**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 March 31, 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.  xYes  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  xNo

 

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 May 11,2009, 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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TABLE OF CONTENTS

 

**FORM 10-Q**

 
|    | PART I-  FINANCIAL INFORMATION                                                                      |
|---------|----------------------------------------------------------------------------------------------------------|
| Item 1  | Financial  Statements (Unaudited)                                                                        |
|    | Condensed Consolidated Statements of Operations for  the three months ended March 31, 2009 and 2008 |
|    | Condensed Consolidated Balance Sheets as of  March 31, 2009 and December 31, 2008              |
|    | Condensed Consolidated Statements of Cash Flows for  the three months ended March 31, 2009 and 2008 |
|    | Condensed Consolidated Statements of Equity for the  three months ended March 31, 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** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                               | ** ** | **March 31,**     | ** ** |
| ** **                                                               | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Net sales                                                                |       | $                      | 660.0      |   | $ | 843.8 |   |
| Cost of products sold                                                    |       | 477.9                  |       | 571.3 |   |
| Gross profit                                                             |       | 182.1                  |       | 272.5 |   |
| Selling, general and administrative expenses                             |       | 145.1                  |       | 166.6 |   |
| Restructuring and other severance costs                                  |       | 7.8                    |       | 0.8 |   |
| Loss on sale of assets and other                                         |       | 0.1                    |       | 0.1 |   |
| Operating income                                                         |       | 29.1                   |       | 105.0 |   |
| Other expenses, net:                                                     |       |                   |       |   |   |
| Interest expense (a)                                                     |       | (49.7                  | )          | (73.7 | ) |
| Interest income                                                          |       | 0.4                    |       | 2.2 |   |
| Gain on early extinguishment of debt                                     |       | 2.2                    |       | — |   |
| Foreign exchange (loss) gain, net                                        |       | (5.6                   | )          | 15.1 |   |
| Other, net                                                               |       | 0.1                    |       | 0.4 |   |
| Other expenses, net                                                      |       | (52.6                  | )          | (56.0 | ) |
| (Loss) income from continuing operations before  taxes                   |       | (23.5                  | )          | 49.0 |   |
| Income tax (benefit) provision                                           |       | (16.7                  | )          | 19.7 |   |
| (Loss) income from continuing operations                                 |       | (6.8                   | )          | 29.3 |   |
| Income (loss) from discontinued operations, net of tax                   |       | 2.3                    |       | (1.0 | ) |
| Net (loss) income                                                        |       | (4.5                   | )          | 28.3 |   |
| Net loss (income) attributable to noncontrolling  interest               |       | 3.0                    |       | (0.6 | ) |
| Net (loss) income attributable to Rockwood  Specialties Group, Inc. |       | $                      | (1.5       | ) | $ | 27.7 |   |
|                                                                     |       |                   |       |   |   |
| Amounts attributable to Rockwood Specialties  Group, Inc.:          |       |                   |       |   |   |
| (Loss) earnings from continuing operations                               |       | $                      | (3.8       | ) | $ | 28.7 |   |
| Earnings (loss) from discontinued operations                             |       | 2.3                    |       | (1.0 | ) |
| Net (loss) income                                                        |       | $                      | (1.5       | ) | $ | 27.7 |   |

 

----

| (a) Interest expense includes:          |   |   |   |   |   |
|----------------------------------------------|--------|--------|--------|--------|--------|
| Interest expense on debt                     |   | $      | (37.7  | )      | $      | (40.6 | ) |
| Mark-to-market losses on interest rate swaps |   | (9.6   | )      | (30.8  | )      |
| Deferred financing costs                     |   | (2.4   | )      | (2.3   | )      |
| Total                                        |   | $      | (49.7  | )      | $      | (73.7 | ) |

 

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)**

 
| ** **                                                                                       | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                       | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| **ASSETS**                                                                                       |       |               |       |                  |       |
| Current assets:                                                                                  |       |               |       |                  |       |
| Cash and cash equivalents                                                                        |       | $                  | 321.8      |                  | $          | 468.7 |   |
| Accounts  receivable, net                                                                        |       | 425.5              |       | 464.6                 |       |
| Inventories                                                                                      |       | 603.2              |       | 641.0                 |       |
| Deferred income  taxes                                                                           |       | 22.5               |       | 22.2                  |       |
| Prepaid expenses  and other current assets                                                       |       | 53.1               |       | 65.9                  |       |
| Total current  assets                                                                            |       | 1,426.1            |       | 1,662.4               |       |
| Property, plant  and equipment, net                                                              |       | 1,645.6            |       | 1,752.2               |       |
| Goodwill                                                                                         |       | 871.1              |       | 917.8                 |       |
| Other intangible  assets, net                                                                    |       | 708.4              |       | 754.8                 |       |
| Deferred debt  issuance costs, net of accumulated amortization of $38.0 and $39.2,  respectively |       | 33.5               |       | 39.1                  |       |
| Deferred income  taxes                                                                           |       | 19.7               |       | 11.6                  |       |
| Other assets                                                                                     |       | 35.8               |       | 39.5                  |       |
| Total assets                                                                                     |       | $                  | 4,740.2    |                  | $          | 5,177.4 |   |
| **LIABILITIES**                                                                                  |       |               |       |                  |       |
| Current  liabilities:                                                                            |       |               |       |                  |       |
| Accounts payable                                                                                 |       | $                  | 201.9      |                  | $          | 260.8 |   |
| Income taxes  payable                                                                            |       | 3.3                |       | 4.1                   |       |
| Accrued  compensation                                                                            |       | 77.7               |       | 92.6                  |       |
| Restructuring  liability                                                                         |       | 13.4               |       | 18.9                  |       |
| Accrued expenses  and other current liabilities                                                  |       | 188.1              |       | 215.5                 |       |
| Deferred income  taxes                                                                           |       | 8.9                |       | 9.0                   |       |
| Long-term debt,  current portion                                                                 |       | 26.5               |       | 90.9                  |       |
| Total current  liabilities                                                                       |       | 519.8              |       | 691.8                 |       |
| Long-term debt                                                                                   |       | 2,559.5            |       | 2,720.3               |       |
| Pension and  related liabilities                                                                 |       | 337.4              |       | 352.0                 |       |
| Deferred income  taxes                                                                           |       | 82.8               |       | 97.7                  |       |
| Other  liabilities                                                                               |       | 194.4              |       | 189.8                 |       |
| Total  liabilities                                                                               |       | 3,693.9            |       | 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                                                          |       | 160.4              |       | 207.0                 |       |
| Accumulated  deficit                                                                             |       | (442.1             | )          | (440.6                | )          |
| Total Rockwood  Specialties Group, Inc. stockholder’s equity                           |       | 762.3              |       | 810.4                 |       |
| Noncontrolling  interest                                                                         |       | 284.0              |       | 315.4                 |       |
| Total equity                                                                                     |       | 1,046.3            |       | 1,125.8               |       |
| Total  liabilities and equity                                                                    |       | $                  | 4,740.2    |                  | $          | 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)**

 
| ** **                                                                                                                                               | ** ** | **Three months ended** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                                                               | ** ** | **March 31,**     | ** ** |
| ** **                                                                                                                                               | ** ** | **2009**               | ** ** | **2008** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                                                                               |       |                   |       |   |   |
| Net (loss)  income                                                                                                                                       |       | $                      | (4.5       | ) | $ | 28.3 |   |
| Adjustments to  reconcile net (loss) income to net cash provided by operating activities:                                                                |       |                   |       |   |   |
| (Income) loss  from discontinued operations, net of tax                                                                                                  |       | (2.3                   | )          | 1.0 |   |
| Depreciation and  amortization                                                                                                                           |       | 68.1                   |       | 61.5 |   |
| Deferred  financing costs amortization                                                                                                                   |       | 2.4                    |       | 2.3 |   |
| Gain on early  extinguishment of debt (including $1.4 of noncash write-offs on deferred financing  costs for the three months ended March 31, 2009) |       | (2.2                   | )          | — |   |
| Foreign exchange  loss (gain)                                                                                                                            |       | 5.6                    |       | (15.1 | ) |
| Fair value  adjustment of derivatives                                                                                                                    |       | 9.6                    |       | 30.8 |   |
| Bad debt  provision                                                                                                                                      |       | —                 |       | 0.3 |   |
| Stock-based  compensation                                                                                                                                |       | 0.8                    |       | 1.8 |   |
| Deferred income  taxes                                                                                                                                   |       | (22.5                  | )          | 7.3 |   |
| Loss (gain) on  sale of assets and other                                                                                                                 |       | 0.1                    |       | (0.4 | ) |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions:                                                 |       |                   |       |   |   |
| Accounts receivable                                                                                                                                      |       | 22.2                   |       | (41.6 | ) |
| Inventories                                                                                                                                              |       | 15.7                   |       | (9.8 | ) |
| Prepaid expenses  and other assets                                                                                                                       |       | 9.7                    |       | 3.2 |   |
| Accounts payable                                                                                                                                         |       | (37.2                  | )          | (39.1 | ) |
| Income taxes  payable                                                                                                                                    |       | (0.5                   | )          | 1.4 |   |
| Accrued expenses  and other liabilities                                                                                                                  |       | (20.5                  | )          | 4.8 |   |
| Net cash  provided by operating activities of continuing operations                                                                                      |       | 44.5                   |       | 36.7 |   |
| Net cash used in  operating activities of discontinued operations                                                                                        |       | —                 |       | (9.5 | ) |
| **Net  cash provided by operating activities**                                                                                                           |       | 44.5                   |       | 27.2 |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                                                                               |       |                   |       |   |   |
| Acquisitions,  including transaction fees paid, net of cash acquired                                                                                     |       | (0.7                   | )          | (10.9 | ) |
| Post closing  purchase price consideration                                                                                                               |       | —                 |       | 29.1 |   |
| Capital  expenditures, excluding capital leases                                                                                                          |       | (44.3                  | )          | (55.6 | ) |
| Proceeds on sale  of assets                                                                                                                              |       | 2.1                    |       | 2.4 |   |
| Net cash used in  investing activities of continuing operations                                                                                          |       | (42.9                  | )          | (35.0 | ) |
| Net cash used in  investing activities of discontinued operations                                                                                        |       | (0.4                   | )          | (5.1 | ) |
| **Net  cash used in investing activities**                                                                                                               |       | (43.3                  | )          | (40.1 | ) |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                                                                               |       |                   |       |   |   |
| Repayment of  2014 Notes                                                                                                                                 |       | (11.9                  | )          | — |   |
| Repayment of  senior secured credit facilities                                                                                                           |       | (29.8                  | )          | (33.5 | ) |
| Payments on  other long-term debt                                                                                                                        |       | (2.6                   | )          | (3.0 | ) |
| Payments related  to early extinguishment of senior secured debt                                                                                         |       | (102.3                 | )          | — |   |
| Loan from Viance  joint venture noncontrolling shareholder                                                                                               |       | 2.0                    |       | — |   |
| Contractual  advance to Titanium Dioxide Pigments venture noncontrolling shareholder                                                                     |       | (1.3                   | )          | — |   |
| Distribution to  noncontrolling shareholder                                                                                                              |       | —                 |       | (2.2 | ) |
| Net cash used in  financing activities of continuing operations                                                                                          |       | (145.9                 | )          | (38.7 | ) |
| Net cash used in  financing activities of discontinued operations                                                                                        |       | —                 |       | — |   |
| **Net  cash used in financing activities**                                                                                                               |       | (145.9                 | )          | (38.7 | ) |
| Effect of  exchange rate changes on cash and cash equivalents                                                                                            |       | (2.2                   | )          | (0.5 | ) |
| Net decrease in  cash and cash equivalents                                                                                                               |       | (146.9                 | )          | (52.1 | ) |
| Cash and cash equivalents  of continuing operations, beginning of period                                                                                 |       | 468.7                  |       | 346.9 |   |
| Cash and cash  equivalents of continuing operations, end of period                                                                                       |       | $                      | 321.8      |   | $ | 294.8 |   |
|                                                                                                                                                     |       |                   |       |   |   |
| Supplemental  disclosures of cash flow information:                                                                                                      |       |                   |       |   |   |
| Interest paid                                                                                                                                            |       | $                      | 25.9       |   | $ | 25.9 |   |
| Income taxes  paid, net of refunds                                                                                                                       |       | $                      | 6.0        |   | $ | 10.9 |   |
| Non-cash  investing activities:                                                                                                                          |       |                   |       |   |   |
| Acquisition of  capital equipment                                                                                                                        |       | $                      | 8.1        |   | $ | 7.4 |   |

 

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.** | ** ** | **Noncontrolling** | ** ** | **Total** | ** ** | **Group, Inc.** | ** ** | **Noncontrolling** | ** ** | **Total** | ** ** |
| ** **                                                                                        | ** ** | **Stockholders**     | ** ** | **Interest**       | ** ** | **Equity** | ** ** | **Stockholders** | ** ** | **Interest** | ** ** | **Equity** | ** ** |
| Balance,  December 31                                                                        |       | $                    | 810.4      |               | $          | 315.4 |   | $ | 1,125.8 |   | $ | 1,565.3 |   | $ | 175.3 |   | $ | 1,740.6 |   |
|                                                                                              |       |                 |       |               |       |   |   |   |   |   |   |   |   |
| Net (loss)  income                                                                                |       | (1.5                 | )          | (3.0               | )          | (4.5 | ) | 27.7 |   | 0.6 |   | 28.3 |   |
| Other  comprehensive (loss) income                                                                |       | (46.6                | )          | (3.9               | )          | (50.5 | ) | 83.3 |   | — |   | 83.3 |   |
| Comprehensive  (loss) income                                                                      |       | (48.1                | )          | (6.9               | )          | (55.0 | ) | 111.0 |   | 0.6 |   | 111.6 |   |
| Change in  estimate of fair value of assets contributed to the Titanium Dioxide Pigments  venture |       | —               |       | (16.5              | )          | (16.5 | ) | — |   | — |   | — |   |
| Distribution to  noncontrolling shareholder                                                       |       | —               |       | —             |       | — |   | — |   | (2.2 | ) | (2.2 | ) |
| Foreign currency  translation                                                                     |       | —               |       | (8.0               | )          | (8.0 | ) | — |   | — |   | — |   |
| Balance,  March 31                                                                           |       | $                    | 762.3      |               | $          | 284.0 |   | $ | 1,046.3 |   | $ | 1,676.3 |   | $ | 173.7 |   | $ | 1,850.0 |   |

 

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 OFSIGNIFICANT 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,timber-treatment 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”).The remaining businesses acquired are focused on highly specialized markets andconsist of: surface treatment and lithium chemicals; advanced ceramics andtitanium dioxide pigments.

 

On September 1,2008, the Company completed the formation of a venture with Kemira Oyj (“Kemira”)that focuses on specialty titanium dioxide pigments (See Note 6, “Acquisitions,”for further details).

 

***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. Certain priorperiod amounts related to reporting the sale of the pool and spa chemicalsbusiness in October 2008 as discontinued operations and the adoption ofSFAS No. 160,*Noncontrolling Interestsin Consolidated Financial Statements, an amendment of ARB No. 51,*have been reclassified to conform to 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 theCompany’s 2008 Form 10-K. In the opinion of management, thisinformation contains all adjustments necessary, consisting of normal andrecurring accruals, for a fair presentation of the results for the periodspresented.

 

The Company’snoncontrolling interest (formerly minority interest) in continuing operationsrepresents the total of the noncontrolling party’s interest in certaininvestments (principally the Viance, LLC joint venture and the Titanium DioxidePigments venture) that are consolidated but less than 100% owned.

 

On January 2, 2007,Chemical Specialties, Inc. (“CSI”), a wholly-owned subsidiary of theCompany within the Timber Treatment Chemicals business of the PerformanceAdditives segment, and Rohm and Haas Company completed the formation of Viance,LLC, a joint venture company that provides an extensive range of advanced woodtreatment technologies and services to the global wood treatmentindustry. In accordance with the consolidation principles of FinancialAccounting Standards Board (“FASB”) Interpretation (“FIN”) 46(R),*Consolidation of Variable Interest Entities — AnInterpretation of ARB No. 51*, the Company has concluded thatRockwood is the primary beneficiary of the joint venture and as such hasconsolidated the joint venture.  At March 31, 2009 and December 31,2008, the Viance, LLC joint venture had no third party debt outstanding, noconsolidated assets of the Company were pledged as collateral for any jointventure obligations and the general creditors of the joint venture had norecourse to the general credit of the Company.  The net assets of theViance, LLC joint venture included in the Condensed Consolidated Balance Sheetsof the Company were $85.8 million and $87.5 million at March 31, 2009 and December 31,2008, respectively, and were primarily related to identifiable intangibleassets. All intercompany accounts, balances and transactions have beeneliminated.

