1       |                   | $          | (3.3 | ) | $ | 10.3 |   | $ | 102.4 |   |
|                                                                     |       |                   |       |                   |       |   |   |   |   |
| **Adjusted EBITDA:**                                                     |       |                   |       |                   |       |   |   |   |   |
| Specialty  Chemicals                                                     |       | $                      | 68.1       |                   | $          | 78.8 |   | $ | 175.9 |   | $ | 241.4 |   |
|                                                                     |       | 26.0                   | %          | 24.7                   | %          | 24.3 | % | 25.0 | % |
| Performance  Additives                                                   |       | 28.3                   |       | 28.6                   |       | 71.2 |   | 99.5 |   |
|                                                                     |       | 15.5                   | %          | 12.8                   | %          | 13.8 | % | 14.7 | % |
| Titanium  Dioxide Pigments                                               |       | 24.6                   |       | 23.9                   |       | 65.6 |   | 60.2 |   |
|                                                                     |       | 13.9                   | %          | 17.0                   | %          | 13.6 | % | 15.8 | % |
| Advanced  Ceramics                                                       |       | 31.4                   |       | 38.1                   |       | 75.3 |   | 121.5 |   |
|                                                                     |       | 28.9                   | %          | 30.1                   | %          | 25.6 | % | 30.0 | % |
| Specialty  Compounds                                                     |       | 8.8                    |       | 7.9                    |       | 25.5 |   | 26.7 |   |
|                                                                     |       | 16.1                   | %          | 11.5                   | %          | 16.2 | % | 12.7 | % |
| Corporate  and other                                                     |       | (10.1                  | )          | (14.1                  | )          | (27.9 | ) | (41.8 | ) |
| Total  Adjusted EBITDA (a)                                               |       | $                      | 151.1      |                   | $          | 163.2 |   | $ | 385.6 |   | $ | 507.5 |   |

 

----

(a)                This amount does not include $2.7 million and $5.1million of Adjusted EBITDA for the three and nine months ended September 30,2008 from the pool and spa chemicals business sold in October 2008.

 

42

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

 
| ** **                                                               | ** ** | **Change:  Three months ended September 30, 2009 versus 2008** | ** ** | **Change:  Nine months ended September 30, 2009 versus 2008** | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                               | ** ** | ** **                                                          | ** ** | ** **                                                         | ** ** | **Constant** | ** ** | **Constant** | ** ** | ** ** | ** ** | ** ** | ** ** | **Constant** | ** ** | **Constant** | ** ** |
| ** **                                                               | ** ** | ** **                                                          | ** ** | **%**                                                              | ** ** | **Currency** | ** ** | **Currency** | ** ** | ** ** | ** ** | **%** | ** ** | **Currency** | ** ** | **Currency** | ** ** |
| **($ in millions)**                                                 | ** ** | **Total**                                                           | ** ** | **Change**                                                         | ** ** | **Effect  (a)** | ** ** | **Basis** | ** ** | **Total** | ** ** | **Change** | ** ** | **Effect  (a)** | ** ** | **Basis** | ** ** |
| **Statement of operations data:**                                        |       |                                                                |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net sales:**                                                           |       |                                                                |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                                                     |       | $                                                                   | (58.0      | )                                                                  | (18.2      | )% | $ | (12.3 | ) | $ | (45.7 | ) | $ | (243.7 | ) | (25.2 | )% | $ | (66.7 | ) | $ | (177.0 | ) |
| Performance  Additives                                                   |       | (41.0                                                               | )          | (18.4                                                              | )          | (7.2 | ) | (33.8 | ) | (159.2 | ) | (23.5 | ) | (37.2 | ) | (122.0 | ) |
| Titanium  Dioxide Pigments                                               |       | 36.9                                                                |       | 26.2                                                               |       | (4.6 | ) | 41.5 |   | 100.0 |   | 26.3 |   | (28.9 | ) | 128.9 |   |
| Advanced  Ceramics                                                       |       | (17.8                                                               | )          | (14.1                                                              | )          | (5.1 | ) | (12.7 | ) | (111.3 | ) | (27.5 | ) | (28.5 | ) | (82.8 | ) |
| Specialty  Compounds                                                     |       | (13.8                                                               | )          | (20.1                                                              | )          | (2.7 | ) | (11.1 | ) | (53.3 | ) | (25.3 | ) | (13.7 | ) | (39.6 | ) |
| Corporate  and other                                                     |       | (0.9                                                                | )          | (36.0                                                              | )          | (0.1 | ) | (0.8 | ) | (3.7 | ) | (47.4 | ) | (0.5 | ) | (3.2 | ) |
| Total  net sales                                                         |       | (94.6                                                               | )          | (10.7                                                              | )          | (32.0 | ) | (62.6 | ) | (471.2 | ) | (17.8 | ) | (175.5 | ) | (295.7 | ) |
|                                                                     |       |                                                                |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross  profit                                                            |       | (26.3                                                               | )          | (10.2                                                              | )          | (10.2 | ) | (16.1 | ) | (196.8 | ) | (24.2 | ) | (50.0 | ) | (146.8 | ) |
| Selling,  general and administrative expenses                            |       | (15.5                                                               | )          | (9.1                                                               | )          | (7.0 | ) | (8.5 | ) | (61.8 | ) | (12.1 | ) | (38.7 | ) | (23.1 | ) |
| Restructuring  and other severance costs                                 |       | 0.8                                                                 |       |                                                               |       |   |   | 0.8 |   | 10.3 |   |   |   |   |   | 10.3 |   |
| Gain  on sale of assets and other                                        |       | 2.3                                                                 |       |                                                               |       |   |   | 2.3 |   | 1.5 |   |   |   |   |   | 1.5 |   |
| Total  operating expenses                                                |       | (12.4                                                               | )          | (7.1                                                               | )          | (7.0 | ) | (5.4 | ) | (50.0 | ) | (9.7 | ) | (38.7 | ) | (11.3 | ) |
| **Operating income (loss):**                                             |       |                                                                |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                                                     |       | (12.6                                                               | )          | (20.9                                                              | )          | (1.5 | ) | (11.1 | ) | (74.3 | ) | (39.5 | ) | (5.8 | ) | (68.5 | ) |
| Performance  Additives                                                   |       | 6.6                                                                 |       | 165.0                                                              |       | (0.7 | ) | 7.3 |   | (20.1 | ) | (54.5 | ) | (1.9 | ) | (18.2 | ) |
| Titanium  Dioxide Pigments                                               |       | (3.0                                                                | )          | (42.9                                                              | )          | — |   | (3.0 | ) | (10.6 | ) | (60.9 | ) | (0.3 | ) | (10.3 | ) |
| Advanced  Ceramics                                                       |       | (8.5                                                                | )          | (33.2                                                              | )          | (1.0 | ) | (7.5 | ) | (53.2 | ) | (63.0 | ) | (4.0 | ) | (49.2 | ) |
| Specialty  Compounds                                                     |       | 0.8                                                                 |       | 16.7                                                               |       | (0.2 | ) | 1.0 |   | (0.5 | ) | (2.9 | ) | (0.5 | ) | — |   |
| Corporate  and other                                                     |       | 2.8                                                                 |       | 18.4                                                               |       | 0.2 |   | 2.6 |   | 11.9 |   | 24.9 |   | 1.2 |   | 10.7 |   |
| Total                                                                    |       | (13.9                                                               | )          | (16.1                                                              | )          | (3.2 | ) | (10.7 | ) | (146.8 | ) | (49.5 | ) | (11.3 | ) | (135.5 | ) |
| **Other expenses, net:**                                                 | ** ** | ** **                                                          | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest  expense                                                        |       | 2.3                                                                 |       | (4.1                                                               | )          | 1.4 |   | 0.9 |   | 7.1 |   | (5.1 | ) | 8.9 |   | (1.8 | ) |
| Interest  income                                                         |       | (0.2                                                                | )          | (33.3                                                              | )          | (0.2 | ) | — |   | (3.0 | ) | (71.4 | ) | (0.3 | ) | (2.7 | ) |
| Loss  on early extinguishment of debt, net                               |       | (0.9                                                                | )          |                                                               |       |   |   |   |   | (26.6 | ) |   |   |   |   |   |   |
| Foreign  exchange gain (loss), net                                       |       | 31.0                                                                |       |                                                               |       |   |   |   |   | 27.6 |   |   |   |   |   |   |   |
| Other,  net                                                              |       | (0.2                                                                | )          |                                                               |       |   |   |   |   | (0.3 | ) |   |   |   |   |   |   |
| Other  expenses, net                                                     |       | 32.0                                                                |       |                                                               |       |   |   |   |   | 4.8 |   |   |   |   |   |   |   |
| **Income from continuing operations before taxes**                       | ** ** | ** **                                                          | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Specialty  Chemicals                                                     |       | (11.1                                                               | )          |                                                               |       |   |   |   |   | (89.0 | ) |   |   |   |   |   |   |
| Performance  Additives                                                   |       | 7.2                                                                 |       |                                                               |       |   |   |   |   | (21.7 | ) |   |   |   |   |   |   |
| Titanium  Dioxide Pigments                                               |       | (1.0                                                                | )          |                                                               |       |   |   |   |   | (5.2 | ) |   |   |   |   |   |   |
| Advanced  Ceramics                                                       |       | (9.0                                                                | )          |                                                               |       |   |   |   |   | (60.7 | ) |   |   |   |   |   |   |
| Specialty  Compounds                                                     |       | 0.2                                                                 |       |                                                               |       |   |   |   |   | (2.1 | ) |   |   |   |   |   |   |
| Corporate  and other                                                     |       | 31.8                                                                |       |                                                               |       |   |   |   |   | 36.7 |   |   |   |   |   |   |   |
| Total                                                                    |       | 18.1                                                                |       |                                                               |       |   |   |   |   | (142.0 | ) |   |   |   |   |   |   |
| Income  tax provision                                                    |       | 2.7                                                                 |       |                                                               |       |   |   |   |   | (43.7 | ) |   |   |   |   |   |   |
| Income  (loss) from continuing operations                                |       | 15.4                                                                |       |                                                               |       |   |   |   |   | (98.3 | ) |   |   |   |   |   |   |
| (Loss)  income from discontinued operations, net of tax                  |       | (1.6                                                                | )          |                                                               |       |   |   |   |   | 0.4 |   |   |   |   |   |   |   |
| Net  (loss) income                                                       |       | 13.8                                                                |       |                                                               |       |   |   |   |   | (97.9 | ) |   |   |   |   |   |   |
| Net  loss attributable to the noncontrolling interest                    |       | (0.4                                                                | )          |                                                               |       |   |   |   |   | 5.8 |   |   |   |   |   |   |   |
| Net  income (loss) attributable to Rockwood Specialties Group, Inc. |       | $                                                                   | 13.4       |                                                               |       |   |   |   |   |   | $ | (92.1 | ) |   |   |   |   |   |   |
| **Adjusted EBITDA:**                                                     |       |                                                                |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                                                     |       | $                                                                   | (10.7      | )                                                                  | (13.6      | )% | $ | (2.3 | ) | $ | (8.4 | ) | $ | (65.5 | ) | (27.1 | )% | $ | (10.5 | ) | $ | (55.0 | ) |
| Performance  Additives                                                   |       | (0.3                                                                | )          | (1.0                                                               | )          | (1.3 | ) | 1.0 |   | (28.3 | ) | (28.4 | ) | (5.0 | ) | (23.3 | ) |
| Titanium  Dioxide Pigments                                               |       | 0.7                                                                 |       | 2.9                                                                |       | (0.6 | ) | 1.3 |   | 5.4 |   | 9.0 |   | (4.3 | ) | 9.7 |   |
| Advanced  Ceramics                                                       |       | (6.7                                                                | )          | (17.6                                                              | )          | (1.7 | ) | (5.0 | ) | (46.2 | ) | (38.0 | ) | (7.9 | ) | (38.3 | ) |
| Specialty  Compounds                                                     |       | 0.9                                                                 |       | 11.4                                                               |       | (0.3 | ) | 1.2 |   | (1.2 | ) | (4.5 | ) | (1.5 | ) | 0.3 |   |
| Corporate  and other                                                     |       | 4.0                                                                 |       | 28.4                                                               |       | 0.2 |   | 3.8 |   | 13.9 |   | 33.3 |   | 1.0 |   | 12.9 |   |
| Total  Adjusted EBITDA                                                   |       | $                                                                   | (12.1      | )                                                                  | (7.4       | )% | $ | (6.0 | ) | $ | (6.1 | ) | $ | (121.9 | ) | (24.0 | )% | $ | (28.2 | ) | $ | (93.7 | ) |