 

As noted above, theCompany completed a Titanium Dioxide Pigments venture with Kemira in September 2008. The Company has consolidated this venture and has reported Kemira’s interest asa noncontrolling interest in the condensed consolidated financial statements.This entity did not meet the definition of a variable interest entity under FIN46(R) and was thus consolidated in accordance with ARB No. 51,*Consolidated Financial Statements*. Thewater treatment business formerly within the Titanium Dioxide Pigments segmentwas not part of the transaction and is now being reported within the Clay-basedAdditives business in the Performance Additives segment. As a result, theCompany’s financial statements have been reclassified to reflect the watertreatment business as part of the Performance Additives segment for the periodspresented. See Note 6, “Acquisitions,” for further details.

 

7

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Unless otherwise noted,all balance sheet related items which are denominated in euros are converted atthe March 31, 2009 exchange rate of €1.00 = $1.325.

 

***Nature of Operations/Segment Reporting***—The Company is a global developer,manufacturer and marketer of high value-added specialty chemicals and advancedmaterials. The Company currently operates in various business lines within itsfive reportable segments consisting of: (1) Specialty Chemicals, whichincludes lithium compounds and chemicals, metal surface treatment chemicals,and synthetic metal sulfides, (2) Performance Additives, which includescolor pigments and services, timber treatment chemicals and clay-basedadditives, (3) Titanium Dioxide Pigments, which consists of titaniumdioxide pigments, and zinc- and barium-based compounds, (4) AdvancedCeramics, which includes ceramic-on-ceramic ball head and liner components usedin hip-joint prostheses systems, ceramic cutting tools and a range of otherceramic components and (5) Specialty Compounds, which consists of plasticand rubber compounds.

 

The basis for determiningan enterprise’s operating segments is the manner in which financial informationis used internally by the enterprise’s chief operating decision maker, theCompany’s Chief Executive Officer. See Note 3, “Segment Information,” forfurther segment reporting information.

 

***Use of Estimates***—The preparation of financial statements and relateddisclosures in conformity with accounting principles generally accepted in theUnited States requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities, the disclosure of contingentassets and liabilities at the date of the financial statements, and revenue andexpenses during the periods reported. These estimates include, among otherthings, assessing the collectability of accounts receivable, the use and recoverabilityof inventory, the valuation of deferred tax assets, the measurement of theaccrual for uncertain tax benefits, impairment of goodwill as well as property,plant and equipment and other intangible assets, the accrual of environmentaland legal reserves and the useful lives of tangible and intangible assets,among others. Actual results could differ from those estimates. Suchestimates also include the fair value of assets acquired and liabilitiesassumed allocated to the purchase price of business combinations consummated.

 

***Risks Associated with International Operations and CurrencyRisk***—TheCompany’s international operations are subject to risks normally associatedwith foreign operations, including, but not limited to, the disruption ofmarkets, changes in export or import laws, restrictions on currency exchangesand the modification or introduction of other governmental policies withpotentially adverse effects. A majority of the Company’s sales and expenses aredenominated in currencies other than U.S. dollars. Changes in exchange ratesmay have a material effect on the Company’s reported results of operations andfinancial position. In addition, a significant portion of the Company’sindebtedness is denominated in euros.

 

***Related Party Transactions***—Rockwood has engaged in transactionswith certain related parties including KKR and DLJMB and affiliates ofeach. Information concerning certain transactions is included in Note 1, “Descriptionof Business and Summary of Significant Accounting Policies,” in the Company’s2008 Form 10-K.

 

As part of the TitaniumDioxide Pigments venture with Kemira that was completed in September 2008,the venture has a long-term agreement expiring in August 2018 to purchasesteam and electricity (“energy”) from Kemira.  The venture purchased $8.0million of energy from Kemira during the first quarter of 2009.  As of March 31,2009, $6.3 million was due to Kemira, as well an additional one-time payment of$13.9 million in connection with the energy supply agreement.  Minimumannual payments under the energy agreement are approximately $17.0million.  In connection with this energy supply arrangement, the venturehas approximately $28.6 million of non-interest bearing notes receivable fromKemira that are due in August 2028.  The carrying value of the notesreceivable were $4.6 million at March 31, 2009. Interest is imputed at aneffective rate of 8.96%.

 

As part of the TitaniumDioxide Pigments venture with Kemira, the venture has a supply agreement forthe sale of certain raw materials to Kemira that are manufactured by theventure.  The term of this contract expires in December 2015. Transactionsbetween the Titanium Dioxide Pigments venture and Kemira amounted to: sales toKemira of $0.6 million in the three months ended March 31, 2009 andamounts due from Kemira of $0.7 million at March 31, 2009.  Inaddition, there were sales from the Titanium Dioxide Pigments venture tocompanies owned by Kemira of $3.6 million during the three months ended March 31,2009, of which $2.2 million was due to the venture at March 31, 2009.

 

As part of the Viance,LLC joint venture formed in January 2007 between a subsidiary within theTimber Treatment Chemicals business and Rohm and Haas, the joint ventureentered into certain related party transactions with Rohm andHaas. Viance, LLC does not own manufacturing facilities, and as a result,relies on the members of the joint venture to provide substantially all productand distribution requirements. In addition, the members sell products to Viance,LLC.  Transactions between Viance, LLC and Rohm and Haas amounted to:purchases from Rohm and Haas of $1.2 million and $1.2 million for the threemonths ended March 31, 2009 and 2008, respectively, and sales to Rohm andHaas of $0.1 million and $0.1 million for the three months ended March 31,2009 and 2008, respectively.  Amounts due to Rohm and Haas totaled $1.2million and $3.0 million at March 31, 2009 and December 31, 2008,respectively.  In addition, a short-termnote payable of $2.0 million as of March 31, 2009 was due to Rohm andHaas.

 

8

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As of March 31,2009, the Company had $12.2 million of payables due to its parent company,primarily related to stock-based compensation costs.

 

***Revenue Recognition***—The Company recognizes revenue when the earningsprocess is complete. Product sales are recognized when products are shipped tothe customer in accordance with the terms of the contract of sale, title andrisk of loss have been transferred, collectibility is reasonably assured, andpricing is fixed or determinable. Accruals are made for sales returns and otherallowances based on the Company’s experience. Revenue under service agreements,which was less than 1% of consolidated net sales in 2008, is realized when theservice is performed. Liabilities for product warranties are less than 1% ofconsolidated net sales as of March 31, 2009 and December 31, 2008.

 

***Foreign Currency Translation***—The functional currency of each of theCompany’s foreign subsidiaries is primarily the respective local currency.Balance sheet accounts of the foreign operations are translated into U.S.dollars at period-end exchange rates and income and expense accounts aretranslated at average exchange rates during the period. Translation gains andlosses related to net assets located outside the U.S. are shown as a componentof accumulated other comprehensive income. Gains and losses resulting fromforeign currency transactions (transactions denominated in a currency otherthan the entity’s functional currency), including intercompany financingarrangements for which settlement is planned or anticipated, are included indetermining net income for the period in which exchange rates change. Gains orlosses on certain intercompany loans that are of a long-term investment naturefor which settlement is not planned or anticipated in the foreseeable futureand gains or losses on euro-denominated debt that is designated as a netinvestment hedge of the Company’s euro-denominated investments are reported andaccumulated in the same manner as translation adjustments. These loans areall related to intercompany debt arrangements. As of March 31, 2009,intercompany debt arrangements deemed to be of a long-term investment naturefor which settlement is not planned or anticipated in the foreseeable future ispredominantly related to €519.4 million ($688.2 million) of intercompany loans.

 

***Derivatives***— The Company accounts for derivatives based onStatement of Accounting Standards (SFAS) No. 133,*Accounting for Derivative Instruments and HedgingActivities*, as amended and interpreted. SFAS No. 133 requiresthat all derivatives be recognized as either assets or liabilities at fairvalue. Changes in the fair value of derivatives not designated as hedginginstruments are recognized currently in earnings while changes in the fairvalue of derivatives that are designated as hedging instruments are recognizedas a component of comprehensive income. The Company uses derivative instrumentsto manage its exposure to market risks associated with fluctuations in interestrates and foreign currency exchange rates. See “Comprehensive Income” sectionof Note 1 for the impact of the Company’s net investment and foreign exchangecash flow hedges. The Company does not enter into derivative contracts fortrading purposes nor does it use leveraged or complex instruments.

 

On January 1, 2009,the Company adopted SFAS No. 161,*Disclosures about Derivative Instruments and Hedging Activities - an Amendmentof FASB Statement 133*. This statement changes the disclosurerequirements for derivative instruments and hedging activities, includingenhanced disclosures about (a) how and why the Company uses derivativeinstruments, (b) how derivative instruments and related hedged items areaccounted for under SFAS No. 133,*  Accounting for Derivative Instruments andHedging Activities,* and its related interpretations, and (c) howderivative instruments and related hedged items affect an entity’s financialposition, financial performance, and cash flows.  See Note 4, “Derivatives,”for the disclosure requirements of this new standard.

 

***Pension, Postemployment and Postretirement Costs***—Defined benefit costs and liabilitieshave been determined in accordance with SFAS No. 87,  *Employers’Accounting for Pensions* and SFAS No. 158,*Employers’ Accounting for Defined Benefit Pensionand Other Postretirement Plans, an amendment of FASB Statements No. 87,88, 106 and 132 (R)*. Other postretirement benefit costs andliabilities have been determined in accordance with SFAS No. 106,*Employers’ Accounting for Postretirement BenefitsOther Than Pensions* and SFAS No. 158,*Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and132 (R).*  Postemploymentbenefit costs and liabilities have been determined in accordance with SFAS No. 112,*Employers’ Accounting for Postemployment Benefits.*

 

***Income Taxes***—Income taxes are determined in accordance withSFAS 109,*Accounting for Income Taxes*and FIN No. 48,*  Accounting for Uncertainty in Income Taxes —An Interpretation of FASB Statement No. 109*. The Company’sU.S. operations are included in a consolidated federal income tax return. Theamount of current and deferred tax expense is computed on a separate entitybasis for each member of the group based on applying the principles ofSFAS No. 109. Deferred tax assets and liabilities are recognizedfor future tax consequences attributable to differences between the financialstatement carrying amounts and the corresponding tax carrying amounts of assetsand liabilities. Deferred tax assets are also recognized for tax loss and taxcredit carryforwards. A valuation allowance is recorded to reduce deferred taxassets when it is more likely than not that a tax benefit will not be realizedbased on available evidence weighted toward evidence that is objectivelyverifiable. Deferred taxes are not provided on the undistributed earnings ofsubsidiaries as such amounts are considered to be permanently invested or couldbe distributed to the parent company in a tax free manner.

 

FIN 48 clarifies theaccounting for uncertainty in income taxes recognized in an entity’s financialstatements in accordance with FASB Statement No. 109,  *Accountingfor Income Taxes,* and prescribes a recognition threshold andmeasurement attribute for financial statement disclosure of tax positions takenor expected to be taken on a tax return. Under FIN 48, the impact of anuncertain income tax position on the income tax return must be recognized atthe largest amount that is more-likely-than-not to not be sustained 

 

9

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upon audit by therelevant authority. An uncertain income tax position will not be recognized ifit has less than a 50% likelihood of being sustained. Additionally, FIN 48provides guidance on derecognizing, classification, interest and penalties,accounting in interim periods, disclosure and transition.   In accordance with FIN 48, the Companyrecords liabilities for uncertain tax benefits net of deferred tax assetsassociated with tax loss carryforwards for liabilities arising in the same yearas the asset and for liabilities arising in different years from the asset,provided that the related tax loss can be carried back or forward to offset theliability.

 

In accordance with SFAS No. 109,Paragraph 140, the Company has allocated a tax benefit to the extent of itsU.S. loss from continuing operations, offset by a tax provision charged toother comprehensive income. When a tax jurisdiction has a loss from continuingoperations and income from other items on a net basis, the Company’s policy isto allocate a tax benefit to continuing operations from the other items ofincome on a pro-rata basis.

 

Future realization of thetax benefit of an existing deductible temporary difference or carryforwardultimately depends on the existence of sufficient taxable income of theappropriate character (for example, ordinary income or capital gain) within thecarryforward period available under the tax law. The Company’s policy is toconsider the following sources of taxable income, which may be available underthe tax law to realize a tax benefit for deductible temporary differences andcarryforwards:

 

·                  Future reversals of existing taxable temporarydifferences.

 

·                  Future taxable income exclusive of reversing temporarydifferences and carryforwards.

 

·                  Taxable income in prior carry back year (s) ifcarry back is permitted under the tax law.

 

·                  Tax planning strategies that would, if necessary, beimplemented to:

 

(1)                Accelerate taxable amounts to utilize expiringcarryforwards.

 

(2)                Change the character of taxable or deductible amountsfrom ordinary income or loss to capital gain or loss.

 

(3)                Switch from tax-exempt to taxable investments.

 

Evidence available abouteach of those possible sources of taxable income will vary between taxjurisdictions and, possibly, from year to year. To the extent evidence aboutone or more sources of taxable income is sufficient to support a conclusionthat a valuation allowance is not necessary, the Company’s policy is that othersources need not be considered. Consideration of each source is required,however, to determine the amount of the valuation allowance that may berequired to be recognized for deferred tax assets.

 

For any specificjurisdiction where a history of three years of cumulative losses has occurredor where there has been a substantial change in the business (e.g., a majoracquisition or divestiture), the Company does not rely on projections of futuretaxable income as described above. Instead, the Company determines its need fora valuation allowance on deferred tax assets, if any, by determining an averagesteady-state normalized taxable income amount over the last three years,adjusted for acquisitions or divestitures if necessary. The Company will alsoconsider the following positive evidence in the above scenarios, if present:

 

·                  Existing contracts or firm sales backlog that willproduce more than enough taxable income to realize the deferred tax asset basedon existing sales prices and cost structures.

 

·                  An excess of appreciated asset value over the taxbasis of the entity’s net assets in an amount sufficient to realize thedeferred tax asset.

 

***Comprehensive Income***—Comprehensive income includes net income and theother comprehensive income components which include unrealized gains and lossesfrom foreign currency translation and from certain intercompany transactionsthat are of a long-term investment nature, pension-related adjustments that arerecorded directly into a separate section of equity in the balance sheets andnet investment and foreign exchange cash flow hedges. Foreign currencytranslation amounts are not adjusted for income taxes since they relate toindefinite length investments in non-U.S. subsidiaries and certain intercompanydebt.

 

Comprehensive income(loss) is summarized as follows:

 

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| ** **                                                                         | ** ** | **Three months ended** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                         | ** ** | **March 31,**     | ** ** |
| **($ in millions)**                                                           | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Net (loss)  income                                                                 |       | $                      | (4.5       | ) | $ | 28.3 |   |
| Pension related  adjustments, net of tax                                           |       | 0.1                    |       | 0.5 |   |
| Foreign currency  translation                                                      |       | (62.0                  | )          | 116.8 |   |
| Intercompany  foreign currency loans                                               |       | (37.6                  | )          | 62.8 |   |
| Net investment  hedges, net of tax                                                 |       | 49.3                   |       | (96.8 | ) |
| Foreign exchange  contracts, net of tax                                            |       | (0.3                   | )          | — |   |
| Comprehensive  (loss) income                                                       |       | (55.0                  | )          | 111.6 |   |
| Comprehensive  loss (income) attributable to noncontrolling interest               |       | 6.9                    |       | (0.6 | ) |
| Comprehensive  (loss) income attributable to Rockwood Specialties Group, Inc. |       | $                      | (48.1      | ) | $ | 111.0 |   |

 

***Accounting for Environmental Liabilities***—In the ordinary course of business,Rockwood is subject to extensive and changing federal, state, local and foreignenvironmental laws and regulations, and has made provisions for the estimatedfinancial impact of environmental cleanup related costs. Rockwood’s policy hasbeen to accrue costs of a non-capital nature related to environmental clean-upwhen those costs are believed to be probable and can be reasonably estimated.If the aggregate amount of the obligation and the amount and timing of the cashpayments for a site are fixed or reliably determinable, the liability isdiscounted. Expenditures that extend the life of the related property ormitigate or prevent future environmental contamination are capitalized andexpenditures related to existing conditions resulting from past or presentoperations and from which no current or future benefit is discernible areimmediately expensed. The quantification of environmental exposures requires anassessment of many factors, including changing laws and regulations,advancements in environmental technologies, the quality of informationavailable related to specific sites, the assessment stage of each siteinvestigation and the length of time involved in remediation or settlement. Insome matters, Rockwood may share costs with other parties. Rockwood does notinclude anticipated recoveries from insurance carriers or other third partiesin its accruals for environmental liabilities.

 

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

 

***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 thePlan, Holdings granted stock options, restricted stock and other stock-basedawards to the Company’s employees and directors and allowed employees anddirectors to purchase shares of its common stock. There were 10,000,000authorized shares available for grant under the Plan. Holdings will nolonger issue equity awards under this Plan. In April 2009, Holdings adopted the 2009 Stock Incentive Plan (the “NewPlan”), which has 11,000,000 authorized shares. No shares have been awardedunder the New Plan. Effective January 1, 2006, the Company adopted SFAS No. 123R,*Share-Based Payment*, and relatedinterpretations and began expensing the grant-date fair value of stock options.

 

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 $0.8 million and $1.9 million for thethree months ended March 31, 2009 and 2008, respectively.  The total tax benefit recognized related tostock options was less than $0.1 million and $0.2 million for the three monthsended March 31, 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 period January 1, 2009 through December 31,2009. However, in accordance with SFAS No. 123R, the Company did not recognizeany compensation cost in 2008 for this issuance because the performance targetsthat form the basis for vesting of these restricted stock units were not knownas of December 31, 2008. These performance targets were established on February 20,2009, when such performance targets were approved by Holdings’ CompensationCommittee, and as a result, the Company began recording compensation cost on aratable basis over the vesting period. The grant date fair value of theserestricted stock units was $7.59 per stock unit.

 

Holdings’ grantedadditional stock options and restricted stock units in 2008 and 2007 to certainemployees of Rockwood Corporate Headquarters and its business units. Therestricted stock units contain a provision in which the units shall immediatelyvest and become converted into the right to receive a cash payment on thevesting date upon a change in control as defined in the equityagreement. As the provisions for redemption are outside the control of theCompany, the fair value of these units as of March 31, 2009 and December 31,2008 have been recorded as mezzanine equity (outside of permanent equity) inthe Condensed Consolidated Balance Sheets of Holdings.

 

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***Recent Accounting Pronouncements***—The following represents the impact ofrecently issued accounting pronouncements:

 

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

 

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

 

In February 2008,the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position(FSP) Financial Accounting Standard (FAS) FSP FAS 157-2,  *Effective Date of FASB Statement No. 157*.  FSP FAS 157-2 delays the effective date ofSFAS No. 157 from 2008 to 2009 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 FSP 157-2 on January 1,2009 and this FSP did not have a material impact on its financial statements.

 

In March 2008, SFAS No. 161,*Disclosures about Derivative Instruments and HedgingActivities - an Amendment of FASB Statement 133,* was issued. Thisstatement changes the disclosure requirements for derivative instruments andhedging activities, including enhanced disclosures about (a) how and whyan entity uses derivative instruments, (b) how derivative instruments andrelated hedged items are accounted for under SFAS No. 133,*  Accountingfor Derivative Instruments and Hedging Activities,* and its relatedinterpretations, and (c) how derivative instruments and related hedgeditems affect an entity’s financial position, financial performance, and cashflows.  The Company adopted SFAS No. 161 on January 1,2009.  This standard did not have amaterial impact on the Company’s financial statements.  See Note 4, “Derivatives,” for the disclosurerequirements of this new standard.

 

In April 2008, theFASB issued FSP No. 142-3,*Determination of the Useful Life of Intangible Assets*. This FSPamends the 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,*Goodwilland Other Intangible Assets*. The intent of this FSP is to improvethe consistency between the useful life of a recognized intangible asset underStatement 142 and the period of expected cash flows used to measure the fairvalue of the asset under FASB Statement No. 141 (revised 2007),*Business Combinations*, and other U.S.GAAP. This FSP 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.*  This FSP amends FASB Statement No. 132(revised 2003), *Employers’ Disclosures about Pensions andOther Postretirement Benefits,*to provide guidance on an employer’sdisclosures about plan assets of a defined benefit pension or otherpostretirement plan.  This includesdisclosing objectives about how investment allocation decisions are made, themajor categories of plan assets, the inputs and valuation techniques used tomeasure the fair value of plan assets, the effect of fair value measurementsusing significant unobservable inputs (Level 3) on changes in plan assets, andsignificant concentrations of risk within plan assets.  The disclosures about plan assets required bythis FSP are effective for the Company for the 2009 fiscal year end.

 

In April 2009, theFASB issued FSP No. 141 (R) — 1, *Accounting for AssetsAcquired and Liabilities Assumed in a Business Combination That Arise fromContingencies. *This FSPamends and clarifies FASB Statement No. 141 (revised 2007), *Business Combinations,*to address application issues raisedby preparers, auditors, and members of the legal profession on initialrecognition and measurement, subsequent measurement and accounting, anddisclosure of assets and liabilities arising from contingencies in a businesscombination.  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, *InterimDisclosures about Fair Value of Financial Statements.*This FSPamends FASB Statement No. 107, *Disclosures**about Fair Value of Financial Instruments,*to requiredisclosures about fair value of financial instruments for interim reportingperiods of publicly traded companies as well as in annual financialstatements.  This FSP also amends APBOpinion No. 28, *Interim FinancialReporting,*to require disclosures in summarized financialinformation at interim reporting periods. This FSP is effective for the Company beginning with its Form 10-Qfor the period ended June 30, 2009 and relates to disclosures to be madeabout the fair value of its debt instruments.

 

In April 2009, theFASB issued FSP No. 157-4, *Determining Fair ValueWhen the Volume and Level of Activity for the Asset or Liability HaveSignificantly Decreased and Identifying Transactions That Are Not Orderly. *This FSP provides additionalguidance for 

 

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estimating fair value inaccordance with 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 on identifying circumstances thatindicate a transaction is not orderly. This FSP is effective for the Company beginning with its Form 10-Qfor the period ended June 30, 2009 and is not expected to have a materialimpact on its financial statements.

 

**2.  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 pool and spa chemicalsbusiness sale recorded in the fourth quarter of 2008 was $40.5 million (net of$25.7 million of taxes).  In connectionwith SFAS No. 144,*Accounting for theImpairment or Disposal of Long-Lived Assets*, the Company’s financialstatements have been reclassified to reflect this business as a discontinuedoperation for all periods presented.

 

For the first quarter of2009, income from discontinued operations net of tax was $2.3 million and wasprimarily due to the favorable resolution of a claim against the Company’sformer Group Novasep business.  Operatingresults of the discontinued operations of the pool and spa chemicals businessfor the three months ended March 31, 2008 were as follows:

 
| ** **                                    | ** ** | **Three months ended**  | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|
| **($ in millions)**                      | ** ** | **March 31, 2008** | ** ** |
| Net sales                                     |       | $                       | 10.2       |   |
| Cost of products  sold                        |       | 7.8                     |       |
| Gross profit                                  |       | 2.4                     |       |
| Selling, general  and administrative expenses |       | 3.5                     |       |
| Loss before  taxes                            |       | (1.1                    | )          |
| Income tax  benefit                           |       | (0.1                    | )          |
| Net loss                                      |       | $                       | (1.0       | ) |

 

**3.  SEGMENT INFORMATION:**

 

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

 

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

 

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:

 

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| ** **                                  | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **    | ** ** | ** **           | ** ** |
|---------------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|---------------|------------|----------------------|------------|
| ** **                                  | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | **Corporate** | ** ** | ** **           | ** ** |
| **($ in millions)**                    | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **and other** | ** ** | **Consolidated (a)** | ** ** |
| **Three  months ended March 31, 2009** |       |          |       |            |       |         |       |         |       |          |       |          |       |                 |       |
| Net sales                                   |       | $             | 225.3      |            | $          | 155.3        |       | $            | 139.0      |          | $          | 87.9          |       | $                    | 51.1       |   | $ | 1.4 |   | $ | 660.0 |   |
| Total Adjusted  EBITDA                      |       | 50.3          |       | 20.6            |       | 21.5         |       | 17.8         |       | 7.8           |       | (8.8          | )          | 109.2                |       |
| **Three  months ended March 31, 2008** |       |          |       |            |       |         |       |         |       |          |       |          |       |                 |       |
| Net sales                                   |       | $             | 311.7      |            | $          | 211.3        |       | $            | 115.9      |          | $          | 133.2         |       | $                    | 69.0       |   | $ | 2.7 |   | $ | 843.8 |   |
| Total Adjusted  EBITDA                      |       | 80.5          |       | 33.7            |       | 22.2         |       | 38.5         |       | 8.7           |       | (14.4         | )          | 169.2                |       |

 
| ** **                  | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **                  | ** ** | ** **                | ** ** | ** **       | ** ** |
|-----------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|-----------------------------|------------|---------------------------|------------|------------------|------------|
| ** **                  | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | **Corporate**               | ** ** | ** **                | ** ** | ** **       | ** ** |
| ** **                  | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **and other (b)** | ** ** | **Eliminations (c)** | ** ** | **Consolidated** | ** ** |
| Identifiable  assets as of: |       |          |       |            |       |         |       |         |       |          |       |                        |       |                      |       |             |       |
| March 31,  2009        |       | $             | 1,948.9    |            | $          | 794.3        |       | $            | 889.1      |          | $          | 826.1                       |       | $                         | 126.5      |             | $          | 391.8 |   | $ | (236.5 | ) | $ | 4,740.2 |   |
| 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 $(0.8) millionof Adjusted EBITDA for the three months ended March 31, 2008 from the pooland spa chemicals business sold in October 2008.

 

(b)              This amount includes $46.3 million and$50.7 million of assets from legacy businesses at March 31, 2009 and December 31,2008, respectively. These businesses were formerly owned primarily by DynamitNobel.

 

(c)               Amounts contained in the “Eliminations”column represent the individual subsidiaries’ retained interest in theircumulative net cash balance (deposits less withdrawals) included in thecorporate centralized cash system and within the identifiable assets of therespective segment. These amounts are eliminated as the corporate centralized cashsystem is 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 2014 Notesand the facility agreement related to the Titanium Dioxide Pigments ventureexcludes certain adjustments permitted under the senior credit agreement.Senior management uses Adjusted EBITDA on a segment basis as the primarymeasure to evaluate the ongoing performance of the Company’s business segmentsand reporting units.  Because the Companyviews Adjusted EBITDA on a segment basis as an operating performance measure,the Company uses income (loss) from continuing operations before taxes as themost comparable GAAP measure. 

 

14

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

 
| ** **                                             | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **         | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|--------------------|------------|------------------|------------|
| ** **                                             | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | **Corporate**      | ** ** | ** **       | ** ** |
| **($ in millions)**                          | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **and other** | ** ** | **Consolidated** | ** ** |
| **Three  months ended March 31, 2009**            |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| Income (loss)  from continuing operations before taxes |       | $             | 13.2       |            | $          | (5.4         | )          | $            | (7.4       | )             | $          | (6.8               | )          | $                | 2.8        |   | $ | (19.9 | ) | $ | (23.5 | ) |
| Interest expense  (a)                                  |       | 15.0          |       | 7.1             |       | 10.0         |       | 8.0          |       | 2.3           |       | 7.3                |       | 49.7             |       |
| Interest income                                        |       | (0.2          | )          | 0.1             |       | (0.2         | )          | —       |       | —        |       | (0.1               | )          | (0.4             | )          |
| Depreciation and  amortization                         |       | 18.8          |       | 15.1            |       | 17.9         |       | 11.9         |       | 2.7           |       | 1.7                |       | 68.1             |       |
| Restructuring  and other severance costs               |       | 1.6           |       | 2.9             |       | 0.1          |       | 3.1          |       | —        |       | 0.1                |       | 7.8              |       |
| Systems/organization  establishment expenses           |       | 0.3           |       | 0.5             |       | 1.1          |       | 0.1          |       | —        |       | 0.1                |       | 2.1              |       |
| Loss (gain) on  early extinguishment of debt           |       | 0.4           |       | —          |       | —       |       | 0.3          |       | —        |       | (2.9               | )          | (2.2             | )          |
| Loss on sale of  assets and other                      |       | 0.1           |       | —          |       | —       |       | —       |       | —        |       | —             |       | 0.1              |       |
| Foreign exchange  loss, net                            |       | 0.7           |       | —          |       | —       |       | 1.2          |       | —        |       | 3.7                |       | 5.6              |       |
| Other                                                  |       | 0.4           |       | 0.3             |       | —       |       | —       |       | —        |       | 1.2                |       | 1.9              |       |
| Total Adjusted  EBITDA                                 |       | $             | 50.3       |            | $          | 20.6         |       | $            | 21.5       |          | $          | 17.8               |       | $                | 7.8        |   | $ | (8.8 | ) | $ | 109.2 |   |
| **Three  months ended March 31, 2008**            |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| Income (loss)  from continuing operations before taxes |       | $             | 52.7       |            | $          | 8.0          |       | $            | 1.0        |          | $          | 18.1               |       | $                | 3.6        |   | $ | (34.4 | ) | $ | 49.0 |   |
| Interest expense  (a)                                  |       | 12.8          |       | 7.4             |       | 9.0          |       | 8.7          |       | 2.3           |       | 33.5               |       | 73.7             |       |
| Interest income                                        |       | (0.7          | )          | —          |       | —       |       | (0.1         | )          | (0.2          | )          | (1.2               | )          | (2.2             | )          |
| Depreciation and  amortization                         |       | 16.1          |       | 16.9            |       | 12.2         |       | 11.9         |       | 2.9           |       | 1.5                |       | 61.5             |       |
| Restructuring  and other severance costs               |       | —        |       | 0.6             |       | —       |       | 0.2          |       | —        |       | —             |       | 0.8              |       |
| Systems/organization  establishment expenses           |       | 0.3           |       | 0.7             |       | —       |       | 0.1          |       | 0.1           |       | —             |       | 1.2              |       |
| Inventory write-up  charges                            |       | 0.4           |       | —          |       | —       |       | —       |       | —        |       | —             |       | 0.4              |       |
| Loss on sale of  assets and other                      |       | —        |       | —          |       | —       |       | 0.1          |       | —        |       | —             |       | 0.1              |       |
| Foreign exchange  gain, net                            |       | (0.6          | )          | —          |       | —       |       | (0.5         | )          | —        |       | (14.0              | )          | (15.1            | )          |
| Other                                                  |       | (0.5          | )          | 0.1             |       | —       |       | —       |       | —        |       | 0.2                |       | (0.2             | )          |
| Total Adjusted  EBITDA (b)                        |       | $             | 80.5       |            | $          | 33.7         |       | $            | 22.2       |          | $          | 38.5               |       | $                | 8.7        |   | $ | (14.4 | ) | $ | 169.2 |   |

 

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(a)                Includes losses of$9.6 million and $30.8 million for the three months ended March 31, 2009and 2008, respectively, representing the movement in the mark-to-marketvaluation of the Company’s interest rate and cross-currency hedginginstruments.

 

(b)               This amount doesnot include $(0.8) million of Adjusted EBITDA for the three months ended March 31,2008 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.

 

*Itemsexcluded from Adjusted EBITDA*

 

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

 

·                  *Restructuringand related charges*:  Restructuring charges of $7.8 million and$0.8 million were recorded in the three months ended March 31, 2009 and2008, respectively, for miscellaneous restructuring activities, includingheadcount reductions and facility closures (see Note 13, “Restructuring andOther Severance Costs,” for further details).

 

·                  *Systems/organizationestablishment expenses*:  For the three months ended March 31,2009, expenses of $2.1 million were recorded related to the integration ofbusinesses acquired, primarily related to the completion of the TitaniumDioxide Pigments venture on September 1, 2008 and the acquisition of theElementis plc business in the Performance Additives segment in August 2007. For the three months ended March 31, 2008, expenses of $1.2 million wererecorded related to the integration of businesses acquired, primarily relatedto the acquisition of the Elementis plc business in the Performance Additivessegment.

 

·                  *Inventorywrite-up charges*:  Under SFAS 141,*Business Combinations*, all inventoriesacquired in an acquisition must be revalued to “fair value.” In connection withacquisitions, the Company allocates a portion of the total purchase price toinventory to reflect manufacturing profit in inventory at the date of theacquisitions. This resulted in a reduction of gross profit of $0.4 millionfor the three months ended March 31, 2008 in the Specialty Chemicalssegment as the inventory was sold in the normal course of business.

 

15

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·                  *Loss(gain) on early extinguishment of debt*:  In the first quarterof 2009, the Company recorded a netgain of $2.2 million related to the repurchase of €12.2 million ($15.5 million based on the exchange rate ineffect on the date of repurchase) of its senior subordinated notes due in 2014,and the prepayment of €63.2million ($85.1 million based onthe exchange rate in effect on the date of payment) and $17.2 million of its senior securedterm loans related to amortization payments due between 2009 - 2011.