 

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

 

43

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

 

**Overview**

 

Net sales decreased $94.6million in the third quarter of 2009 compared with the same period in the prioryear primarily due to lower volumes and the negative impact of currency changesof $32.0 million, partially offset by bolt-on acquisitions, particularly theTitanium Dioxide Pigments venture with Kemira, and increased selling prices of$5.7 million. See further discussion by segment below.

 

Operating income andAdjusted EBITDA decreased in the third quarter of 2009 compared with the sameperiod in the prior year primarily due to lower sales volumes and the negativeimpact of currency changes. This was partially offset by higher selling pricesand lower raw material costs, as well as other cost control measures throughoutthe Company.

 

Net income fromcontinuing operations increased $15.4 million compared with the same period inthe prior year primarily due to foreign exchange losses on financing activitiesrecorded in the third quarter of 2008 compared to foreign exchange gainsrecorded in the third quarter of 2009 and lower interest expense due to adecrease in mark-to-market losses on our interest rate hedginginstruments. This was partially offset by the lower sales volumes and thenegative impact of currency changes noted above, and a loss on the earlyextinguishment of debt, net recorded in the third quarter of 2009 primarilyrelated to lender fees to extend the maturity of our revolving credit facility.

 

Income from discontinuedoperations, net of tax decreased $1.6 million in the third quarter of 2009 andwas primarily due to the absence of income from the sale of the pool and spachemicals business in October 2008.

 

Net loss attributable tononcontrolling interest of $0.6 million was recorded in the third quarter of2009 and primarily relates to losses recorded in our Titanium Dioxide Pigment’sventure. Net loss attributable to noncontrolling interest of $1.0 million wasrecorded in the third quarter of 2008 and relates to losses recorded in ourViance LLC timber treatment chemicals and Titanium Dioxide Pigment’s ventures.

 

Net income attributableto Rockwood Specialties Group, Inc. increased $13.4 million in the thirdquarter of 2009 compared with the same period in the prior year due to thereasons noted above.

 

**Netsales**

 

*SpecialtyChemicals*.  Netsales decreased $58.0 million over the prior year primarily due to lowervolumes and the negative impact of currency changes of $12.3 million. Inthe Fine Chemicals business, lower volumes were driven by lower demand acrossmost industries. Net sales in the Surface Treatment business were lower ondecreased volumes, particularly in general industrial and automotiveapplications, partially offset by higher selling prices and the impact of abolt-on acquisition in September 2008.

 

*PerformanceAdditives*.  Netsales decreased $41.0 million over the prior year primarily due to lowervolumes of construction-related products in our Color Pigments and Services andTimber Treatment Chemicals businesses, lower volumes in our Clay-basedAdditives business and the negative impact of currency changes of $7.2 million.This decrease was partially offset by increased selling prices and the impactof a bolt-on acquisition in August 2008 in our Color Pigments and Servicesbusiness.

 

*TitaniumDioxide Pigments*.  Netsales increased $36.9 million over the prior year due to the completion of theventure with Kemira on September 1, 2008. This was partially offsetby lower volumes of titanium dioxide products and functional additives, and thenegative impact of currency changes of $4.6 million.

 

*AdvancedCeramics*.  Netsales decreased $17.8 million over the prior year primarily due to lowervolumes in all applications, except medical, and the negative impact ofcurrency changes of $5.1 million, partially offset by the impact of a bolt-onacquisition in October 2008.

 

*SpecialtyCompounds*.  Netsales decreased $13.8 million over the prior year primarily due to lowervolumes in most applications, particularly in wire and cable, and the negativeimpact of currency changes of $2.7 million.

 

*Corporateand other*.  Netsales decreased $0.9 million over the prior year primarily due to lower volumesin the wafer reclaim business.

 

**Grossprofit**

 

Gross profit decreased$26.3 million over the prior year primarily due to the volume decreases notedabove and the negative impact of currency changes of $10.2 million. Inaddition, depreciation and amortization costs were higher in most businessesprimarily from the impact of acquisitions. The decrease in gross profitwas partially offset by cost control measures undertaken throughout the Companyand lower raw material costs throughout most businesses. Gross profit as apercentage of net sales were 29.4% and 29.2% in the third 

 

44

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quarter of 2009 and 2008,respectively.

 

**Selling,general and administrative expenses**

 

Selling, general andadministrative expenses, or SG&A, decreased $15.5 million over the prioryear primarily due to the impact of currency changes of $7.0 million, lowercompensation-related costs and professional fees, as well as other cost controlmeasures undertaken throughout the Company. SG&A expenses as apercentage of net sales were 19.7% and 19.3% in the third quarter of 2009 and2008, respectively.

 

**Restructuringand other severance costs**

 

We recorded $4.2 millionof restructuring and other severance costs in the third quarter of 2009throughout the Company. These charges primarily relate to headcountreductions as part of our global cost control initiatives. We recorded$3.4 million of restructuring and other severance charges in the third quarterof 2008 for restructuring actions primarily in the Performance Additives,Advanced Ceramics and Specialty Chemicals segments for miscellaneous headcountreductions. See Note 14, “Restructuring and Other Severance Costs,” forfurther details.

 

**Operatingincome**

 

*SpecialtyChemicals*.  Operatingincome decreased $12.6 million over the prior year primarily due to the lowervolumes discussed above, increased restructuring and other severance costs of$1.7 million and the negative impact of currency changes of $1.5million. This decrease was partially offset by higher selling prices,lower raw material costs of $3.7 million, primarily for phosphoric acid andtin, cost control measures and the impact of a bolt-on acquisition in September 2008.

 

*PerformanceAdditives*. Operatingincome increased $6.6 million over the prior year primarily due to lower rawmaterial costs of $5.3 million, primarily for iron-oxide, MEA and copper, costcontrol measures, acquired in-process research and development costs and aninventory write-up charge of $2.8 million and $1.5 million, respectively,recorded in the third quarter of 2008, higher selling prices and the impact ofa bolt-on acquisition. This increase was partially offset by the lower volumesdiscussed above and lower depreciation and amortization costs of $1.3 million.

 

*TitaniumDioxide Pigments*.  Operatingincome decreased $3.0 million over the prior year primarily due to the lowervolumes noted above and increased depreciation and amortization costs of $5.2million primarily related to the Kemira venture completed in September 2008.This was partially offset by increased sales related to the Kemira venture,cost control measures, lower raw material costs of $5.9 million and aninventory write-up charge of $2.1 million recorded in the third quarter of 2008.

 

*AdvancedCeramics*.  Operatingincome decreased $8.5 million over the prior year primarily due to the lowervolumes noted above and increased depreciation and amortization costs of $1.6million. This decrease was partially offset by the impact of a bolt-onacquisition in October 2008 and cost control measures.

 

*SpecialtyCompounds*.  Operatingincome increased $0.8 million over the prior year primarily due to lower rawmaterial costs of $6.8 million primarily for PVC resin and plasticizer costsand lower operating costs. This was partially offset by lower selling prices,as well as lower volumes in most applications, particularly in wire and cable.

 

*Corporateand other*.  Operatingloss decreased $2.8 million primarily due to lower compensation-related costsand professional fees, as well as other cost control measures, partially offsetby the lower sales volumes noted above.

 

**Otherincome (expenses)**

 

*Interestexpense*.  Interestexpense increased $2.3 million in the third quarter of 2009 compared to thesame period in the prior year. The third quarter of 2009 and 2008 includednon-cash losses of $1.3 million and $10.0 million, respectively, representingthe movement in the mark-to-market valuation of our interest rate hedginginstruments. Excluding the impact of these losses, interest expense increased$6.4 million primarily due to higher interest rates related to the amendment ofour senior secured credit facility in June 2009, as well as debt incurredduring the third quarter of 2008 related to the Titanium Dioxide Pigmentsventure partially offset by Corporate debt repayments.

 

*Interestincome*.  Interestincome decreased $0.2 million in the third quarter of 2009 compared to the sameperiod in the prior year due to lower average cash balances in the thirdquarter of 2009 compared to the same period in the prior year and lowershort-term average interest rates.

 

*Loss on early extinguishment ofdebt, net.* In thethird quarter of 2009, we recorded a loss on early extinguishment of debt, netof $0.9 million primarily related to lender fees to extend the maturity of ourrevolving credit facility.

 

*Foreignexchange, net*.  Inthe third quarter of 2009, we had foreign exchange gains of $4.5 millionprimarily due to the impact of the 

 

45

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stronger euro as of September 30,2009 versus June 30, 2009 in connection with non-operatingEuro-denominated transactions. In the third quarter of 2008, foreignexchange losses of $26.5 million were reported due to the impact of the weakereuro as of September 30, 2008 versus June 30, 2008 related to non-operatingEuro-denominated transactions.

 

**Provisionfor income taxes**

 

We recorded an income taxprovision of $13.0 million in the third quarter of 2009 on income fromcontinuing operations before taxes of $22.6 million. The income tax provisionin the third quarter of 2009 was negatively impacted by the absence of a taxbenefit for the Company’s domestic losses as a result of a full valuationallowance.

 

We recorded an income taxprovision of $10.3 million in the third quarter of 2008 on income from continuingoperations before taxes of $4.5 million. The income tax provision in the thirdquarter of 2008 was adversely impacted by the absence of a tax benefit for theCompany’s domestic losses as a result of a full valuation allowance. Theselosses were primarily due to foreign exchange losses and mark-to-market losseson derivative instruments. This was partially offset by the allocation of taxbenefits to continuing operations primarily from other comprehensive income.

 

**Income(loss) from continuing operations**

 

Income from continuingoperations for the third quarter of 2009 was $9.6 million as compared to a lossfrom continuing operations of $5.8 million for the third quarter of 2008 forthe reasons described above.

 

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

 

Income from discontinuedoperations, net of tax decreased $1.6 million in the third quarter of 2009 andwas primarily due to the absence of income from the sale of the pool and spachemicals business in October 2008.

 

**Net lossattributable to noncontrolling interest**

 

Net loss attributable tononcontrolling interest of $0.6 million was recorded in the third quarter of2009 and primarily relates to losses recorded in our Titanium Dioxide Pigment’sventure. Net loss attributable to noncontrolling interest of $1.0 million wasrecorded in the third quarter of 2008 and relates to losses recorded in ourtimber treatment chemicals and Titanium Dioxide Pigment’s ventures.

 

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

 

Net income attributableto Rockwood Specialties Group, Inc. for the third quarter of 2009 was$10.1 million (income of $10.2 million from continuing operations and loss fromdiscontinued operations of $0.1 million) as compared to net loss attributableto Rockwood Specialties Group, Inc. of $3.3 million (loss of $4.8 millionfrom continuing operations and income from discontinued operations of $1.5million) for the same period in the prior year for the reasons described above.

 

**AdjustedEBITDA**

 

*SpecialtyChemicals*.  AdjustedEBITDA decreased $10.7 million over the prior year primarily due to the lowervolumes discussed above and the negative impact of currency changes of $2.3million. This decrease was partially offset by higher selling prices,lower raw material costs of $3.7 million, cost control measures and the impactof a bolt-on acquisition in September 2008.

 

*PerformanceAdditives*.  AdjustedEBITDA decreased $0.3 million over the prior year due to the lower volumesdiscussed above and the negative impact of currency changes of $1.3 million.This decrease was partially offset by lower raw material costs of $5.3 million,cost control measures, higher selling prices and the impact of a bolt-onacquisition.

 

*TitaniumDioxide Pigments*.  AdjustedEBITDA increased $0.7 million over the prior year due to increased salesrelated to the completion of the venture with Kemira, cost control measures andlower raw material costs of $5.9 million. This was partially offset by lowervolumes and the negative impact of currency changes of $0.6 million.

 

*AdvancedCeramics*.  AdjustedEBITDA decreased $6.7 million over the prior year primarily due to the lowervolumes noted above. This decrease was partially offset by the impact of abolt-on acquisition in October 2008 and cost control measures.

 

*SpecialtyCompounds*.  AdjustedEBITDA increased $0.9 million over the prior year due to lower raw materialcosts of $6.8 million and lower operating costs. This was partially offset bylower selling prices, as well as lower volumes in most applications,particularly in wire and cable.

 

*Corporateand other. *AdjustedEBITDA increased $4.0 million primarily due to lower compensation-related costsand professional fees, as well as other cost control measures, partially offsetby the lower sales volumes noted above.

 

46

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***Nine months ended September 30, 2009 compared to ninemonths ended September 30, 2008***

 

**Overview**

 

Net sales decreased$471.2 million in the nine months ended September 30, 2009 compared with thesame period in the prior year primarily due to lower volumes and the negativeimpact of currency changes of $175.5 million, partially offset by increasedselling prices of $67.6 million and bolt-on acquisitions, particularly theTitanium Dioxide Pigments venture with Kemira. See further discussion bysegment below.

 

Operating income andAdjusted EBITDA decreased in the nine months ended September 30, 2009compared with the same period in the prior year primarily due to lower salesvolumes and the negative impact of currency changes. This was partially offsetby higher selling prices, lower corporate costs due to decreased incentivecompensation-related costs and lower professional fees, lower raw materialcosts, as well as other cost control measures throughout the Company.