 

·                  *Foreignexchange (gain) loss, net*:  For the three months ended March 31,2009, foreign exchange losses of $5.6 million were recorded due to the impactof the weaker euro as of March 31, 2009 versus December 31, 2008, inconnection with non-operating euro-denominated transactions.  For the three months ended March 31,2008, gains of $15.1 million were recorded due to the impact of the strongereuro as of March 31, 2008 versus December 31, 2007 related tonon-operating euro-denominated transactions.

 

·                  *Other*: In the first quarter of 2009, the Company recorded an expense of $1.9 millionprimarily related to an increase in reserves covering two legacy obligationsassumed in connection with the acquisition of the Dynamit Nobel businesses in2004.

 

**4.  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.

 

**Interest Rate Risk**

 

The Company had $1,830.4million and $2,007.9 million of variable rate debt outstanding as of March 31,2009 and December 31, 2008, respectively. Any borrowings under ourrevolving credit facility will also be at a variable rate. Historically, theCompany has entered into interest rate swaps to manage its exposure to changesin interest rates related to variable-rate debt.  As of March 31, 2009, these contractscover notional amounts of $610.0 million (at interest rates ranging from 4.864%to 5.038%) and €495.3 million (at interest rates ranging from 2.995% to4.416%). These derivative contracts effectively convert a majority of thesenior secured credit obligations and the obligations under the TitaniumDioxide Pigments term loan facility to fixed rate obligations. These swaps willmature between November 2009 and July 2012.  The Company has elected not to apply hedgeaccounting for these interest rate swaps and has recorded the mark-to-market ofthese derivatives as a component of interest expense in the CondensedConsolidated Statements of Operations.

 

In connection with the July 2003refinancing, the Company entered into a cross-currency interest rate swap witha notional amount of $20.3 million that effectively converted $20.3 millionU.S. dollar borrowings into euro-based obligations at an effective interestrate of Euribor plus 4%. As of March 31, 2009, the notional amounts ofthis cross-currency interest rate hedge were $19.2 million and €16.9 million.This contract has a final maturity date of July 2010.  The Company has elected not to apply hedgeaccounting for this cross-currency interest rate swap and has recorded themark-to-market of this derivative as a component of interest expense in theCondensed Consolidated Statements of Operations.

 

**Foreign Currency Risk**

 

In December 2008,the Company entered into foreign currency forward contracts to manage itsexposure to fluctuations in currency rates on forecasted sales denominated in acurrency other than the functional currency of the legal entity. Theinstruments were designated as foreign exchange cash flow hedges and areeffective at generating offsetting changes in the fair value or cash flows ofthe hedged item or transaction.  As of March 31,2009, the Company had notional amounts outstanding for these foreign currencyforward contracts of $9.0 million. It is expected that cumulative losses of$(0.5) million as of March 31, 2009 will be reclassified into earningswithin the next nine months.  There was no gain or loss reclassified fromaccumulated other comprehensive income into earnings as a result of thediscontinuance of cash flow hedges due to the probability of the originalforecasted transaction not occurring.  As of March 31, 2009, themaximum length of time over which the Company has hedged its exposure tomovements in foreign exchange rates for forecasted transactions is nine months.

 

InMarch 2009, the Company entered into foreign currency forwardcontracts to manage its exposure to fluctuations in currency rates onforecasted sales denominated in a currency other than the functional currencyof the legal entity.  As of March 31,2009, the Company had notional amounts outstanding for these foreign currencyforward contracts of $3.5 million. The Company has elected not to apply hedgeaccounting for these foreign currency forward contracts.

 

In connection with theoffering of the 2014 Notes, the Company entered into a cross-currency interestrate swap with a five-year term expiring in November 2009 and a notionalamount of €155.6 million that effectively converts the U.S. dollar fixed ratedebt in respect of the 2014 dollar-denominated notes sold into euro fixed ratedebt.  The Company designated thiscontract as a hedge of the foreign currency exposure of its net investment inits euro-denominated operations. There was no ineffective portion of the netinvestment 

 

16

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hedge as of March 31,2009.  In addition, the Company hasdesignated the remaining portion of its euro-denominated debt that is recordedon its U.S. books as a net investment hedge of its euro-denominated investments(euro debt of €617.5 million at March 31, 2009; $818.2 million). As aresult, any foreign currency gains and losses resulting from the euro-denominateddebt discussed above is accounted for as a component of accumulated othercomprehensive income for as long as the hedge remains effective. There was noineffective portion of the net investment hedge as of March 31, 2009.

 

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

** **
| ** **                                                                       | ** ** | ** **                                      | ** ** | **Asset Derivatives**          | ** ** | **Liability Derivatives**      | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                       | ** ** | ** **                                      | ** ** | **Fair Value as of** | ** ** | **Fair Value as of** | ** ** |
| **(in millions)**                                                           | ** ** | **Balance Sheet Location**            | ** ** | **March 31, 2009**        | ** ** | **December 31, 2008**     | ** ** | **March 31, 2009** | ** ** | **December 31, 2008** | ** ** |
| **Derivatives  designated as hedging instruments under SFAS No. 133:**      |       |                                            |       |                                |       |                                |       |   |   |   |   |
| 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 |       | —                              |       | —                              |       | 6.2 |   | 16.4 |   |
| Total  derivatives designated as hedging instruments under SFAS No.133           |       |                                            |       | $                                   | 0.4        |                                | $          | 1.1 |   | $ | 6.2 |   | $ | 16.4 |   |
|                                                                             |       |                                            |       |                                |       |                                |       |   |   |   |   |
| **Derivatives  not designated as hedging instruments under SFAS No. 133:**  |       |                                            |       |                                |       |                                |       |   |   |   |   |
| Foreign exchange  contracts                                                      |       | Prepaid expenses  and other current assets      |       | $                                   | 0.1        |                                | $          | — |   | $ | — |   | $ | — |   |
| Interest rate  swaps                                                             |       | Accrued expenses  and other current liabilities |       | —                              |       | —                              |       | 5.9 |   | 6.5 |   |
|                                                                             |       | Other  liabilities                              |       | —                              |       | —                              |       | 74.4 |   | 58.9 |   |
| Cross-currency  interest rate swaps                                              |       | Accrued expenses  and other current liabilities |       | —                              |       | —                              |       | 0.1 |   | 0.1 |   |
|                                                                             |       | Other  liabilities                              |       | —                              |       | —                              |       | 3.4 |   | 4.7 |   |
| Total  derivatives not designated as hedging instruments under SFAS No. 133 |       |                                            |       | $                                   | 0.1        |                                | $          | — |   | $ | 83.8 |   | $ | 70.2 |   |
| **Total  derivatives**                                                           |       |                                            |       | $                                   | 0.5        |                                | $          | 1.1 |   | $ | 90.0 |   | $ | 86.6 |   |

 

The following tableprovides the gains and losses reported in the Condensed Consolidated BalanceSheets as of March 31, 2009 and the Condensed Consolidated Statements ofOperations for the three months ended March 31, 2009 and 2008:

 
| ** **                                                                                              | ** ** | **Amount of Gain or (Loss)  Recognized in OCI on  Derivatives and Other Financial  Instruments (Effective Portion)** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                              | ** ** | **Three months ended  March 31,**                                                                                    | ** ** |
| **(in millions)**                                                                                       | ** ** | **2009**                                                                                                             | ** ** | **2008** | ** ** |
| **Derivatives  in SFAS No. 133 Cash Flow Hedging Relationships:**                                       |       |                                                                                                                 |       |   |   |
| Foreign exchange  contracts                                                                             |       | $                                                                                                                    | (0.5       | ) | $ | — |   |
|                                                                                                    |       |                                                                                                                 |       |   |   |
| **Derivatives  and Other Financial Instruments in SFAS No. 133 Net Investment Hedging  Relationships:** |       |                                                                                                                 |       |   |   |
| Cross-currency  interest rate swaps - net investment hedge                                              |       | $                                                                                                                    | 10.1       |   | $ | (16.7 | ) |
| Euro-denominated  debt                                                                                  |       | 47.4                                                                                                                 |       | (80.1 | ) |
|                                                                                                    |       | $                                                                                                                    |  57.5 |   | $ | (96.8 | ) |

 

In the first quarter of2009 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 months ended March 31, 2009 and 2008:

 

17

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| ** **                                                                     | ** ** | **Amount of Gain or (Loss)** | ** ** | ** **                     | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------------|------------|--------------------------------|------------|
| ** **                                                                     | ** ** | **Recognized in Income on**  | ** ** | ** **                     | ** ** |
| ** **                                                                     | ** ** | **Derivative**               | ** ** | ** **                     | ** ** |
| ** **                                                                     | ** ** | **Three months ended**       | ** ** | **Location of Gain or (Loss)** | ** ** |
| ** **                                                                     | ** ** | **March 31,**           | ** ** | **Recognized in Income on**    | ** ** |
| **(in millions)**                                                              | ** ** | **2009**                     | ** ** | **2008**                       | ** ** | **Derivative** | ** ** |
| **Derivatives  Not Designated as Hedging Instruments under SFAS No. 133** | ** ** | ** **                   | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Interest rate  contracts                                                       |       | $                            | (10.8      | )                              | $          | (28.8 | ) | Interest expense |   |
| Cross-currency  interest rate swaps                                            |       | 1.2                          |       | (2.0                           | )          | Interest expense |   |
|                                                                           |       | $                            |  (9.6 | )                              | $          | (30.8 | ) |   |   |

 

**5.  FAIR VALUE MEASUREMENTS:**

 

On January 1, 2008,the Company adopted SFAS No. 157,*FairValue Measurements*, 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. The FASB had deferred the implementation of SFAS No. 157 by oneyear for non-financial assets and liabilities, which the Company adopted on January 1,2009.  Under SFAS No. 159,  *The FairValue Option for Financial Assets and Financial Liabilities* —*Including an Amendment of FASB Statement No. 115,*entities are permitted to choose to measure many financial instruments andcertain other items at fair value. The Company has elected not to measureany additional instruments at fair value under SFAS No. 159.

 

As of March 31,2009, 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:

 

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

 

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

 

Level3 — Inputs are unobservable inputs that are used to measure fair value to theextent observable inputs are not available. The Company does not have anyfinancial assets or liabilities that are classified as Level 3 inputs as of March 31,2009 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 March 31, 2009 and December 31, 2008:

 
| ** **                                                     | ** ** | **As of**               | ** ** | **Fair Value Measurements** | ** ** |
|----------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **(in millions)**                                              | ** ** | **March 31, 2009** | ** ** | **Level 1**                 | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Assets                                                         | ** ** | ** **              | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Marketable  securities (a)                                     |       | $                       | 265.4      |                        | $          | 265.4 |   | $ | — |   | $ | — |   |
| Foreign exchange  contracts (b)                                |       | 0.5                     |       | —                      |       | 0.5 |   | — |   |
| Total assets at  fair value                                    |       | $                       | 265.9      |                        | $          | 265.4 |   | $ | 0.5 |   | $ | — |   |
|                                                           |       |                    |       |                        |       |   |   |   |   |
| Liabilities                                                    | ** ** | ** **              | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest rate  swaps (b)                                       |       | $                       | 80.3       |                        | $          | — |   | $ | 80.3 |   | $ | — |   |
| Cross-currency  interest rate swaps (b)                        |       | 3.5                     |       | —                      |       | 3.5 |   | — |   |
| Cross-currency  interest rate swaps - net investment hedge (b) |       | 6.2                     |       | —                      |       | 6.2 |   | — |   |
| Total  liabilities at fair value                               |       | $                       | 90.0       |                        | $          | — |   | $ | 90.0 |   | $ | — |   |

 

18

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| ** **                                                     | ** ** | **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 primarilyrepresent money market funds with an original maturity of three months or less.

 

(b)               See Note 4, “Derivatives,”for further details of the Company’s derivative instruments.

 

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

 

**Counter-partyrisk**

 

The Company managescounter-party risk by entering into derivative contracts with only majorfinancial institutions of investment grade quality and by limiting the amountof exposure to each financial institution. The Company has considered creditadjustments in its determination of the fair value of its derivative assets andliabilities as of March 31, 2009 and December 31, 2008 based onmarket participant assumptions. In addition, based on the credit evaluation ofeach institution comprising its derivative assets as of March 31, 2009 andDecember 31, 2008, the Company believes the carrying values of theseassets as of March 31, 2009 and December 31, 2008 to be fullyrealizable.

 

**6.  ACQUISITIONS:**

 

Pursuant to the Company’sbusiness strategy of achieving profitable growth through selectiveacquisitions, the Company has acquired several businesses in recent years. Inaccordance with SFAS No. 142,  *Goodwill and Other Intangible Assets*,any goodwill resulting from acquisitions is tested for impairment at leastannually.

 

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 preliminary and is subject tochange, with expected completion during the first half of 2009.

 

On September 1,2008, the Company completed the formation of a venture with Kemira that focuseson specialty 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 consolidatedthis venture and has reported Kemira’s interest as noncontrolling interest inthe condensed consolidated financial statements. The Company owns 61% of theventure with Kemira owning the remaining portion.  The venture’s acquisitionof the shares of the Rockwood and Kemira entities was facilitated by theborrowings 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 million using a September 3,2008 exchange rate) to the venture’s noncontrolling shareholder. In addition,the venture obtained a €30.0 million ($42.3 million) revolving credit facilityto finance its operations and the venture has assumed debt of €24.1 million($31.9 million) from Kemira, primarily due to a defined benefit pension plan.The Company estimates that the potential exposure range for assumedenvironmental liabilities is from $13.3 million to $25.3 million. At March 31,2009, $13.3 million of related reserves were recorded. The allocation ofpurchase price to the identifiable assets acquired is preliminary and issubject to change, with expected completion during 2009.

 

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 

 

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pre-treating of metal andis part of the Surface Treatment business within the Specialty Chemicalssegment. The allocation of the purchase price to the identifiable assetsacquired is preliminary and is subject to change, with expected completionduring the first half of 2009.

 

In addition to theacquisitions described above, the Company had completed other smalleracquisitions in 2008.  Depending on thetiming and complexity involved, the purchase price allocation to the net assetsacquired for certain acquisitions completed within the last year waspreliminary as of March 31, 2009.

 

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

 

**7.  INVENTORIES:**

 

Inventories are comprisedof the following:

 
| ** **               | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------|------------|--------------------|------------|-----------------------|------------|
| **($ in millions)** | ** ** | **2009 (a)**       | ** ** | **2008**              | ** ** |
| Raw materials            |       | $                  | 182.4      |                  | $          | 203.8 |   |
| Work-in-process          |       | 73.1               |       | 74.2                  |       |
| Finished goods           |       | 340.3              |       | 355.3                 |       |
| Packaging  materials     |       | 7.4                |       | 7.7                   |       |
| Total                    |       | $                  | 603.2      |                  | $          | 641.0 |   |

 

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(a)                The decrease from December 31,2008 is primarily related to the impact of currency changes.

 

**8.  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                     |       | —        |       | 0.6          |       | 0.6        |       |
| Foreign exchange                 |       | (32.4         | )          | (14.9        | )          | (47.3      | )          |
| Balance,  March 31, 2009    |       | $             | 615.6      |         | $          | 255.5      |       | $ | 871.1 |   |

 

**9.  OTHER INTANGIBLE ASSETS:**

 

Other intangible assets,net consist of:

 
| ** **                               | ** ** | **As of March 31, 2009** | ** ** | **As of December 31, 2008** | ** ** |
|------------------------------------------|------------|-------------------------------|------------|----------------------------------|------------|
| ** **                               | ** ** | **Gross**                     | ** ** | ** **                       | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Carrying**                  | ** ** | **Accumulated**                  | ** ** | ** ** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| **($ in millions)**                 | ** ** | **Amount (a)**                | ** ** | **Amortization**                 | ** ** | **Net** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Patents and  other intellectual property |       | $                             | 396.3      |                             | $          | (142.3 | ) | $ | 254.0 |   | $ | 411.9 |   | $ | (142.0 | ) | $ | 269.9 |   |
| Trade names and  trademarks              |       | 135.1                         |       | (27.6                            | )          | 107.5 |   | 141.5 |   | (27.1 | ) | 114.4 |   |
| Customer  relationships                  |       | 358.3                         |       | (83.8                            | )          | 274.5 |   | 372.2 |   | (79.1 | ) | 293.1 |   |
| Supply  agreements                       |       | 56.4                          |       | (7.6                             | )          | 48.8 |   | 57.3 |   | (6.3 | ) | 51.0 |   |
| Other                                    |       | 59.7                          |       | (36.1                            | )          | 23.6 |   | 61.7 |   | (35.3 | ) | 26.4 |   |
| Total                                    |       | $                             | 1,005.8    |                             | $          | (297.4 | ) | $ | 708.4 |   | $ | 1,044.6 |   | $ | (289.8 | ) | $ | 754.8 |   |

 

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(a)    The decrease from December 31, 2008 is primarily related to the impact ofcurrency changes.