 

Net income fromcontinuing operations decreased $98.3 million in the nine months ended September 30,2009 compared with the same period in the prior year due to the reasons notedabove and a loss on the early extinguishment of debt, net of $26.6 millionprimarily related to the amendment of our senior secured credit facility in June 2009.This was partially offset by higher foreign exchange gains on financingactivities recorded in the nine months ended September 30, 2009.

 

Income from discontinuedoperations, net of tax was $3.3 million in the nine months ended September 30,2009 and was primarily due to the favorable resolution of a claim against theCompany’s former Groupe Novasep business and the reversal of certain reservesno longer deemed necessary in connection with the sale of the Electronicsbusiness in December 2007. Income from discontinued operations, net of taxwas $2.9 million in the nine months ended September 30, 2008 fromoperating the pool and spa chemicals business that was sold in October 2008.

 

Net loss attributable tononcontrolling interest increased $5.8 million in the nine months ended September 30,2009 and was due to losses recorded in our Viance LLC timber treatmentchemicals and Titanium Dioxide Pigment’s ventures.

 

Net income attributableto Rockwood Specialties Group, Inc. decreased $92.1 million in the ninemonths ended September 30, 2009 compared with the same period in the prioryear due to the reasons noted above.

 

**Netsales**

 

*SpecialtyChemicals*.  Netsales decreased $243.7 million over the prior year primarily due to lowervolumes and the negative impact of currency changes of $66.7 million. Inthe Fine Chemicals business, lower volumes in most products, particularly inlithium and metal sulfide applications, were partially offset by higher sellingprices. Net sales in the Surface Treatment business were lower on decreasedvolumes, particularly in general industrial and automotive applications,partially offset by higher selling prices and the impact of a bolt-onacquisition in September 2008.

 

*PerformanceAdditives*.  Netsales decreased $159.2 million over the prior year primarily due to lowervolumes of construction-related products in our Color Pigments and Services andTimber Treatment Chemicals businesses, lower volumes in our Clay-basedAdditives business and the negative impact of currency changes of $37.2million. This decrease was partially offset by increased selling prices and theimpact of a bolt-on acquisition in August 2008.

 

*TitaniumDioxide Pigments*.  Netsales increased $100.0 million over the prior year due to the completion of theventure with Kemira on September 1, 2008, as well as increased sellingprices. This was partially offset by lower volumes of titanium dioxideproducts and functional additives, and the negative impact of currency changesof $28.9 million.

 

*AdvancedCeramics*.  Netsales decreased $111.3 million over the prior year primarily due to lowervolumes in most applications and the negative impact of currency changes of $28.5million, partially offset by the impact of a bolt-on acquisition in October 2008and higher volumes of medical applications.

 

*SpecialtyCompounds*.  Netsales decreased $53.3 million over the prior year primarily due to lowervolumes in most applications, particularly in wire and cable, and the negativeimpact of currency changes of $13.7 million.

 

*Corporateand other*.  Netsales decreased $3.7 million over the prior year primarily due to lower volumesin the wafer reclaim business.

 

**Grossprofit**

 

Gross profit decreased$196.8 million over the prior year primarily due to the sales volume decreasesnoted above and the negative impact of currency changes of $50.0million. In addition, depreciation and amortization costs were higher inmost businesses primarily from the impact of acquisitions. The decrease ingross profit was partially offset by lower raw material costs and cost controlmeasures 

 

47

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undertaken throughout theCompany. Gross profit as a percentage of net sales decreased to 28.3% inthe nine months ended September 30, 2009 from 30.7% in the nine monthsended September 30, 2008.

 

**Selling,general and administrative expenses**

 

Selling, general andadministrative expenses, or SG&A, decreased $61.8 million over the prioryear primarily due to the impact of currency changes of $38.7 million, lowercompensation-related costs and professional fees, as well as other cost controlmeasures undertaken throughout the Company. Lower compensation-related costsinclude the reversal of discretionary profit-sharing accruals of $2.6 millionand the reversal of certain long-term incentive compensation program accrualsof $2.7 million for which related targets are no longer expected to beachieved. SG&A expenses as a percentage of net sales were 20.7% and19.4% in the nine months ended September 30, 2009 and 2008, respectively.

 

**Restructuringand other severance costs**

 

We recorded $16.0 millionof restructuring and other severance costs in the nine months ended September 30,2009 throughout the Company. These charges primarily relate to headcountreductions as part of our global cost control initiatives. We recorded$5.7 million of restructuring and other severance costs in the nine monthsended September 30, 2008 for restructuring actions primarily in thePerformance Additives, Advanced Ceramics and Specialty Chemicals segments formiscellaneous headcount reductions. See Note 14, “Restructuring and OtherSeverance Costs,” for further details.

 

**Operatingincome**

 

*SpecialtyChemicals*.  Operatingincome decreased $74.3 million over the prior year primarily due to the lowervolumes discussed above, the negative impact of currency changes of $5.8million, higher raw material costs of $5.4 million, primarily for phosphoricacid, and increased depreciation and amortization costs of $3.9million. This decrease was partially offset by higher selling prices, costcontrol measures and the impact of a bolt-on acquisition.

 

*PerformanceAdditives*.  Operatingincome decreased $20.1 million over the prior year due to the lower volumesdiscussed above and increased restructuring and other severance costs of $2.4million. This decrease was partially offset by higher selling prices,lower depreciation and amortization costs of $4.5 million and acquiredin-process research and development costs and an inventory write-up charge of$2.8 million and $1.5 million, respectively, recorded in the third quarter of2008. Cost control measures and the impact of a bolt-on acquisition also had afavorable impact on results.

 

*TitaniumDioxide Pigments*.  Operatingincome decreased $10.6 million over the prior year primarily due to the lowervolumes noted above and increased depreciation and amortization costs of $16.9million primarily related to the Kemira venture completed in September 2008.This was partially offset by increased sales related to the Kemira venture,cost control measures, as well as lower raw material costs of $9.4 million.

 

*AdvancedCeramics*.  Operatingincome decreased $53.2 million over the prior year primarily due to the lowervolumes noted above, increased restructuring and other severance costs of $4.6million, increased depreciation and amortization costs of $2.5 million and thenegative impact of currency changes of $4.0 million. This decrease waspartially offset by cost control measures, the impact of a bolt-on acquisitionin October 2008 and higher volumes of medical applications.

 

*SpecialtyCompounds*.  Operatingincome decreased $0.5 million over the prior year primarily due to the negativeimpact of currency changes of $0.5 million. Lower raw material costs of $11.0million, particularly PVC resin and plasticizer costs, and lower operatingcosts were offset by lower volumes in most applications, particularly in wireand cable.

 

*Corporateand other. *Operatingloss decreased $11.9 million primarily due to lower compensation-related costsand professional fees, as well as other cost control measures undertakenthroughout the Company, partially offset by the lower sales volumes noted above.Lower compensation-related costs include the reversal of certain long-termincentive compensation accruals of $2.7 million related to performance targetsthat are no longer expected to be achieved.

 

**Otherincome (expenses)**

 

*Interestexpense*.  Interestexpense decreased $7.1 million in the nine months ended September 30, 2009compared to the same period in the prior year. The nine months ended September 30,2009 and 2008 included non-cash gains of $1.3 million and losses of $6.8million, respectively, representing the movement in the mark-to-marketvaluation of our interest rate hedging instruments. Excluding the impact ofthese gains and losses, interest expense increased $1.0 million primarily dueto higher interest rates related to the amendment of our senior secured creditfacility in June 2009 and debt incurred during the third quarter of 2008related to the Titanium Dioxide Pigments venture with Kemira, partially offsetby Corporate debt repayments.

 

*Interestincome*.  Interestincome decreased $3.0 million in the nine months ended September 30, 2009compared to the same period in the prior year due to lower short-term averageinterest rates.

 

48

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*Loss onearly extinguishment of debt, net*.  For the nine months ended September 30,2009, we recorded a loss on early extinguishment of debt, net of $26.6 millionprimarily related to the write-off of deferred financing costs of $20.9 millionand lender fees related to the early extinguishment of debt of $12.0 million,partially offset by a discount of $6.3 million related to the repurchase of$153.2 million in aggregate principal amount of the 2014 Notes.

 

*Foreignexchange, net*.  For the nine months ended September 30, 2009, foreign exchange gains of$15.4 million were reported primarily due to the impact of the stronger poundsterling, as well as a stronger euro, as of September 30, 2009 versus December 31,2008, in connection with non-operating Euro-denominated transactions. Forthe nine months ended September 30, 2008, foreign exchange losses of $12.2million were reported primarily due to the impact of the weaker euro oneuro-denominated financing transactions.

 

**Provisionfor income taxes**

 

We recorded an income taxprovision of $6.9 million in the nine months ended September 30, 2009 onincome from continuing operations before taxes of $7.7 million. The income taxprovision in the nine months ended September 30, 2009 was negativelyimpacted by the absence of a tax benefit for the Company’s domestic tax lossesas a result of a full valuation allowance and was positively impacted by anonrecurring tax benefit related to foreign currency changes and favorableforeign rate differentials.

 

For the nine months endedSeptember 30, 2008, the effective tax rate was 33.8% and an income taxprovision of $50.6 million was recorded. The effective income tax rate comparedto the federal statutory rate was negatively impacted by domestic losses whichare not tax effected as a result of a full valuation allowance and was positivelyimpacted by favorable foreign rate differentials as a result of geographicearnings mix and an allocation of tax benefits to continuing operationsprimarily related to other comprehensive income.

 

**Incomefrom continuing operations**

 

Income from continuingoperations for the nine months ended September 30, 2009 was $0.8 millionas compared to income from continuing operations of $99.1 million for the ninemonths ended September 30, 2008 for the reasons described above.

 

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

 

Income from discontinuedoperations, net of tax was $3.3 million in the nine months ended September 30,2009 and was due to the favorable resolution of a claim against the Company’sformer Groupe Novasep business and the reversal of certain reserves no longerdeemed necessary in connection with the sale of the Electronics business in December 2007. Incomefrom discontinued operations, net of tax was $2.9 million in the nine monthsended September 30, 2008 from operating the pool and spa chemicalsbusiness that was sold in October 2008.

 

**Net lossattributable to noncontrolling interest**

 

Net loss attributable tononcontrolling interest of $6.2 million and $0.4 million for the nine monthsended September 30, 2009 and 2008, respectively, was recorded. Noncontrollinginterest primarily represents the noncontrolling interest portion of theViance, LLC joint venture that was completed in January 2007 and thenoncontrolling interest portion of the Titanium Dioxide Pigments venturecompleted in September 2008. The change from the prior year primarilyrelates to losses recorded in these ventures.

 

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

 

Net income attributableto Rockwood Specialties Group, Inc. for the nine months ended September 30,2009 was $10.3 million (income of $7.0 million from continuing operations andincome from discontinued operations of $3.3 million) as compared to net incomeattributable to Rockwood Specialties Group, Inc. of $102.4 million (incomeof $99.5 million from continuing operations and income from discontinuedoperations of $2.9 million) for the same period in the prior year for thereasons described above.

 

**AdjustedEBITDA**

 

*SpecialtyChemicals*.  AdjustedEBITDA decreased $65.5 million over the prior year primarily due to the lowervolumes discussed above, the negative impact of currency changes of $10.5million and higher raw material costs of $5.4 million primarily for phosphoricacid. This decrease was partially offset by higher selling prices, cost controlmeasures and the impact of a bolt-on acquisition.

 

*PerformanceAdditives*.  AdjustedEBITDA decreased $28.3 million over the prior year due to the lower volumesdiscussed above and the negative impact of currency changes of $5.0million. This decrease was partially offset by higher selling prices, costcontrol measures and the impact of a bolt-on acquisition.

 

49

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*TitaniumDioxide Pigments*.  AdjustedEBITDA increased $5.4 million over the prior year due to increased salesrelated to the completion of the venture with Kemira, cost control measures andlower raw material costs of $9.4 million. This was partially offset by thenegative impact of currency changes of $4.3 million and lower sales volumes.

 

*AdvancedCeramics*.  AdjustedEBITDA decreased $46.2 million over the prior year primarily due to the lowervolumes noted above and the negative impact of currency changes of $7.9million. This decrease was partially offset by cost control measures, theimpact of a bolt-on acquisition in October 2008 and higher volumes ofmedical applications.

 

*SpecialtyCompounds*.  AdjustedEBITDA decreased $1.2 million over the prior year due to the negative impact ofcurrency changes of $1.5 million and the lower sales volumes noted above. Thiswas partially offset by lower raw material costs of $11.0 million and loweroperating costs.

 

*Corporateand other. *AdjustedEBITDA increased $13.9 million over the prior year primarily due to lowercompensation-related costs and professional fees, as well as other cost controlmeasures undertaken throughout the Company. Lower compensation-relatedcosts include the reversal of certain long-term incentive compensation accrualsof $2.7 million related to performance targets that are no longer expected tobe achieved.

 

***Reconciliation of Net Income (Loss) Attributable to Rockwood******Specialties Group******, Inc. toAdjusted EBITDA***

 

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

 
| ** **                                                               | ** ** | **Three months ended** | ** ** | **Nine months ended**  | ** ** |
|--------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                               | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| **($ in millions)**                                                 | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net  income (loss) attributable to Rockwood Specialties Group, Inc. |       | $                      | 10.1       |                   | $          | (3.3 | ) | $ | 10.3 |   | $ | 102.4 |   |
| Net loss  attributable to noncontrolling interest                        |       | (0.6                   | )          | (1.0                   | )          | (6.2 | ) | (0.4 | ) |
| Net  income (loss)                                                       |       | 9.5                    |       | (4.3                   | )          | 4.1 |   | 102.0 |   |
| Income  tax provision                                                    |       | 13.0                   |       | 10.3                   |       | 6.9 |   | 50.6 |   |
| Loss  (income) from discontinued operations, net of tax                  |       | 0.1                    |       | (1.5                   | )          | (3.3 | ) | (2.9 | ) |
| Income  from continuing operations before taxes                          |       | 22.6                   |       | 4.5                    |       | 7.7 |   | 149.7 |   |
| Interest  expense (a)                                                    |       | 54.0                   |       | 56.3                   |       | 132.6 |   | 139.7 |   |
| Interest  income                                                         |       | (0.4                   | )          | (0.6                   | )          | (1.2 | ) | (4.2 | ) |
| Depreciation  and amortization                                           |       | 71.5                   |       | 65.6                   |       | 208.5 |   | 190.6 |   |
| Restructuring  and other severance costs                                 |       | 4.2                    |       | 3.4                    |       | 16.0 |   | 5.7 |   |
| Systems/organization  establishment expenses                             |       | 2.4                    |       | 3.7                    |       | 5.5 |   | 7.1 |   |
| Inventory  write-up charges                                              |       | —                 |       | 3.7                    |       | — |   | 4.2 |   |
| Loss  on early extinguishment of debt, net                               |       | 0.9                    |       | —                 |       | 26.6 |   | — |   |
| Gain  on sale of assets and other                                        |       | (0.4                   | )          | (2.7                   | )          | (0.3 | ) | (1.8 | ) |
| Acquired  in-process research and development                            |       | —                 |       | 2.8                    |       | — |   | 2.8 |   |
| Foreign  exchange (gain) loss, net                                       |       | (4.5                   | )          | 26.5                   |       | (15.4 | ) | 12.2 |   |
| Other                                                                    |       | 0.8                    |       | —                 |       | 5.6 |   | 1.5 |   |
| Total  Adjusted EBITDA (b)                                               |       | $                      | 151.1      |                   | $          | 163.2 |   | $ | 385.6 |   | $ | 507.5 |   |

 

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(a)                Includes losses of $1.3 million and $10.0 million forthe three months ended September 30, 2009 and 2008, respectively, andgains of $1.3 million and losses of $6.8 million for the nine months ended September 30,2009 and 2008, respectively, representing the movement in the mark-to-marketvaluation of the Company’s interest rate and cross-currency hedginginstruments.

 

(b)               This amount does not include $2.7 million and $5.1million of Adjusted EBITDA for the three and nine months ended September 30,2008 from the pool and spa chemicals business sold in October 2008.

 

**Liquidityand Capital Resources**

 

**CashFlows**

 

*OperatingActivities*.  Net cash provided by operating activities was $269.2 million and $251.4 millionfor the nine months ended September 30, 2009 and 2008, respectively. Netcash from operating activities increased primarily from an outflow of operatingcash from working capital changes in the nine months ended September 30,2008, partially offset by lower net income, higher cash interest 

 

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expense and operatingcash inflows in the prior year related to operating the pool and spa businessthat was sold in October 2008.

 

*InvestingActivities*.  Netcash used in investing activities was $131.5 million for the nine months ended September 30,2009 and was primarily comprised of capital expenditures. Net cash used ininvesting activities was $310.5 million for the nine months ended September 30,2008 and was primarily comprised of capital expenditures and funds used forbolt-on acquisitions, partially offset by funds received related to the claimsettlement between the Company and GEA Group in 2008.