 

Amortization of otherintangible assets was $19.5 million and $18.7 million for the three monthsended March 31, 2009 and 2008, respectively.

 

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

 

20

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| **($ in millions)** | ** ** | **Amortization** | ** ** |
|--------------------------|------------|------------------|------------|
| **Year ended**           | ** ** | **Expense**      | ** ** |
| 2009                     |       | $                | 79.0       |   |
| 2010                     |       | 75.6             |       |
| 2011                     |       | 72.4             |       |
| 2012                     |       | 68.9             |       |
| 2013                     |       | 67.4             |       |
|                          |            |                  |            |  |

 

**10.  LONG-TERM DEBT**

 

Long-term debt and loanspayable are summarized as follows:

 
| ** **                                                                    | ** ** | **March 31,** | ** **    | **December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------|---------------|-----------------------|------------|
| **($ and € in millions)**                                           | ** ** | **2009**           | ** **    | **2008**              | ** ** |
| Senior secured  credit facilities:                                            |       |               |          |                  |       |
| Tranche A-1 term  loans (€4.6 and €22.8, respectively)              |       | $                  | 6.1           |                  | $          | 31.9 |   |
| Tranche A-2 term  loans (€39.8 and €99.4, respectively)             |       | 52.7               |          | 138.9                 |       |
| Tranche E term  loans                                                         |       | 1,082.0            |          | 1,104.9               |       |
| Tranche G term  loans (€261.1 and €265.2, respectively)             |       | 346.0              |          | 370.5                 |       |
| 2014 Notes  (€351.8 and $200.0 and €364.0 and $200.0, respectively) |       | 666.1              |          | 708.5                 |       |
| Titanium Dioxide  Pigments venture term loans (€250.0)                   |       | 331.3              |          | 349.3                 |       |
| Capitalized  lease obligations (€33.7 and €34.3, respectively)      |       | 44.6               |          | 47.9                  |       |
| Other loans                                                                   |       | 57.2               |          | 59.3                  |       |
|                                                                          |       | 2,586.0            |          | 2,811.2               |       |
| Less current  maturities                                                      |       | (26.5              | )             | (90.9                 | )          |
|                                                                          |       | $                  |  2,559.5 |                  | $          | 2,720.3 |   |

 

Inthe first quarter of 2009, the Company repurchased €12.2 million ($15.5 million based on the exchange rate ineffect on the date of repurchase) of its senior subordinated notes due in 2014,and voluntarily prepaid €63.2million ($85.1 million based onthe exchange rate in effect on the date of payment) and $17.2 million of its senior securedterm loans related to amortization payments due between 2009 - 2011.

 

**11.  INCOME TAXES:**

 

The effective tax ratefor the three months ended March 31, 2009 and 2008 was 71.1% and 40.2%,respectively. The difference between the effective rate and the U.S. statutoryrate of 35.0% in the three months ended March 31, 2009 primarily relatesto a nonrecurring tax benefit related to foreign currency changes as well asdomestic tax benefits allocated from other comprehensive income. The differencebetween the effective tax rate and the U.S. statutory rate of 35.0% for thethree months ended March 31, 2008 is primarily a function of favorable foreignrate differentials and the impact of the valuation allowance on domesticlosses.

 

In the three months endedMarch 31, 2009, the Company decreased its worldwide valuation allowancesby $10.0 million. The decrease in the valuation allowance was due to domesticincome reported in other comprehensive income, reduced by an increase in theoffset of net operating losses against uncertain tax benefit liabilities anddeferred tax assets generally associated with the Company’s domestic earnings.The change in the valuation allowance for the three months ended March 31,2009 increased the tax provision by $13.2 million. The following table reflectsthe activity in the valuation allowance for worldwide net operating losses andother deferred income tax assets:

 
| ** **                                                                                     | ** ** | **Valuation** | ** ** |
|------------------------------------------------------------------------------------------------|------------|---------------|------------|
| **($ in millions)**                                                                       | ** ** | **Allowance** | ** ** |
| Balance as of  December 31, 2008                                                          |       | $             | 84.9       |   |
| Increase as  reflected in income tax expense                                                   |       | 13.2          |       |
| Decrease as  reflected in other comprehensive income (a)                                       |       | (23.3         | )          |
| Increase due to  the offset of net operating losses against uncertain tax position liabilities |       | 0.1           |       |
| Balance as of  March 31, 2009                                                             |       | $             | 74.9       |   |

 

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(a)                Primarily relatedto net investment hedges, as well as the mark-to-market of the Company’seuro-denominated debt.

 

In the three months endedMarch 31, 2009, based on the Company’s policy and review of availableinformation, including the Company’s steady-state analysis, it was determinedthat there was not sufficient positive evidence of future taxable income torelease 

 

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the U.S. Federalvaluation allowance that has been recorded. During the three months ended March 31,2009, the Company’s net U.S. Federal deferred tax assets and liabilities weremaintained at a zero level, other than a noncurrent deferred tax liabilityrelating to goodwill with an indefinite reversal period and a noncurrentdeferred tax asset relating to a Federal AMT Credit. It is the Company’s policythat the valuation allowance is reversed in the year management determines itis more likely than not that the deferred tax assets will be realized.

 

In the second quarter of2008, the Company determined that it was necessary to establish a valuationallowance for certain state deferred tax assets. This resulted in a $0.4million increase in the tax provision related to the beginning of perioddeferred tax balance.

 

Unrecognized tax benefitsat March 31, 2009 were $26.2 million. This includes $25.8 million of taxbenefits that, if recognized, would affect the effective tax rate, and $0.4million of tax benefits that, if recognized, would result in an adjustment toother tax 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 three months ended March 31, 2009, the accrual forinterest and penalties was increased by $0.4 million to $7.5 million.

 

During the next twelvemonths, it is reasonably possible that resolution of uncertain tax liabilitiescould result in a benefit of up to $1.3 million or a cost of up to $26.1million. 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 2000, in the U.K. from 2006, and in Germany from2000.

 

**12.  EMPLOYEE BENEFIT PLANS:**

 

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

 
| ** **                            | ** ** | **Three months ended** | ** ** |
|---------------------------------------|------------|------------------------|------------|
| ** **                            | ** ** | **March 31,**     | ** ** |
| **($ in millions)**              | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Service cost                          |       | $                      | 2.0        |   | $ | 1.8 |   |
| Interest cost                         |       | 8.4                    |       | 7.0 |   |
| Expected return  on assets            |       | (3.6                   | )          | (2.7 | ) |
| Net amortization  of actuarial losses |       | 0.2                    |       | — |   |
| Total pension  cost                   |       | $                      | 7.0        |   | $ | 6.1 |   |

 

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

 

The Company recordsrestructuring liabilities that represent charges incurred in connection withconsolidations and cessations of certain of its operations, includingoperations from acquisitions, as well as headcount reduction programs. Thesecharges consist primarily of severance and facility closure costs, 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 monthsended March 31, 2009, the Company expensed $1.4 million of restructuringcharges. In the Performance Additives segment, the Company recorded $0.8million related to a restructuring plan implemented in March 2008 in theColor Pigments and Services business in connection with the integration of thebusinesses acquired from Elementis plc, which included the reorganization andrelocation of the North American Finance and IT services, and the closure ofthree manufacturing facilities in 2008.  This included $0.5 million ofseverance costs and $0.3 million of facility closure costs.  In the Specialty Chemicals segment, $0.4million was recorded primarily for miscellaneous headcount reduction andfacility closure costs as part of a 2008 restructuring charge.  For thethree months ended March 31, 2009, $0.2 million of asset write-offs wererecorded in the Color Pigments and Services business related to a 2009restructuring plan.  In addition, “restructuringand other severance costs” in the Condensed Consolidated Statements ofOperations included other severance-related costs of $6.4 million related toheadcount reductions undertaken throughout the Company.

 

During the three monthsended March 31, 2008, the Company expensed $0.8 million of restructuringcharges. In the Performance Additives segment, the Company implemented arestructuring plan in its Color Pigments and Services business in connectionwith the integration of the business acquired from Elementis plc. For the threemonths ended March 31, 2008, the Company recorded $0.6 million ofseverance costs related to this restructuring plan. In the Advanced Ceramicssegment, $0.2 million was recorded in the first quarter of 2008 formiscellaneous headcount reductions.

 

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 2008 restructuring actions follows:

 
| ** **                                 | ** ** | ** **    | ** ** | **Facility** | ** ** | ** **     | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|---------------|------------|--------------|------------|----------------|------------|------------|------------|
| **($ in millions)**                   | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Relocation** | ** ** | **Total**  | ** ** |
| **2008**                                   | ** ** | ** **    | ** ** | ** **   | ** ** | ** **     | ** ** | ** ** | ** ** |
| Liability  balance, December 31, 2008 |       | $             | 13.2       |         | $          | 0.1            |       | $          | 0.2        |   | $ | 13.5 |   |
| Restructuring  charge in 2009              |       | 0.6           |       | 0.2          |       | 0.1            |       | 0.9        |       |
| Utilized                                   |       | (4.6          | )          | (0.2         | )          | (0.1           | )          | (4.9       | )          |
| Foreign exchange  and other                |       | (0.5          | )          | —       |       | —         |       | (0.5       | )          |
| Liability balance,  March 31, 2009    |       | $             | 8.7        |         | $          | 0.1            |       | $          | 0.2        |   | $ | 9.0 |   |

 

These actions areexpected to be completed during 2009.

 

23

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Selected information forthe 2007 restructuring actions follows:

 
| ** **                                 | ** ** | ** **    | ** ** | **Facility** | ** ** | ** **     | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|---------------|------------|--------------|------------|----------------|------------|------------|------------|
| **($ in millions)**                   | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Relocation** | ** ** | **Total**  | ** ** |
| **2007**                                   | ** ** | ** **    | ** ** | ** **   | ** ** | ** **     | ** ** | ** ** | ** ** |
| Liability  balance, December 31, 2008 |       | $             | 1.3        |         | $          | 1.5            |       | $          | 0.2        |   | $ | 3.0 |   |
| Restructuring  charge in 2009              |       | 0.1           |       | 0.2          |       | —         |       | 0.3        |       |
| Utilized                                   |       | (0.6          | )          | (0.2         | )          | (0.1           | )          | (0.9       | )          |
| Foreign exchange  and other                |       | —        |       | (0.3         | )          | 0.2            |       | (0.1       | )          |
| Liability  balance, March 31, 2009    |       | $             | 0.8        |         | $          | 1.2            |       | $          | 0.3        |   | $ | 2.3 |   |

 

These actions areexpected to be completed during 2009.

 

Selected information forthe 2006 restructuring actions follows:

 
| ** **                                 | ** ** | ** **    | ** ** | **Facility** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|---------------|------------|--------------|------------|------------|------------|
| **($ in millions)**                   | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Total**  | ** ** |
| **2006**                                   | ** ** | ** **    | ** ** | ** **   | ** ** | ** ** | ** ** |
| Liability  balance, December 31, 2008 |       | $             | 0.1        |         | $          | 2.3        |       | $ | 2.4 |   |
| Utilized                                   |       | (0.1          | )          | (0.2         | )          | (0.3       | )          |
| Liability  balance, March 31, 2009    |       | $             | —     |         | $          | 2.1        |       | $ | 2.1 |   |

 

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:

 
| ** **                 | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------|------------|--------------------|------------|-----------------------|------------|
| **($ in millions)**   | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| Specialty  Chemicals       |       | $                  | 7.0        |                  | $          | 8.1 |   |
| Performance  Additives     |       | 1.9                |       | 2.3                   |       |
| Titanium Dioxide  Pigments |       | 1.3                |       | 1.4                   |       |
| Advanced  Ceramics         |       | 0.8                |       | 4.5                   |       |
| Specialty  Compounds       |       | 0.3                |       | 0.5                   |       |
| Corporate and  other       |       | 2.1                |       | 2.1                   |       |
|                       |       | $                  |  13.4 |                  | $          | 18.9 |   |

 

**14.  COMMITMENTS AND CONTINGENCIES:**

 

***Legal Proceedings***—The Company isinvolved in various legal proceedings, including commercial, intellectualproperty, product liability and environmental matters of a nature considerednormal to its business. It is the Company’s policy to accrue for amountsrelated to these matters in accordance with SFAS No. 5,*Accounting for Contingencies*, if it isprobable that a liability has been incurred and an amount can be reasonablyestimated. It is the Company’s policy to disclose such matters when there is atleast a reasonable possibility that a material loss may have been incurred.

 

**Hospira Matter**

 

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.  The Company will continue to vigorouslydefend this matter.  While the Company 

 

24

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believes its subsidiaryhas meritorious defenses against Hospira’s claims and does not believe thatresolution of this matter will have a material adverse effect on its businessor financial condition, the Company cannot predict the ultimate outcome of thislitigation and resolution of this claim may have a material adverse effect onits results of operations or cash flows in any quarterly or annual reportingperiod.

 

**Advertising Matter**

 

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.  On March 20, 2009, the district courtgranted Osmose’s motion for a TRO and set a preliminary injunction hearing for May 19,2009.  Viance raised certaincounterclaims related to OI’s advertisements and those claims will be heard atthe May 19, 2009 hearing.****TheCompany will vigorously defend this matter. While the Company believes the defendants have meritorious defensesagainst OI’s claims and does not believe that resolution of this matter willhave a material adverse effect on its business or financial condition, theCompany cannot predict the ultimate outcome of this litigation and resolutionof this claim may have a material adverse effect on its results of operationsor cash flows in any given quarterly or annual reporting period.

 

**Ceramic Hips**

 

A customer of the Company’sAdvanced Ceramics segment initiated a global voluntary recall of a specificmodel of ceramic ballheads manufactured by Advanced Ceramics.  The recall was initiated after receivingreports of ceramic fractures and it relates only to the specific customer’sdesign and no other product of this segment. The subsidiary is cooperating with its customer in investigating thismatter.  Although the Company does notbelieve this recall will have a material adverse effect on its business orfinancial condition, the Company cannot predict the ultimate outcome of thismatter, and the resolution of this matter may have a material adverse effect onits results of operations or cash flows in any quarterly or annual reportingperiod.

 

**Former Glass Sealants Business**

 

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

 

**EC Heat Stabilizers 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 that itcommenced a proceeding against certain participants in the heat stabilizersmarket, including the business formerly owned by this subsidiary and theCompany’s subsidiary.  Neither theCompany nor any of its subsidiaries are active in the market for heatstabilizers; however, the business sold in 2000 was active in this market.  The Company will vigorously defend thismatter.  While the Company believes its subsidiary has meritoriousdefenses against these 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 proceedingand resolution of this matter may have a material adverse effect on its resultsof operations or cash flows.

 

**Other Matters**

 

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 not believethat these actions will have a material effect on the financial condition,results of operations or liquidity of the Company.

 

Reserves in connectionwith product liability matters do not individually exceed $3.0 million and inthe aggregate $8.0 million as of March 31, 2009. The Company’s reserveestimates are based on available facts, including damage claims and input fromits internal 

 

25

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and external legalcounsel, past experience, and, in some instances where defense costs are beingpaid by its insurer, known insurance recoveries. The Company is unable toestimate the amount or range of any potential incremental charges should factsand circumstances change and may in the future revise its estimates based onnew information becoming available. Further, the Company cannot predict theoutcome of any litigation or the potential for future litigation.

 

***Indemnity Matters***— The Company may beindemnified by third parties in connection with certain matters related toacquired businesses.  For example, under the terms of the sale andpurchase agreement relating to the Dynamit Nobel Acquisition, GEA Group and itssubsidiary GEA North America Inc. (“GEA North America”), were obligated toindemnify the Company for certain legal, tax and environmental liabilities andobligations that relate to the period prior to the closing, subject to certainlimits and exclusions. Pursuant to these agreements, the Company has variousclaims for indemnification with GEA Group. However, in March 2008, theCompany entered into an agreement with GEA Group and GEA North America tosettle all existing and future environmental indemnities under the sale andpurchase agreement relating to the Dynamit Nobel Acquisition in considerationof payment to the Company of €18.8 million ($29.1 million), which was receivedon March 28, 2008. Although the Company has no reason to believe that thefinancial condition of those parties who may have indemnification obligationsto the Company is other than sound, in the event the Company seeks indemnityunder any of these agreements or through other means, there can be no assurancethat any party who may have obligations to indemnify the Company will adhere totheir obligations and the Company may have to resort to legal action to enforceits rights under the indemnities. In cases where the Company’s indemnificationclaims to such third parties are uncontested, the Company expects to realizerecoveries 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 theopinion of management, and based upon information currently available, theultimate resolution of any indemnification obligations owed to the Company orby the Company is not expected to have a material adverse effect on the Company’sfinancial condition, results of operations or cash flows, but may have amaterial adverse effect on the Company’s results of operations or cash flow inany quarterly or annual reporting period.

 

**Safety,Health and Environmental Matters**

 

***General***

 

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

 

***Safety, Health and Environmental Management Systems***

 

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

 

***SHE Capital Expenditures***

 

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

 

***Regulatory Developments***

 

On June 1, 2007, theRegistration, Evaluation and Authorization of Chemicals (“REACH”) legislationbecame effective in the EU. REACH requires manufacturers and importers ofcertain chemicals to register those chemicals, perform health and environmentalrisk 

 

26

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analyses of thosechemicals, and in certain instances, obtain authorizations for the use of thechemicals. Covered substances were pre-registered by December 31, 2008.REACH is expected to be implemented in three phases over an eleven year periodbased on known product hazards and/or volume of product in commerce. UnderREACH, where warranted by a risk assessment, specified uses of some hazardoussubstances may be restricted. As a specialty chemicals company, it is possiblethat the Company is the only manufacturer of one or more substances to beregulated under REACH and thus could potentially bear the full cost ofcompliance with REACH for some or all of the Company’s products. The Companyestimates it has approximately 350 products that are subject to REACH. TheCompany is taking steps to comply with REACH, which included thepre-registration of its products. The Company does not believe these costs willhave a material impact on its results of operations, financial position orliquidity. In addition, it is possible that REACH may affect raw materialsupply, customer demand for certain products and the Company’s decision tocontinue to manufacture and sell certain products.

 

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

 

***Remediation Liabilities***

 

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

 

27

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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 March 31,2009:

 
| **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       |       |    |       |    |       |
|            |       | Silver Peak, NV                 |       | X       |       |    |       |    |       | X       |       |    |       |
|            |       | Sunbright, VA (facility closed) |       | X       |       |    |       |    |       |    |       | X       |       |
|            |       | Valdosta, GA                    |       | X       |       |    |       |    |       |    |       |    |       |

 

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

 

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

 

(c)                The Company iscurrently conducting investigations into additional possible soil and/orgroundwater contamination at these locations.

 

(d)               The Company hasland restoration obligations relating to landfill activities or surface miningat these locations.

 

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

 

The Company is alsoresponsible for environmental matters at some of its former off-site disposallocations owned by third parties. These sites are considered Superfund sites asdefined by the EPA or state regulatory authority. The Company is a potentiallyresponsible party or*de minimis*participant at the following Superfund locations: Casmalia, CA; Laurel, MD;Niagara Falls, NY; South Gate, CA; and Whittier, CA and has reserves for thesematters totaling $0.3 million at March 31, 2009. In addition, the Germanenvironmental authorities recently notified the Company, along with a few otherpotentially responsible parties, of a potential remediation at a former site inLiebenau, Germany. The Company is currently in the process of gatheringadditional information regarding the site and cannot predict the potentialscope of any such 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.

 

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

 

During the course of theCompany’s business, the Company may receive notices of violation, enforcementand other complaints from 

 

28

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regulatory agenciesalleging non-compliance with applicable SHE laws. Currently, the Company is aparty to a consent order with the Metropolitan Sewer District (“MSD”) in St.Louis, Missouri to reduce ammonia concentrations in wastewater discharge to acity treatment plant. MSD’s new National Pollution Discharge Elimination System(“NPDES”) permit required the Company to reduce the facility’s ammoniadischarge by December 31, 2008. The Company has spent $2.4 million intotal capital expenditures in connection with this matter.

 

During 2008, the Company’sTimber Treatment Chemicals subsidiary was cited by the U.S. EPA for failure toreport hazardous material production quantities under the Toxic SubstancesControl Act - 2005 Inventory Update Rule.  The business has provided therequired information; however, the business expects to pay a fine as a resultof this violation. The Company does not believe, based upon currently availableinformation, that this issue will have a material adverse impact on its resultsof operations, financial position or liquidity.

 

***Environmental Reserves***

 

The Company hasestablished financial reserves relating to anticipated environmental cleanupobligations, site reclamation and remediation and closure costs, which arereviewed at least quarterly based on currently available information.Liabilities are recorded when potential liabilities are either known 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 $53.0 million and $55.1 million for known environmentalliabilities as of March 31, 2009 and December 31, 2008, respectively,all of which were classified as other non-current liabilities in the CondensedConsolidated Balance Sheets.  Included in the $53.0 million as of March 31,2009 is $20.8 million that is discounted using discount rates ranging from 5.0%to 7.5%, with the undiscounted amount of these reserves equaling $30.1 million.Included in the $55.1 million as of December 31, 2008 is $21.4 millionthat is discounted using discount rates ranging from 5.0% to 7.5%, with theundiscounted amount of these reserves equaling $30.9 million. In certain cases,the Company’s remediation liabilities are payable over periods of up to 30years. At a number of the sites described above, the extent of contaminationhas not yet been fully investigated or the final scope of remediation is notyet determinable and could potentially affect the range. The Company estimatesthat the potential range for such environmental matters as of March 31,2009 is from $53.0 million to $96.5 million. For the three months ended March 31,2009, the Company recorded charges of $0.2 million to increase itsenvironmental liabilities and made payments of $0.1 million for clean-up andremediation costs, which reduced its environmental liabilities. For the threemonths ended March 31, 2009, the recurring cost of managing hazardoussubstances for ongoing operations is $10.3 million.

 

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

 

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.

 

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**15.  CONSOLIDATING FINANCIAL INFORMATION**

 

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

** **

**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGSTATEMENT OF OPERATIONS**

**THREEMONTHS ENDED MARCH 31, 2009**

**(Dollarsin millions)**

 
| ** **                                                               | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                               | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| Net sales                                                                |       | $           | —     |             | $          | 156.5             |       | $                | 503.5      |   | $ | 660.0 |   |
| Cost of products  sold                                                   |       | —      |       | 118.4            |       | 359.5             |       | 477.9            |       |
| Gross profit                                                             |       | —      |       | 38.1             |       | 144.0             |       | 182.1            |       |
| Selling, general  and administrative expenses                            |       | —      |       | 33.7             |       | 111.4             |       | 145.1            |       |
| Restructuring  and other severance costs                                 |       | —      |       | 1.8              |       | 6.0               |       | 7.8              |       |
| Loss on sale of  assets                                                  |       | —      |       | 0.1              |       | —            |       | 0.1              |       |
| Operating income                                                         |       | —      |       | 2.5              |       | 26.6              |       | 29.1             |       |
| Other income  (expenses), net:                                           |       |        |       |             |       |              |       |             |       |
| Intergroup  interest, net                                                |       | 25.6        |       | (11.4            | )          | (14.2             | )          | —           |       |
| Interest expense                                                         |       | (36.5       | )          | (0.4             | )          | (12.8             | )          | (49.7            | )          |
| Interest income                                                          |       | 0.5         |       | (0.2             | )          | 0.1               |       | 0.4              |       |
| Intergroup  other, net                                                   |       | 155.2       |       | (150.9           | )          | (4.3              | )          | —           |       |
| Gain (loss) on  early extinguishment of debt                             |       | 3.5         |       | (0.1             | )          | (1.2              | )          | 2.2              |       |
| Foreign exchange  (loss) gain, net                                       |       | (7.6        | )          | (0.1             | )          | 2.1               |       | (5.6             | )          |
| Other, net                                                               |       | (0.3        | )          | 0.3              |       | 0.1               |       | 0.1              |       |
| Other income  (expenses), net                                            |       | 140.4       |       | (162.8           | )          | (30.2             | )          | (52.6            | )          |
| Income (loss)  from continuing operations before taxes                   |       | 140.4       |       | (160.3           | )          | (3.6              | )          | (23.5            | )          |
| Income tax  (benefit) provision                                          |       | (7.9        | )          | 2.1              |       | (10.9             | )          | (16.7            | )          |
| Income (loss)  from continuing operations                                |       | 148.3       |       | (162.4           | )          | 7.3               |       | (6.8             | )          |
| Income from  discontinued operations, net of tax                         |       | 0.1         |       | 0.1              |       | 2.1               |       | 2.3              |       |
| Net income  (loss)                                                       |       | 148.4       |       | (162.3           | )          | 9.4               |       | (4.5             | )          |
| Net loss attributable  to the noncontrolling interest                    |       | —      |       | —           |       | 3.0               |       | 3.0              |       |
| Net income  (loss) attributable to Rockwood Specialties Group, Inc. |       | $           | 148.4      |             | $          | (162.3            | )          | $                | 12.4       |   | $ | (1.5 | ) |

 

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGSTATEMENT OF OPERATIONS**

**THREEMONTHS ENDED MARCH 31, 2008**

**(Dollarsin millions)**

 
| ** **                                                               | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                               | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| Net sales                                                                |       | $           | —     |             | $          | 185.5             |       | $                | 658.3      |   | $ | 843.8 |   |
| Cost of products  sold                                                   |       | —      |       | 135.1            |       | 436.2             |       | 571.3            |       |
| Gross profit                                                             |       | —      |       | 50.4             |       | 222.1             |       | 272.5            |       |
| Selling, general  and administrative expenses                            |       | —      |       | 40.9             |       | 125.7             |       | 166.6            |       |
| Restructuring  and other severance costs                                 |       | —      |       | 0.4              |       | 0.4               |       | 0.8              |       |
| Loss on sale of  assets                                                  |       | —      |       | —           |       | 0.1               |       | 0.1              |       |
| Operating income                                                         |       | —      |       | 9.1              |       | 95.9              |       | 105.0            |       |
| Other expenses,  net:                                                    |       |        |       |             |       |              |       |             |       |
| Intergroup  interest, net                                                |       | 27.7        |       | (9.5             | )          | (18.2             | )          | —           |       |
| Interest expense                                                         |       | (64.5       | )          | (0.5             | )          | (8.7              | )          | (73.7            | )          |
| Interest income                                                          |       | 2.7         |       | (0.1             | )          | (0.4              | )          | 2.2              |       |
| Intergroup  other, net                                                   |       | —      |       | 1.4              |       | (1.4              | )          | —           |       |
| Foreign exchange  gain (loss), net                                       |       | 21.2        |       | (0.2             | )          | (5.9              | )          | 15.1             |       |
| Other, net                                                               |       | (0.4        | )          | 0.4              |       | 0.4               |       | 0.4              |       |
| Other expenses,  net                                                     |       | (13.3       | )          | (8.5             | )          | (34.2             | )          | (56.0            | )          |
| (Loss) income  from continuing operations before taxes                   |       | (13.3       | )          | 0.6              |       | 61.7              |       | 49.0             |       |
| Income tax  provision                                                    |       | 0.3         |       | 1.6              |       | 17.8              |       | 19.7             |       |
| (Loss) income  from continuing operations                                |       | (13.6       | )          | (1.0             | )          | 43.9              |       | 29.3             |       |
| Loss from  discontinued operations, net of tax                           |       | —      |       | (1.0             | )          | —            |       | (1.0             | )          |
| Net (loss)  income                                                       |       | (13.6       | )          | (2.0             | )          | 43.9              |       | 28.3             |       |
| Net income  attributable to the noncontrolling interest                  |       | —      |       | —           |       | (0.6              | )          | (0.6             | )          |
| Net (loss)  income attributable to Rockwood Specialties Group, Inc. |       | $           | (13.6      | )                | $          | (2.0              | )          | $                | 43.3       |   | $ | 27.7 |   |

 

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** **

**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGBALANCE SHEET**

**MARCH 31,2009**

**(Dollarsin millions)**

 
| ** **                                                             | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                                             | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                                             |       |        |       |             |       |              |       |             |       |             |       |
| Current assets:                                                        |       |        |       |             |       |              |       |             |       |             |       |
| Cash and cash  equivalents                                             |       | $           | 149.3      |             | $          | 4.3               |       | $                | 168.2      |             | $          | — |   | $ | 321.8 |   |
| Accounts  receivable, net                                              |       | —      |       | 89.1             |       | 336.4             |       | —           |       | 425.5            |       |
| Inventories                                                            |       | —      |       | 150.3            |       | 452.9             |       | —           |       | 603.2            |       |
| Deferred income  taxes                                                 |       | 3.2         |       | 12.4             |       | 6.9               |       | —           |       | 22.5             |       |
| Prepaid expenses  and other current assets                             |       | 0.5         |       | 8.0              |       | 44.6              |       | —           |       | 53.1             |       |
| Total current  assets                                                  |       | 153.0       |       | 264.1            |       | 1,009.0           |       | —           |       | 1,426.1          |       |
| Property, plant  and equipment, net                                    |       | —      |       | 288.3            |       | 1,357.3           |       | —           |       | 1,645.6          |       |
| Investment in  subsidiary                                              |       | 1,423.2     |       | 90.7             |       | —            |       | (1,513.9         | )          | —           |       |
| Goodwill                                                               |       | —      |       | 18.2             |       | 852.9             |       | —           |       | 871.1            |       |
| Intergroup  receivable                                                 |       | 2,052.1     |       | 259.6            |       | 3,365.4           |       | (5,677.1         | )          | —           |       |
| Other intangible  assets, net                                          |       | —      |       | 110.4            |       | 598.0             |       | —           |       | 708.4            |       |
| Deferred debt  issuance costs, net                                     |       | 1.6         |       | 2.7              |       | 29.2              |       | —           |       | 33.5             |       |
| Deferred income  taxes                                                 |       | —      |       | —           |       | 19.7              |       | —           |       | 19.7             |       |
| Other assets                                                           |       | —      |       | 0.9              |       | 34.9              |       | —           |       | 35.8             |       |
| Total assets                                                           |       | $           | 3,629.9    |             | $          | 1,034.9           |       | $                | 7,266.4    |             | $          | (7,191.0 | ) | $ | 4,740.2 |   |
| **LIABILITIES**                                                        |       |        |       |             |       |              |       |             |       |             |       |
| Current  liabilities:                                                  |       |        |       |             |       |              |       |             |       |             |       |
| Accounts payable                                                       |       | $           | —     |             | $          | 46.0              |       | $                | 155.9      |             | $          | — |   | $ | 201.9 |   |
| Income taxes  payable                                                  |       | —      |       | (2.5             | )          | 5.8               |       | —           |       | 3.3              |       |
| Accrued  compensation                                                  |       | —      |       | 7.8              |       | 69.9              |       | —           |       | 77.7             |       |
| Restructuring  liability                                               |       | —      |       | 1.6              |       | 11.8              |       | —           |       | 13.4             |       |
| Accrued expenses  and other current liabilities                        |       | 35.7        |       | 41.5             |       | 110.9             |       | —           |       | 188.1            |       |
| Deferred income  taxes                                                 |       | —      |       | —           |       | 8.9               |       | —           |       | 8.9              |       |
| Long-term debt,  current portion                                       |       | —      |       | —           |       | 26.5              |       | —           |       | 26.5             |       |
| Total current  liabilities                                             |       | 35.7        |       | 94.4             |       | 389.7             |       | —           |       | 519.8            |       |
| Long-term debt                                                         |       | 2,100.1     |       | —           |       | 459.4             |       | —           |       | 2,559.5          |       |
| Pension and  related liabilities                                       |       | —      |       | 15.6             |       | 321.8             |       | —           |       | 337.4            |       |
| Intergroup  payable                                                    |       | 77.1        |       | 1,336.5          |       | 4,263.5           |       | (5,677.1         | )          | —           |       |
| Deferred income  taxes                                                 |       | 3.5         |       | 4.8              |       | 74.5              |       | —           |       | 82.8             |       |
| Other  liabilities                                                     |       | 78.4        |       | 28.9             |       | 87.1              |       | —           |       | 194.4            |       |
| Total liabilities                                                      |       | 2,294.8     |       | 1,480.2          |       | 5,596.0           |       | (5,677.1         | )          | 3,693.9          |       |
| **EQUITY**                                                             |       |        |       |             |       |              |       |             |       |             |       |
| Rockwood  Specialties Group, Inc. stockholder’s equity:      |       |        |       |             |       |              |       |             |       |             |       |
| Common stock                                                           |       | —      |       | 190.6            |       | 164.7             |       | (355.3           | )          | —           |       |
| Paid-in capital                                                        |       | 1,044.0     |       | 104.5            |       | 1,054.1           |       | (1,158.6         | )          | 1,044.0          |       |
| Accumulated  other comprehensive income                                |       | 31.5        |       | (6.6             | )          | 135.5             |       | —           |       | 160.4            |       |
| Retained  earnings (deficit)                                           |       | 259.6       |       | (733.8           | )          | 32.1              |       | —           |       | (442.1           | )          |
| Total Rockwood  Specialties Group, Inc. stockholder’s equity |       | 1,335.1     |       | (445.3           | )          | 1,386.4           |       | (1,513.9         | )          | 762.3            |       |
| Noncontrolling  interest                                               |       | —      |       | —           |       | 284.0             |       | —           |       | 284.0            |       |
| Total equity                                                           |       | 1,335.1     |       | (445.3           | )          | 1,670.4           |       | (1,513.9         | )          | 1,046.3          |       |
| Total  liabilities and equity                                          |       | $           | 3,629.9    |             | $          | 1,034.9           |       | $                | 7,266.4    |             | $          | (7,191.0 | ) | $ | 4,740.2 |   |