 

*FinancingActivities*.  Net cash (used in) provided by financing activities was $(314.2) million and$113.0 million for the nine months ended September 30, 2009 and 2008,respectively. Net cash used in financing activities increased due tocertain debt prepayments. 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 in the first half of 2009, and $25.8 million related to theamendment of the senior secured credit facility in June 2009. For the ninemonths ended September 30, 2008, net cash provided by financing activitiesincluded $362.5 million related to the financing of the Titanium DioxidePigments venture, partially offset by the payment of assumed debt to theminority shareholder of the Titanium Dioxide Pigments venture of $141.4 million.

 

**Liquidity**

 

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

 

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

 

·                  On June 15, 2009, we amended our senior securedcredit agreement, which amends and restates in its entirety our senior securedcredit agreement. See further details in Note 11, “Long-Term Debt,” andbelow within this Liquidity and Capital Resources section.

 

Our primary liquidityrequirements are working capital, debt service, capital expenditures andacquisitions. Our debt service requirements in future years are significant andare substantially higher than historical amounts. We believe that based oncurrent conditions in our industry and markets, our cash reserves, cash flowsfrom operations and borrowings available under our revolving credit facilitywill be adequate sources of liquidity for the remainder of 2009. However,a prolonged economic downturn or recession may have a material adverse impacton our results of operations, cash flows from operations and our liquidity. SeeItem 1, “Business,” and Item 1A, “Risk Factors” in our 2008 Form 10-K.

 

In addition, our liquidity may be negatively impacteddue to funding obligations related to certain pension plans. We have severalpension plans located in Germany, Finland, the United Kingdom and the UnitedStates, which were adversely impacted by market conditions in late 2008 andearly 2009. Although recent investment performance of assets in pension planscovering our employees in these countries has reduced the amount of anyimmediate funding obligations, we may have to make a significant payment via aone-time payment and/or long-term funding arrangement to one or more of these plans.However, our funding obligations could change significantly based on theinvestment performance of the pension plan. Any deterioration of the capitalmarkets or returns available in such markets may materially and adverselyimpact our pension plan assets and increase our funding obligations for one ormore of these plans and adversely impact our liquidity. We cannot predict theimpact of this or any further market disruption on our pension fundingobligations.

 

In August 2009, theU.S. Department of Energy awarded $28.4 million in Recovery and ReinvestmentAct funds, subject to certain conditions, to our Fine Chemicals business withinour Specialty Chemicals segment.  We expect to use the funds toexpand and upgrade the production of lithium compounds used in lithium ionbatteries for hybrid and electric vehicles at our Silver Peak, Nevada and KingsMountain, North Carolina facilities. In addition to the funds from thisgrant, we are required to invest an additional $28 million in the project overthe next few years.  In addition, in September 2009, the GermanFederal Ministry for the Environment, Nature Conservation and Nuclear Safetyawarded €5.7 million to our Fine Chemicals business to set up a pilot plant forthe recycling of lithium ion batteries, subject to customary terms andconditions. Including the funds from this grant, we expect to invest anadditional €8.8 million in the project over the next few years.

 

As of September 30,2009, we had actual total indebtedness of $2,562.7 million. Our $250.0 millionrevolving credit facility under our senior secured credit facility provided foradditional borrowings of up to $224.1 million as of September 30, 2009.There were no outstanding borrowings under this revolving credit facility as ofSeptember 30, 2009, although we had outstanding letters of credit of $25.9million that reduced our availability under the senior secured credit facility.The €30.0 million ($43.9 million) revolving credit facility under the TitaniumDioxide Pigments venture facility provided for additional borrowings of up to€10.0 million ($14.6 million) as of September 30, 2009. There was €10.0million ($14.6 million) of borrowings outstanding under this facility as of September 30,2009, as well as an outstanding bank guarantee of €10.0 million ($14.6 million)that further reduced availability under this facility.

 

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As of September 30,2009, we had cash and cash equivalents of $282.1 million from several sources,including cash from operations and the net cash proceeds received from the saleof the pool and spa chemicals business in October 2008, less cash used forcertain selective acquisitions and debt repayments.

 

*Seniorsecured credit facilities.*  On June 15, 2009, we amended andrestated our senior secured credit agreement (“Restated Credit Agreement”),which amends and restates in its entirety our senior secured creditagreement. The Restated Credit Agreement extends the maturity of certainterm loans by providing for (i) approximately $942.0 million of newtranche H term loans with a maturity date of May 15, 2014, the aggregateamount of which is deemed to convert a like amount of outstanding principal ofexisting tranche E term loans (that had a maturity date of July 30, 2012)under the existing credit agreement and (ii) approximately €195.6 million($270.0 million using the exchange rate on the date of amendment, June 15,2009, of $1.3803) of new tranche I term loans with a maturity date of May 15,2014, the aggregate amount of which is deemed to convert a like amount of outstandingprincipal of existing tranche G term loans (that had a maturity date of July 30,2012) under the existing credit agreement. In the third quarter of 2009,we extended the maturity of $180 million of availability under ourrevolving credit facility from 2010 to 2012 bearing interest at our option ofeither (i) Libor (subject to Libor floor of 2.00%) plus 4.50% or (ii) ABRplus 3.25%.

 

The Restated CreditAgreement also provides for a Libor (Euribor for Euro-denominated tranches)floor of 2.00% applicable to all senior secured credit facilities subject topricing based on Libor or Euribor with the following applicable margins aboveLibor or Euribor: applicable margins for Tranches A-1 and A-2 of 3.00%; TrancheE of 2.75%; Tranche G of 3.00%; Tranche H of 4.25%; and Tranche I of 4.50%, ineach case per annum, each with a 0.25% reduction for achieving a designatedcredit rating, with the exception of Tranches A-1 and A-2. As a result,interest expense related to these term loans is now higher than in priorperiods. As of September 30, 2009, the Company continued to qualifyfor the 0.25% interest rate reduction as the designated credit ratings wereachieved.

 

In addition, the RestatedCredit Agreement replaced the consolidated total debt to consolidated AdjustedEBITDA ratio covenant with a senior secured debt to consolidated AdjustedEBITDA covenant ratio such that we may not permit our senior secured debt ratioto exceed 4.40 to 1.00 on the last day of any fiscal quarter through andincluding March 31, 2010, 4.25 to 1.00 on the last day of any fiscalquarter thereafter through and including September 30, 2010, and 4.00 to1.00 on the last day of any fiscal quarter thereafter. The Restated CreditAgreement also resets the asset sales basket and increased the available amountbasket that applies to certain investment, debt and capital expenditurenegative covenants and certain other baskets.

 

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

 

·                  tranche A-1 term loans in an aggregate principalamount of €4.2 million ($6.1 million) and tranche A-2 term loans in anaggregate principal amount of €36.5 million ($53.4 million), each maturing on July 30,2011 and bearing interest at a Euribor floor of 2.00% plus 3.00%;

 

·                  tranche E term loans in an aggregate principal amountof $139.4 million, maturing on July 30, 2012 and bearing interest at aLibor floor of 2.00% plus 2.50%;

 

·                  tranche G term loans in an aggregate principal amountof €65.1 million ($95.3 million) maturing on July 30, 2012 and bearinginterest at a Euribor floor of 2.00% plus 2.75%;

 

·                  tranche H term loan in an aggregate principal amountof $937.2 million maturing on May 15, 2014 and bearing interest at a Liborfloor of 2.00% plus 4.00%;

 

·                  tranche I term loan in an aggregate principal amountof €194.7 million ($285.0 million) maturing on May 15, 2014 and bearinginterest at a Euribor floor of 2.00% Euribor plus 4.25%; and

 

·                  a revolving credit facility in an aggregate principalamount of $250.0 million, of which $70.0 million matures on July 30,2010 bearing interest at the Company’s option of either (i) Libor(subject to Libor floor of 2.00%) plus 3.00% or (ii) ABR plus 1.75% ofwhich $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%. As of September 30, 2009, we hadno borrowings outstanding under this facility and had outstanding letters ofcredit of $25.9 million that reduced our availability under the creditfacility.

 

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

 

The Company’s borrowingsand the borrowings of our wholly-owned subsidiary Rockwood Specialties Limitedunder the senior 

 

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secured credit facilitiesare guaranteed and secured by assets and pledges of capital stock.