 

32

----

** **

**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

----

** **

**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGSTATEMENT OF CASH FLOWS**

**THREEMONTHS ENDED MARCH 31, 2009**

**(Dollarsin millions)**

 
| ** **                                                                                               | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                               | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                               |       |        |       |             |       |              |       |             |       |
| Net income  (loss)                                                                                       |       | $           | 148.4      |             | $          | (162.3            | )          | $                | 9.4        |   | $ | (4.5 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities:     |       |        |       |             |       |              |       |             |       |
| Income from  discontinued operations, net of tax                                                         |       | (0.1        | )          | (0.1             | )          | (2.1              | )          | (2.3             | )          |
| Depreciation and  amortization                                                                           |       | —      |       | 13.8             |       | 54.3              |       | 68.1             |       |
| Deferred  financing costs amortization                                                                   |       | 0.1         |       | 0.2              |       | 2.1               |       | 2.4              |       |
| Gain on early  extinguishment of debt                                                                    |       | (3.5        | )          | 0.1              |       | 1.2               |       | (2.2             | )          |
| Foreign exchange  loss (gain)                                                                            |       | 7.6         |       | 0.1              |       | (2.1              | )          | 5.6              |       |
| Fair value  adjustment of derivatives                                                                    |       | 6.6         |       | —           |       | 3.0               |       | 9.6              |       |
| Bad debt  provision                                                                                      |       | —      |       | 0.4              |       | (0.4              | )          | —           |       |
| Stock-based  compensation                                                                                |       | —      |       | 0.7              |       | 0.1               |       | 0.8              |       |
| Deferred income  taxes                                                                                   |       | (8.1        | )          | 2.1              |       | (16.5             | )          | (22.5            | )          |
| Loss on sale of  assets and other                                                                        |       | —      |       | 0.1              |       | —            |       | 0.1              |       |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions: |       |        |       |             |       |              |       |             |       |
| Accounts  receivable                                                                                     |       | —      |       | 2.1              |       | 20.1              |       | 22.2             |       |
| Inventories                                                                                              |       | —      |       | 3.8              |       | 11.9              |       | 15.7             |       |
| Prepaid expenses  and other assets                                                                       |       | 0.2         |       | 4.2              |       | 5.3               |       | 9.7              |       |
| Accounts payable                                                                                         |       | —      |       | (2.4             | )          | (34.8             | )          | (37.2            | )          |
| Income taxes  payable                                                                                    |       | 0.8         |       | (0.4             | )          | (0.9              | )          | (0.5             | )          |
| Accrued expenses  and other liabilities                                                                  |       | 37.8        |       | (49.7            | )          | (8.6              | )          | (20.5            | )          |
| Intercompany  operating activities, net                                                                  |       | 214.2       |       | (170.5           | )          | (43.7             | )          | —           |       |
| Net cash provided  by (used in) operating activities of continuing operations                            |       | 404.0       |       | (357.8           | )          | (1.7              | )          | 44.5             |       |
| Net cash  provided by operating activities of discontinued operations                                    |       | —      |       | —           |       | —            |       | —           |       |
| **Net  cash provided by (used in) operating activities**                                                 |       | 404.0       |       | (357.8           | )          | (1.7              | )          | 44.5             |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                               |       |        |       |             |       |              |       |             |       |
| Acquisitions,  including transaction fees paid, net of cash acquired                                     |       | —      |       | —           |       | (0.7              | )          | (0.7             | )          |
| Capital  expenditures, excluding capital leases                                                          |       | —      |       | (8.0             | )          | (36.3             | )          | (44.3            | )          |
| Proceeds on sale  of assets                                                                              |       | —      |       | 2.0              |       | 0.1               |       | 2.1              |       |
| Net cash used in  investing activities of continuing operations                                          |       | —      |       | (6.0             | )          | (36.9             | )          | (42.9            | )          |
| Net cash used in  investing activities of discontinued operations                                        |       | —      |       | (0.4             | )          | —            |       | (0.4             | )          |
| **Net  cash used in investing activities**                                                               |       | —      |       | (6.4             | )          | (36.9             | )          | (43.3            | )          |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                               |       |        |       |             |       |              |       |             |       |
| Repayment of  2014 Notes                                                                                 |       | (11.9       | )          | —           |       | —            |       | (11.9            | )          |
| Repayment of  senior secured credit facilities                                                           |       | (11.9       | )          | —           |       | (17.9             | )          | (29.8            | )          |
| Payments on  other long-term debt                                                                        |       | —      |       | —           |       | (2.6              | )          | (2.6             | )          |
| Payment related  to early extinguishment of senior secured debt                                          |       | (40.8       | )          | —           |       | (61.5             | )          | (102.3           | )          |
| Loan from Viance  joint venture noncontrolling shareholder                                               |       | —      |       | —           |       | 2.0               |       | 2.0              |       |
| Contractual  advance to Titanium Dioxide Pigments venture noncontrolling shareholder                     |       | —      |       | —           |       | (1.3              | )          | (1.3             | )          |
| Intercompany financing  related activity                                                                 |       | (462.6      | )          | 357.2            |       | 105.4             |       | —           |       |
| Net cash (used  in) provided by financing activities of continuing operations                            |       | (527.2      | )          | 357.2            |       | 24.1              |       | (145.9           | )          |
| Net cash used in  financing activities of discontinued operations                                        |       | —      |       | —           |       | —            |       | —           |       |
| **Net  cash (used in) provided by financing activities**                                                 |       | (527.2      | )          | 357.2            |       | 24.1              |       | (145.9           | )          |
| Effect of  exchange rate changes on cash and cash equivalents                                            |       | (0.2        | )          | (0.2             | )          | (1.8              | )          | (2.2             | )          |
| Net decrease in  cash and cash equivalents                                                               |       | (123.4      | )          | (7.2             | )          | (16.3             | )          | (146.9           | )          |
| Cash and cash  equivalents of continuing operations, beginning of period                                 |       | 272.7       |       | 11.5             |       | 184.5             |       | 468.7            |       |
| Cash and cash  equivalents of continuing operations, end of period                                       |       | $           | 149.3      |             | $          | 4.3               |       | $                | 168.2      |   | $ | 321.8 |   |

 

34

----

 

**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATINGSTATEMENT OF CASH FLOWS**

**THREEMONTHS ENDED MARCH 31, 2008**

**(Dollarsin millions)**

** **
| ** **                                                                                               | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                               | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                               |       |        |       |             |       |              |       |             |       |
| Net (loss)  income                                                                                       |       | $           | (13.6      | )                | $          | (2.0              | )          | $                | 43.9       |   | $ | 28.3 |   |
| Adjustments to  reconcile net (loss) income to net cash provided by (used in) operating  activities:     |       |        |       |             |       |              |       |             |       |
| Income from  discontinued operations, net of tax                                                         |       | —      |       | 1.0              |       | —            |       | 1.0              |       |
| Depreciation and  amortization                                                                           |       | —      |       | 11.3             |       | 50.2              |       | 61.5             |       |
| Deferred  financing costs amortization                                                                   |       | 0.1         |       | 0.2              |       | 2.0               |       | 2.3              |       |
| Foreign exchange  (gain) loss                                                                            |       | (21.2       | )          | 0.2              |       | 5.9               |       | (15.1            | )          |
| Fair value  adjustment of derivatives                                                                    |       | 28.2        |       | —           |       | 2.6               |       | 30.8             |       |
| Bad debt  provision                                                                                      |       | —      |       | 0.2              |       | 0.1               |       | 0.3              |       |
| Stock-based  compensation                                                                                |       | —      |       | 1.1              |       | 0.7               |       | 1.8              |       |
| Deferred income  taxes                                                                                   |       | (0.9        | )          | 1.5              |       | 6.7               |       | 7.3              |       |
| Gain on sale of  assets and other                                                                        |       | —      |       | —           |       | (0.4              | )          | (0.4             | )          |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions: |       |        |       |             |       |              |       |             |       |
| Accounts  receivable                                                                                     |       | —      |       | (14.3            | )          | (27.3             | )          | (41.6            | )          |
| Inventories                                                                                              |       | —      |       | (9.6             | )          | (0.2              | )          | (9.8             | )          |
| Prepaid expenses  and other assets                                                                       |       | 1.0         |       | 18.1             |       | (15.9             | )          | 3.2              |       |
| Accounts payable                                                                                         |       | —      |       | (7.2             | )          | (31.9             | )          | (39.1            | )          |
| Income taxes  payable                                                                                    |       | 0.3         |       | (0.5             | )          | 1.6               |       | 1.4              |       |
| Accrued expenses  and other liabilities                                                                  |       | 12.7        |       | (11.2            | )          | 3.3               |       | 4.8              |       |
| Intercompany  operating activities, net                                                                  |       | 2.5         |       | (1.4             | )          | (1.1              | )          | —           |       |
| Net cash  provided by (used in) operating activities of continuing operations                            |       | 9.1         |       | (12.6            | )          | 40.2              |       | 36.7             |       |
| Net cash used in  operating activities of discontinued operations                                        |       | —      |       | (9.5             | )          | —            |       | (9.5             | )          |
| **Net  cash provided by (used in) operating activities**                                                 |       | 9.1         |       | (22.1            | )          | 40.2              |       | 27.2             |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                               |       |        |       |             |       |              |       |             |       |
| Acquisitions,  including transaction fees paid, net of cash acquired                                     |       | —      |       | (1.5             | )          | (9.4              | )          | (10.9            | )          |
| Post closing  purchase price consideration                                                               |       | —      |       | —           |       | 29.1              |       | 29.1             |       |
| Capital  expenditures, excluding capital leases                                                          |       | —      |       | (7.0             | )          | (48.6             | )          | (55.6            | )          |
| Proceeds on sale  of assets                                                                              |       | —      |       | 1.8              |       | 0.6               |       | 2.4              |       |
| Net cash used in  investing activities of continuing operations                                          |       | —      |       | (6.7             | )          | (28.3             | )          | (35.0            | )          |
| Net cash used in  investing activities of discontinued operations                                        |       | —      |       | (5.1             | )          | —            |       | (5.1             | )          |
| **Net  cash used in investing activities**                                                               |       | —      |       | (11.8            | )          | (28.3             | )          | (40.1            | )          |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                               |       |        |       |             |       |              |       |             |       |
| Repayment of  senior secured credit facilities                                                           |       | (12.6       | )          | —           |       | (20.9             | )          | (33.5            | )          |
| Payments on  other long-term debt                                                                        |       | —      |       | —           |       | (3.0              | )          | (3.0             | )          |
| Distribution to  noncontrolling shareholder                                                              |       | —      |       | —           |       | (2.2              | )          | (2.2             | )          |
| Intercompany  financing related activity                                                                 |       | 60.8        |       | (71.7            | )          | 10.9              |       | —           |       |
| Net cash  provided by (used in) financing activities of continuing operations                            |       | 48.2        |       | (71.7            | )          | (15.2             | )          | (38.7            | )          |
| Net cash used in  financing activities of discontinued operations                                        |       | —      |       | —           |       | —            |       | —           |       |
| **Net  cash provided by (used in) financing activities**                                                 |       | 48.2        |       | (71.7            | )          | (15.2             | )          | (38.7            | )          |
| Effect of  exchange rate changes on cash and cash equivalents                                            |       | 0.3         |       | 0.1              |       | (0.9              | )          | (0.5             | )          |
| Net increase  (decrease) in cash and cash equivalents                                                    |       | 57.6        |       | (105.5           | )          | (4.2              | )          | (52.1            | )          |
| 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                                       |       | $           | 428.3      |             | $          | (189.8            | )          | $                | 56.3       |   | $ | 294.8 |   |

 

**16.  SUBSEQUENT EVENT**

 

On May 5, 2009, theCompany commenced a tender offer in Europe to purchase up to €115.0 million ($153.3 million based on arate of €1.00 = $1.333 on May 5, 2009) of its outstanding €348.3 million7.625% Senior Subordinated Notes due in 2014 (“2014 Notes”) pursuant to amodified Dutch Auction.  On May 12,2009, the Company announced that ithas accepted for purchase €89.5 million ($122.1 million based on a rate of €1.00= $1.3648 on May 12, 2009) aggregate principal amount of 2014 Notes at €980.00per €1,000 principal amount of 2014 Notes for an aggregate purchase price of €87.7million ($119.7 million based on a rate of €1.00 = $1.3648 on May 12,2009) plus accrued and unpaid interest. The Company will fund this purchasewith available cash and cash equivalents and expects to complete the purchaseon May 15, 2009.

 

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 segment. As a result, our condensedconsolidated financial statements have been reclassified to reflect thesesegments as discontinued operations for all periods presented. See Note 2, “DiscontinuedOperations,” 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 financial statementsand the notes to those statements that appear elsewhere in this QuarterlyReport. Amounts may not recalculate due to rounding differences.*

 

*Unlessotherwise noted, all balance sheet related items which are denominated in eurosare converted at the March 31, 2009 exchange rate of €1.00 = $1.325.*

 

**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. We implementeda restructuring plan in March 2008 in our Color Pigments and Servicesbusiness in connection with the business acquired from Elementis plc. This included the reorganization and relocation of the North American Financeand IT services and the closure of three manufacturing facilities. 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 by mid2009.

 

·                  In the fourth quarter of 2008, we reducedoverhead and eliminated duplicative positions throughout the Company as part ofour global cost control initiatives.  Tocope with the downturn in the economy, we have continued this activity in thefirst quarter of 2009, and we remain focused on reducing costs, improvingproductivity, and conserving cash by controlling working capital and capitalspending.

 

·                  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 6, “Acquisitions,” for furtherdetails; and

 

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

 

36

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**FactorsWhich Affect Our Results of Operations**

 

**OurMarkets**

 

Because the businesses inour segments generally serve many unrelated end-use markets, we discuss theprincipal market conditions on a segment basis rather than a consolidatedbasis. The principal market conditions in our segments and regions in which weoperate that impacted our results of operations during the periods presentedinclude 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 made in December 2007 and September 2008that offset raw material cost increases and lower volumes from a slowdown inthe automotive markets.  In the first quarter of 2009, results declined onlower volumes in most businesses. Results for the remainder of 2009 could be negatively impacted by continuedeconomic downturns in all business sectors and regions.

 

·                 Demand for our lithium products in the Fine Chemicalsbusiness line of our Specialty Chemicals segment is generally driven by demandfor lithium carbonate in industrial applications, the aluminum business, glassceramics, cement and the general demand in China. Sales of lithium productsspecifically used in life science applications depend on the trends in drugdevelopment and growth in pharmaceuticals markets as well as genericcompetition. Growth in the Fine Chemicals business occurred in 2008 inmost market segments, driven by price increases and higher sales volumes oflithium applications.  In the firstquarter of 2009, lower volumes in most applications, particularly in lithiumand metal sulfide applications, had a negative impact on results.  A continued economic downturn could have anegative impact on our results for the remainder of 2009.

 

***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 Europeanvolumes were lower in 2008 and continued to decline in the first quarter of2009.  We expect results to decline forthe remainder of 2009 due to the severe slowdown in the construction industry.

 

·                  Demand for our wood protection products, in particularalkaline copper quaternary, or ACQ, is generally driven by new construction, aswell as remodeling and renovations.  Themarket position of ACQ was negatively impacted in 2008 and the first quarter of2009 by customer shifts to substitute products, a general slowdown in theconstruction market and the use of wood substitutes. These trends are expectedto continue in 2009.  Last year, weintroduced our newest*Ecolife*system which utilizes *Ecovance,*ahigh-performance non-metallic preservative with enhanced environmentalbenefits. Commercialization began in 2008, but did not have a significantimpact in 2008 or the first quarter of 2009, and is not expected to have asignificant impact for the remainder of the year.

 

·                  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.  As aresult of the economic slowdown, volumes were lower in most applications in thefirst quarter of 2009 and are expected to be lower for the remainder of theyear.

 

·                  Raw material costs have increased in the first quarterof 2009 in the Performance Additives segment, in particular, iron oxide forColor Pigments and Services and quaternary amine (“quat”) and monoethanolamine(“MEA”) for Timber Treatment Chemicals. Our ability to pass on additionalselling price increases for raw material increases in 2009 is uncertain inthese businesses.