 

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

 

*Covenantcompliance.*  Inaddition to the affirmative and restrictive covenants, the senior securedcredit agreement contains the following financial covenants that are determinedbased on our Adjusted EBITDA (including certain adjustments for acquisitionsand related synergies), which reflects management’s interpretations thereof:

 

·                  a leverage ratio: for the twelve-month period ended September 30,2009, net senior secured debt (senior secured debt plus capital leaseobligations, minus cash up to a maximum of $100.0 million) to Adjusted EBITDAmust be less than 4.40 to 1; for such period, our ratio equaled 3.47 to 1; and

 

·                  an interest coverage ratio: for the twelve-monthperiod ended September 30, 2009, Adjusted EBITDA to cash interest expense(interest expense, net excluding deferred debt issuance cost amortization andthe movements in the mark-to market value of our interest rate andcross-currency interest rate derivatives) must be at least 2.00 to 1; for suchperiod, our ratio equaled 3.11 to 1.

 

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

 

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

 

We were in compliancewith the above covenants as of September 30, 2009.

 

*2014Notes.*  Asof September 30, 2009, the 2014 Notes have an aggregate principal amountof €250.1 million ($366.1 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 and November 15and accrues at the rate of 7.625% in the case of the Euro notes and 7.500% inthe case of the U.S. Dollar notes. Certain of our domestic subsidiariesguarantee the 2014 Notes on a senior subordinated unsecured basis (see Note 16,“Consolidating Financial Information,” for further details). In the firsthalf of 2009, we repurchased at a discount €113.9 million ($153.2 million) inaggregate principal amount of our 2014 Notes. We may use available cash torepurchase additional 2014 Notes at any time.

 

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

 

The indenture governingthe 2014 Notes prohibits us from incurring additional debt, subject to certainpermitted incurrences, unless the fixed charge coverage ratio, which is theratio of Adjusted EBITDA (as defined therein excluding certain adjustmentspermitted under the senior secured credit agreement) to fixed charges (asdefined therein), for the most recently ended four fiscal quarters is at least2.00 to 1. In addition, the indenture prohibits us from making restrictedpayments (such as dividends or other equity distributions, repurchases ofcapital stock or restricted investments), subject to certain permittedpayments, unless, among other things, the fixed charge coverage ratio for themost recently ended four fiscal quarters is at least 2.00 to 1. For thefour-fiscal quarter period ended September 30, 2009, the fixed chargecoverage ratio equaled 3.11 to 1. This covenant is a material term of theindenture governing the 2014 Notes.

 

Because the indenturegoverning the 2014 Notes defines an event of default to include, among otherthings, a default under any other debt obligation in excess of $35.0 millionthat could cause the acceleration of such obligation, any acceleration underthe senior secured credit agreement or other debt agreement would also resultin a default under the indenture governing these notes, which 

 

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could lead to the noteholders electing to declare the principal, premium, if any, and interest on thethen outstanding notes immediately due and payable.

 

*TitaniumDioxide Pigments venture term loans, revolving credit facility and assumeddebt.*  As of September 30, 2009, the Titanium Dioxide Pigments venture, which wascompleted in September 2008, had €245.0 million ($358.7 million) outstandingunder the term loan facility of its facility agreement entered into in June 2008,as amended in August 2008. The facility also provides for a revolvingcredit facility of €30.0 million ($43.9 million) of which €10.0 million ($14.6million) was outstanding as of September 30, 2009. An outstanding bankguarantee of €10.0 million ($14.6 million) further reduced its availabilityunder this facility. Both the term loan and revolving credit facilities maturein June 2013.

 

In addition, the TitaniumDioxide Pigments venture has assumed debt of €23.8 million ($34.8 million) fromKemira, primarily due to a defined benefit plan, at interest rates ranging from3.70% to 5.00%.

 

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

 

As of September 30,2009, the interest rate on the term loan and revolving credit facility isEuribor (or Libor if the currency is in USD) plus 2.50%, subject to a step downdetermined by reference to a leverage ratio test. The term loan is payable ininstallments over a five-year period from the date of the facility agreement,with payments commencing twelve months from such date and the remainder due atthe final maturity date. The term loan and revolving credit facility may berepaid in advance without penalty.

 

The facility agreementcontains affirmative and restrictive covenants, subject to certain thresholdsand exceptions. The restrictive covenants limit the venture’s ability toundertake certain actions, including but not limited to acquiring or disposingof assets, creating liens on assets, entering into a merger or corporaterestructuring, and incurring additional indebtedness. These covenants arecalculated in accordance with International Financial Reporting Standards andare based solely on the results of the venture. In addition, the facilityagreement requires the venture to meet certain financial covenants, including:

 

·                  A leverage coverage ratio: for the twelve-month periodended September 30, 2009, net debt to EBITDA, subject to certainadjustments (which is substantially similar to the definition of AdjustedEBITDA in our senior secured credit agreement) must be less than 4.00 to 1: forsuch period, our ratio equaled 3.58 to 1;

 

·                  An interest coverage ratio: EBITDA, subject to certainadjustments, (which is substantially similar to the definition of AdjustedEBITDA in our senior secured credit agreement) to cash interest expense (net ofinterest income), must be greater than 3.00 to 1: for such period, our ratioequaled 3.99 to 1; and

 

·                  Cash flow coverage ratio: cash generated for financingactivities (EBITDA, subject to certain adjustments, less working capitalchanges, capital expenditures and interest) to debt service (interest expenseand amortization of debt) must be greater than 1.00: for such period, our ratioequaled 1.75 to 1.

 

We were in compliancewith the above covenants as of September 30, 2009.

 

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

 
| ** **                                                                                                             | ** ** | **Nine months ended**  | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                             | ** ** | **September 30,** | ** ** |
| **($ in millions)**                                                                                               | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Net  cash provided by operating activities from continuing operations                                                  |       | $                      | 269.2      |   | $ | 239.5 |   |
| Changes  in assets and liabilities, net of the effect of foreign currency translation  and acquisitions                |       | (54.6                  | )          | 94.2 |   |
| Current  portion of income tax provision                                                                               |       | 18.4                   |       | 36.4 |   |
| Interest  expense, net, excluding amortization of deferred financing costs and  unrealized losses/gains on derivatives |       | 126.5                  |       | 121.6 |   |
| Restructuring  and other severance costs                                                                               |       | 16.0                   |       | 5.7 |   |
| Systems/organization  establishment expenses                                                                           |       | 5.5                    |       | 7.1 |   |
| Inventory  write-up charges                                                                                            |       | —                 |       | 4.2 |   |
| Bad  debt provision                                                                                                    |       | (0.7                   | )          | (0.9 | ) |
| Gain  on sale of assets and other                                                                                      |       | (0.3                   | )          | (1.8 | ) |
| Other                                                                                                                  |       | 5.6                    |       | 1.5 |   |
| Total  Adjusted EBITDA                                                                                                 |       | $                      | 385.6      |   | $ |  507.5 |   |

 

***Contractual Obligations***

 

The Company is obligatedto make future payments under various contracts such as debt agreements(including scheduled cash interest payments), operating lease agreements, andunconditional purchase obligations.  In addition, liabilities forunrecognized tax benefits in the amount of $28.0 million as of December 31,2008 were excluded from the Contractual Obligations table as we were unable tomake a reasonably reliable estimate of the period of cash settlement with therespective taxing authorities. Liabilities for these unrecognized tax benefitsare classified as non-current income tax liabilities (other liabilities) unlessexpected to be paid in one year. A discussion of these contractual obligationsis included in the Company’s 2008 Form 10-K. As noted above, werepurchased $153.2 million of our Euro-denominated 2014 Notes and voluntarilyprepaid $102.3 million of our senior secured term loans in the first half of2009. We also amended our senior secured credit agreement in June 2009. Exceptfor the debt repayments made in 2009, the extension of the maturity of $1.2billion of our senior secured debt from 2012 to 2014, and the higher interestcosts associated with the amendment to our senior secured credit agreement,there have not been significant changes to these contractual obligations as of September 30,2009.

 

***Capital Expenditures***

 

Rockwood’s capitalexpenditures for the nine months ended September 30, 2009 consistedprimarily of replacements of worn, obsolete or damaged equipment as well asinvestments in new equipment.

 

For the nine months endedSeptember 30, 2009 and 2008, our capital expenditures, excluding capitalleases, were $116.5 million and $157.1 million, respectively. Capitalexpenditures for each of our reporting segments are provided in the followingtable:

 
| ** **                                 | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **        | ** ** | ** **       | ** ** |
|--------------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|-------------------|------------|------------------|------------|
| ** **                                 | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | **Corporate and** | ** ** | ** **       | ** ** |
| **($ in millions)**                   | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **other**         | ** ** | **Consolidated** | ** ** |
| Nine  months ended September 30, 2009 |       | $             | 35.6       |            | $          | 20.5         |       | $            | 30.3       |          | $          | 24.7              |       | $                | 4.3        |   | $ | 1.1 |   | $ | 116.5 |   |
| Nine  months ended September 30, 2008 |       | 50.8          |       | 30.3            |       | 31.0         |       | 32.0         |       | 8.7           |       | 4.3               |       | 157.1            |       |
|                                            |            |               |            |                 |            |              |            |              |            |               |            |                   |            |                  |            |  |  |  |  |  |  |  |

 

We may incur future costsfor capital improvements and general compliance under Safety, Health andEnvironmental (“SHE”) laws. For the year ended December 31, 2008, ourcapital expenditures for SHE matters totaled $28.1 million, excluding costs tomaintain and repair pollution control equipment. For 2009, we estimate capitalexpenditures for compliance with SHE laws to be at similar levels; however, becausecapital expenditures for these matters are subject to changes in and new SHElaws, we cannot provide assurance that our recent expenditures will beindicative of future amounts required to comply with these laws, including theEU’s Registration, Evaluation and Authorization of Chemicals (“REACH”)legislation. See Note 15, “Commitments and Contingencies,” “RegulatoryDevelopments” for a discussion of REACH.

 

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***Foreign currency related transactions***

 

As of September 30,2009, $1,271.6 million of the debt outstanding is denominated in euros.

 

**RecentAccounting Standards**

 

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

 

**Off-BalanceSheet Arrangements**

 

In the normal course ofbusiness, the Company incurs obligations which include guarantees related tocontract completion, regulatory compliance and product performance. Undercertain circumstances, these obligations are supported through the issuance ofletters of credit and other bank guarantees. As of September 30, 2009, theCompany had approximately $29.6 million of letters of credit and other bankguarantees, of which $13.5 million will expire in 2009 through 2014. The remainingguarantees have no specified expiration date. This amount includes outstandingletters of credit of $25.9 million that reduced our availability under thesenior secured credit facility. In the opinion of management, such obligationswill not significantly affect the Company’s financial position, results ofoperations or cash flows as the Company anticipates fulfilling its performanceobligations.

 

**Commitmentsand Contingencies**

 

See Note 15, “Commitmentsand Contingencies,” for a discussion of the Company’s Commitments andContingencies.

 

**CriticalAccounting Policies and Estimates**

 

Our discussion andanalysis of our financial condition and results of operations are based uponour condensed consolidated financial statements, which have been prepared in accordancewith U.S. GAAP. The preparation of these financial statements requires us tomake estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and the related disclosure of contingentassets and liabilities. These estimates include assessing, among other things:

 

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

 

·                  the use and recoverability of inventory;

 

·                  the valuation of deferred tax assets;

 

·                  the amount of unrecognized tax benefits;

 

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

 

·                  the useful lives of tangible and intangible assets.

 

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

 

The significantaccounting policies of the Company are described in Note 1, “Descriptionof Business and Summary of Significant Accounting Policies,” to the unauditedcondensed consolidated financial statements and the critical accounting policiesand estimates are described in the “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” section in the Company’s 2008 Form 10-K.There have been no significant changes to these critical accounting policiesand estimates as of September 30, 2009.

 

**Forward-LookingStatements**

 

This document containsforward-looking statements. Forward-looking statements within the context ofthe Private Securities Litigation Reform Act of 1995 are not statements ofhistorical fact and may involve a number of risks and uncertainties.Forward-looking statements give our current expectations or forecasts of futureevents and estimates of amounts not yet determinable. We have used the words “anticipate,”“estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “predict,” “could,”“may” and other words and terms of similar meaning, including references toassumptions, in this report to identify forward-looking statements. These forward-lookingstatements are made based on expectations and beliefs concerning future eventsaffecting us and are subject to uncertainties and factors relating to ouroperations and business environment, all of which are difficult to predict andmany of which 

 

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are beyond our control,that could cause our actual results to differ materially from those expressedin or implied by these forward-looking statements. In particular, these factorsinclude, among other things:

 

·                  our business strategy;

·                  changes in the general economic conditions in NorthAmerica and Europe and in other locations in which we currently do business;

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

·                  fluctuations in interest rates, exchange rates andcurrency values;

·                  availability and pricing of raw materials;

·                  fluctuations in energy prices;

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

·                  our ability to access capital markets;

·                  technological changes affecting production of ourmaterials;

·                  governmental and environmental regulations and changesin those regulations;

·                  hazards associated with chemicals manufacturing;

·                  our high level of indebtedness;

·                  risks associated with negotiating, consummating andintegrating acquisitions;

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

·                  risks associated with international sales andoperations.

 

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

 

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

 

We are exposed to marketrisk from changes in interest rates, foreign currency exchange rates andcommodity prices. We manage our exposure to these market risks through regularoperating and financing activities and through the use of derivatives. Whenused, derivatives are employed as risk management tools and not for tradingpurposes. A discussion and analysis of the Company’s market risk isincluded in the Company’s 2008 Form 10-K. There have been no significantchanges to these market risks as of September 30, 2009.

 

**Item4T.  Controls and Procedures**

 

Our management, with theparticipation of our Chief Executive Officer and Chief Financial Officer,evaluated the effectiveness of the design and operation of our disclosurecontrols and procedures as of September 30, 2009 and concluded that ourdisclosure controls and procedures are effective. In connection with thisevaluation, our management did not identify any change in our internal controlover financial reporting that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting during thethird quarter of 2009.

 

**PART II— OTHER INFORMATION**

 

**Item1.  Legal Proceedings.**

 

We are involved in legalproceedings from time to time in the ordinary course of our business, includingwith respect to product liability, intellectual property and environmentalmatters. In addition, we may be required to make indemnity payments inconnection with certain product liability and environmental claims. See Item 1,“Business,” and Item 1A, “Risk Factors,” “Environmental Indemnities—We maybe subject to environmental indemnity claims relating to properties we havedivested”; “Product Liability— Due to the nature of our business and products,we may be liable for damages arising out of product liability claims”; and “ProductLiability—Due to the nature of our business and products, we may be liable fordamages arising out of certain indemnity claims” in our 2008 Form 10-K.

 

**Hospira Matter**

 

In August 2009, the North Carolina Supreme Courtdenied both parties petitions for review of the appellate court’sruling. The parties recently reached a tentative settlement in thismatter, which is subject to executing a mutually agreed settlement agreement.

 

**Advertising Matter**

 

In September 2009, the district court issued a preliminaryinjunction prohibiting Viance from making certain claims related to MCQ in itsadvertisements and denied Viance’s request for a preliminary injunction relatedto certain claims in Osmose’s advertisements. The 

 

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Company expects the matter to proceed to a full trialon the merits of the claims. The Company will continue to vigorouslydefend this matter.

 

**Toxic Substances Control ActMatter**

 

In September, 2009, a subsidiary of our SpecialtyChemicals segment was cited by the U.S. Environmental Protection Agency forfailure to report hazardous material production quantities under the ToxicSubstances Control Act - 2005 Inventory Update Rule.  The business hasprovided the required information; however, the business expects to pay a fineas a result of this violation.

 

We do not believe thatany individual, legal proceeding, government action or arbitration is likely tohave a material adverse effect on our business, results of operations, cashflows or financial condition. We cannot predict the outcome of any legalproceeding or the potential for future legal proceedings. See Note 15, “Commitmentsand Contingencies,” in this Form 10-Q and Item 3, Legal Proceedings in our 2008Form 10-K.

 

**Item1A. Risk Factors.**

 

A discussion of theCompany’s risk factors is included in the Company’s Form 10-K for the yearended December 31, 2008. There have been no material changes to these riskfactors.

 

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

 

None.

 

**Item3.  Defaults upon Senior Securities.**

 

None.

 

**Item4.  Submission of Matters to a Vote of Security Holders.**

 

None.

 

**Item5.  Other Information.**

 

None.

 

**Item6.  Exhibits**

 

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

 

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**SIGNATURES**

 

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

 
|   |   | ROCKWOOD SPECIALTIES  GROUP, INC. |
|--------|--------|----------------------------------------|
|   |   |                                   |
|   |   |                                   |   |
|   |   | By:                                    | /s/ SEIFI GHASEMI |
|   |   |                                   | Seifi Ghasemi |
|   |   |                                   | Chairman and Chief  Executive Officer |
|   |   |                                   | Date: November 5,  2009 |
|   |   |                                   |   |
|   |   |                                   |   |
|   |   | ROCKWOOD SPECIALTIES  GROUP, INC. |
|   |   |                                   |
|   |   |                                   |   |
|   |   | By:                                    | /s/ ROBERT J. ZATTA |
|   |   |                                   | Robert J. Zatta |
|   |   |                                   | Senior Vice President  and Chief Financial Officer |
|   |   |                                   | Date: November 5,  2009 |

 

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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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