 

***Titanium Dioxide Pigments***

 

·                  Demand for our titanium dioxide products in 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 applications decreasedin 2008.  In first quarter of 2009, lowervolumes of fiber anatase applications were partially offset by increasedselling prices.  Sales of titanium dioxide products in rutile grade weredown in 2008 due to lower selling prices, partially offset by slightly highervolumes.  In the first quarter of 2009, sales of rutile applications wereup due to higher volumes as a result of the venture with Kemira that wascompleted on September 1, 2008, partially offset by lower sellingprices.  Our functional additivesbusiness was down in 2008 and in the first quarter of 2009 on lower volumes,partially offset 

 

37

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by increased sellingprices.  A continued economic downturncould have a negative impact on the results of these applications for theremainder of 2009.

 

***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 firstquarter of 2009.  We expect this trend tocontinue throughout the remainder 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 quarter of 2009.  Sales of mechanical systems and applicationswere lower in 2008 and the first quarter of 2009 on decreased volumes. Sales ofelectronic applications were lower in 2008 and the first quarter of 2009 ondecreased volumes.  Sales of our multi-functional applications were downin 2008 and in the first quarter of 2009 from lower volumes.

 

Volumes for theseapplications, particularly cutting tools, electronics and multi-functional, aswell as other industrial driven applications, are expected to be lower for theremainder of 2009 due to the economic downturn, particularly 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.  As a result of a general downturn in the wireand cable market, volumes of wire and cable products were down in 2008 and inthe first quarter of 2009, and are expected to continue to decline for theremainder 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 quarter of 2009 and are expectedto continue to decline for the remainder of the year.  Net sales ofregulated packaging were lower in 2008 and in the first quarter of 2009 and areexpected to continue to decline for the remainder of the year.

 

·                  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 quarter of 2009 and are expected to belower for the remainder of 2009.

 

**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 96 manufacturing facilities in 26countries. Consequently, we are exposed to global economic and politicalchanges, particularly currency fluctuations that could impact our profitabilityand demand for our products.

 

Our sales and productioncosts are mainly denominated in U.S. dollars or euros. Our results ofoperations and financial condition have been historically impacted by thefluctuation of the euro against our reporting currency, the U.S. dollar. Forthe three months ended March 31, 2009, the average exchange rate of theeuro against the U.S. dollar was lower compared to the same period in 2008. Asa result, our net sales, gross profit and operating income were negativelyimpacted. Historically, however, our operating margins have not beensignificantly impacted by currency fluctuations because, in general, sales andcosts of products sold are generated or incurred in the same currency, subjectto certain exceptions.

 

38

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**RawMaterials**

 

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

 

**EnergyCosts**

 

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

 

**IncomeTaxes**

 

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

 

In the first quarter of2009, the worldwide valuation allowance decreased by $10.0 million. This wasdue to a $23.3 million reduction in domestic losses in other comprehensiveincome, partially offset by an increase of $0.1 million due to the offset ofnet operating losses against uncertain tax benefit liabilities and a $13.2million deferred tax increase associated with the Company’s domestic earnings.Of the $10.0 million decrease in the valuation allowance for the first quarterof 2009, $13.2 million impacted the tax provision.

 

**Acquisitions**

 

In 2008, we madeacquisitions pursuant to our business strategy of achieving profitable growth.See Note 6, “Acquisitions,” for further details.

 

**SpecialCharges and Credits**

 

During the periodspresented, we incurred certain special charges that includedsystems/organization establishment expenses, restructuring and other severancecosts, foreign exchange gains and losses, a gain on the early extinguishment ofdebt and inventory write-up charges. See “Items excluded from Adjusted EBITDA”section in Note 3, “Segment Information,” for a discussion of special chargesand credits recorded in the three months ended March 31, 2009 and 2008.

 

**SpecialNote Regarding Non-GAAP Financial Measures**

 

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

 

39

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**Definitionof Adjusted EBITDA**

 

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

 

·                  interest expense;

·                  depreciation expense;

·                  amortization expense, including amortization ofdeferred financing fees;

·                  extraordinary losses and non-recurring charges;

·                  non-cash charges;

·                  losses on asset sales;

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

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

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

·                  any fees and expenses related to permittedacquisitions;

·                  any deduction for noncontrolling interest expense; and

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

 

less:

 

·                  extraordinary gains and non-recurring gains;

·                  non-cash gains; and

·                  gains on asset sales,

 

in all cases, subject tocertain exclusions.

 

For presentation purposeswithin this report, we use the computation set forth in our senior securedcredit agreement as a basis which reflects management’s interpretationsthereof. Management has determined that stock-based compensation costs, whichare non-cash charges, will not be an adjustment in calculating Adjusted EBITDAas these costs will be an ongoing recurring cost to the Company. These costsare recorded in selling, general and administrative expenses in the CondensedConsolidated Statements of Operations. Specifically, the calculation ofAdjusted EBITDA according to the indenture underlying our 2014 Notes and thefacility agreement governing our Titanium Dioxide Pigments venture excludescertain adjustments prescribed within 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 noteholders acceleratingthe maturity of the 2014 Notes. In addition, if we cannot satisfy thesefinancial covenants in the indenture governing the 2014 Notes, we cannot engagein certain activities, such as incurring additional indebtedness or makingcertain payments. Consequently, Adjusted EBITDA is critical to our assessmentof our liquidity.

 

40

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

 

**Limitations**

 

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

 

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

 

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

 

An investor or potentialinvestor may find any one or all of these items important in evaluating ourperformance, results of operations, financial position and liquidity.Management compensates for the limitations of using non-GAAP financial measuresby using them only to supplement our U.S. GAAP results to provide a morecomplete understanding of the factors and trends affecting our business.

Adjusted EBITDA is not analternative to net income (loss) or income (loss) from continuing operationsbefore taxes or operating income or cash flows from operating activities ascalculated and presented in accordance with U.S. GAAP. You should not rely onAdjusted EBITDA as a substitute for any such U.S. GAAP financial measures. Westrongly urge you to review the reconciliations of Adjusted EBITDA to U.S. GAAPfinancial measures and other financial information, in each case includedelsewhere in this Annual Report. We also strongly urge you not to rely on anysingle financial measure to evaluate our business. Our measure of Adjusted EBITDAmay not be comparable to those of other 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 (loss) income is set forth in—Reconciliationof Net (Loss) Income Attributable to Rockwood Specialties Group, Inc. toAdjusted EBITDA for the three months ended March 31, 2009 and 2008),including as a percentage of net sales, for the periods presented.  See Note 3, “Segment Information,” forsegment information and a reconciliation to income (loss) from continuingoperations before taxes to Adjusted EBITDA on a segment basis.

 

41

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| ** **                                                               | ** ** | **Three months ended** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                               | ** ** | **March 31,**     | ** ** |
| **($ in millions)**                                                 | ** ** | **2009**               | ** ** | **2008** | ** ** |
| **Statement  of operations data:**                                       |       |                   |       |   |   |
| **Net  sales:**                                                          |       |                   |       |   |   |
| Specialty  Chemicals                                                     |       | $                      | 225.3      |   | $ | 311.7 |   |
| Performance  Additives                                                   |       | 155.3                  |       | 211.3 |   |
| Titanium Dioxide  Pigments                                               |       | 139.0                  |       | 115.9 |   |
| Advanced  Ceramics                                                       |       | 87.9                   |       | 133.2 |   |
| Specialty  Compounds                                                     |       | 51.1                   |       | 69.0 |   |
| Corporate and  other                                                     |       | 1.4                    |       | 2.7 |   |
| Total net sales                                                          |       | 660.0                  |       | 843.8 |   |
|                                                                     |       |                   |       |   |   |
| Gross profit                                                             |       | 182.1                  |       | 272.5 |   |
|                                                                     |       | 27.6                   | %          | 32.3 | % |
| Selling, general  and administrative expenses                            |       | 145.1                  |       | 166.6 |   |
|                                                                     |       | 22.0                   | %          | 19.7 | % |
| Restructuring  and other severance costs                                 |       | 7.8                    |       | 0.8 |   |
| Loss on sale of  assets and other                                        |       | 0.1                    |       | 0.1 |   |
| **Operating  income (loss):**                                            |       |                   |       |   |   |
| Specialty  Chemicals                                                     |       | 29.2                   |       | 63.6 |   |
|                                                                     |       | 13.0                   | %          | 20.4 | % |
| Performance  Additives                                                   |       | 1.8                    |       | 15.5 |   |
|                                                                     |       | 1.2                    | %          | 7.3 | % |
| Titanium Dioxide  Pigments                                               |       | 2.4                    |       | 9.9 |   |
|                                                                     |       | 1.7                    | %          | 8.5 | % |
| Advanced  Ceramics                                                       |       | 2.6                    |       | 26.3 |   |
|                                                                     |       | 3.0                    | %          | 19.7 | % |
| Specialty  Compounds                                                     |       | 5.1                    |       | 5.7 |   |
|                                                                     |       | 10.0                   | %          | 8.3 | % |
| Corporate and  other                                                     |       | (12.0                  | )          | (16.0 | ) |
| Total operating  income                                                  |       | 29.1                   |       | 105.0 |   |
| **Other  expenses, net:**                                                |       |                   |       |   |   |
| Interest expense                                                         |       | (49.7                  | )          | (73.7 | ) |
| Interest income                                                          |       | 0.4                    |       | 2.2 |   |
| Gain on early  extinguishment of debt                                    |       | 2.2                    |       | — |   |
| Foreign exchange  (loss) gain, net                                       |       | (5.6                   | )          | 15.1 |   |
| Other, net                                                               |       | 0.1                    |       | 0.4 |   |
| Other expenses,  net                                                     |       | (52.6                  | )          | (56.0 | ) |
| **(Loss)  income from continuing operations before taxes**               |       | (23.5                  | )          | 49.0 |   |
| Income tax  (benefit) provision                                          |       | (16.7                  | )          | 19.7 |   |
| (Loss) income  from continuing operations                                |       | (6.8                   | )          | 29.3 |   |
| Income (loss)  from discontinued operations, net of tax                  |       | 2.3                    |       | (1.0 | ) |
| Net (loss)  income                                                       |       | (4.5                   | )          | 28.3 |   |
| Net loss  (income) attributable to the noncontrolling interest           |       | 3.0                    |       | (0.6 | ) |
| Net (loss)  income attributable to Rockwood Specialties Group, Inc. |       | $                      | (1.5       | ) | $ | 27.7 |   |
|                                                                     |       |                   |       |   |   |
| **Adjusted  EBITDA:**                                                    |       |                   |       |   |   |
| Specialty  Chemicals                                                     |       | $                      | 50.3       |   | $ | 80.5 |   |
|                                                                     |       | 22.3                   | %          | 25.8 | % |
| Performance  Additives                                                   |       | 20.6                   |       | 33.7 |   |
|                                                                     |       | 13.3                   | %          | 15.9 | % |
| Titanium Dioxide  Pigments                                               |       | 21.5                   |       | 22.2 |   |
|                                                                     |       | 15.5                   | %          | 19.2 | % |
| Advanced  Ceramics                                                       |       | 17.8                   |       | 38.5 |   |
|                                                                     |       | 20.3                   | %          | 28.9 | % |
| Specialty  Compounds                                                     |       | 7.8                    |       | 8.7 |   |
|                                                                     |       | 15.3                   | %          | 12.6 | % |
| Corporate and  other                                                     |       | (8.8                   | )          | (14.4 | ) |
| Total Adjusted  EBITDA (a)                                               |       | $                      | 109.2      |   | $ | 169.2 |   |

 

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(a)                This amount does not include $(0.8)million of Adjusted EBITDA for the three months ended March 31, 2008 fromthe pool and spa chemicals business sold in October 2008.

 

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

 

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| ** **                                                               | ** ** | **Change: Three months ended March 31, 2009 versus 2008** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                               | ** ** | ** **                                                     | ** ** | ** ** | ** ** | **Constant** | ** ** | **Constant** | ** ** |
| ** **                                                               | ** ** | ** **                                                     | ** ** | **%** | ** ** | **Currency** | ** ** | **Currency** | ** ** |
| **($ in millions)**                                                 | ** ** | **Total**                                                      | ** ** | **Change** | ** ** | **Effect (a)** | ** ** | **Basis** | ** ** |
| **Statement  of operations data:**                                       |       |                                                           |       |   |   |   |   |   |   |
| **Net  sales:**                                                          |       |                                                           |       |   |   |   |   |   |   |
| Specialty  Chemicals                                                     |       | $                                                              | (86.4      | ) | (27.7 | )% | $ | (28.1 | ) | $ | (58.3 | ) |
| Performance  Additives                                                   |       | (56.0                                                          | )          | (26.5 | ) | (14.9 | ) | (41.1 | ) |
| Titanium Dioxide  Pigments                                               |       | 23.1                                                           |       | 19.9 |   | (10.9 | ) | 34.0 |   |
| Advanced  Ceramics                                                       |       | (45.3                                                          | )          | (34.0 | ) | (11.3 | ) | (34.0 | ) |
| Specialty  Compounds                                                     |       | (17.9                                                          | )          | (25.9 | ) | (6.3 | ) | (11.6 | ) |
| Corporate and  other                                                     |       | (1.3                                                           | )          | (48.1 | ) | (0.2 | ) | (1.1 | ) |
| Total net sales                                                          |       | (183.8                                                         | )          | (21.8 | ) | (71.7 | ) | (112.1 | ) |
|                                                                     |       |                                                           |       |   |   |   |   |   |   |
| Gross profit                                                             |       | (90.4                                                          | )          | (33.2 | ) | (19.6 | ) | (70.8 | ) |
| Selling, general  and administrative expenses                            |       | (21.5                                                          | )          | (12.9 | ) | (16.0 | ) | (5.5 | ) |
| Restructuring  and other severance costs                                 |       | 7.0                                                            |       |   |   |   |   | 7.0 |   |
| Loss on sale of  assets and other                                        |       | —                                                         |       |   |   |   |   | — |   |
| Total operating  expenses                                                |       | (14.5                                                          | )          | (8.7 | ) | (16.0 | ) | 1.5 |   |
| **Operating  income (loss):**                                            |       |                                                           |       |   |   |   |   |   |   |
| Specialty  Chemicals                                                     |       | (34.4                                                          | )          | (54.1 | ) | (1.8 | ) | (32.6 | ) |
| Performance  Additives                                                   |       | (13.7                                                          | )          | (88.4 | ) | (0.4 | ) | (13.3 | ) |
| Titanium Dioxide  Pigments                                               |       | (7.5                                                           | )          | (75.8 | ) | (0.7 | ) | (6.8 | ) |
| Advanced  Ceramics                                                       |       | (23.7                                                          | )          | (90.1 | ) | (1.0 | ) | (22.7 | ) |
| Specialty  Compounds                                                     |       | (0.6                                                           | )          | (10.5 | ) | (0.2 | ) | (0.4 | ) |
| Corporate and  other                                                     |       | 4.0                                                            |       | 25.0 |   | 0.5 |   | 3.5 |   |
| Total                                                                    |       | (75.9                                                          | )          | (72.3 | ) | (3.6 | ) | (72.3 | ) |
| **Other  expenses, net:**                                                |       |                                                           |       |   |   |   |   |   |   |
| Interest expense                                                         |       | 24.0                                                           |       | (32.6 | ) | 1.3 |   | 22.7 |   |
| Interest income                                                          |       | (1.8                                                           | )          | (81.8 | ) | (0.1 | ) | (1.7 | ) |
| Gain on early  extinguishment of debt                                    |       | 2.2                                                            |       |   |   |   |   |   |   |
| Foreign exchange  (loss) gain, net                                       |       | (20.7                                                          | )          |   |   |   |   |   |   |
| Other, net                                                               |       | (0.3                                                           | )          |   |   |   |   |   |   |
| Other expenses,  net                                                     |       | 3.4                                                            |       |   |   |   |   |   |   |
| **(Loss)  income from continuing operations before taxes**               |       |                                                           |       |   |   |   |   |   |   |
| Specialty  Chemicals                                                     |       | (39.5                                                          | )          |   |   |   |   |   |   |
| Performance  Additives                                                   |       | (13.4                                                          | )          |   |   |   |   |   |   |
| Titanium Dioxide  Pigments                                               |       | (8.4                                                           | )          |   |   |   |   |   |   |
| Advanced  Ceramics                                                       |       | (24.9                                                          | )          |   |   |   |   |   |   |
| Specialty Compounds                                                      |       | (0.8                                                           | )          |   |   |   |   |   |   |
| Corporate and  other                                                     |       | 14.5                                                           |       |   |   |   |   |   |   |
| Total                                                                    |       | (72.5                                                          | )          |   |   |   |   |   |   |
| Income tax  (benefit) provision                                          |       | (36.4                                                          | )          |   |   |   |   |   |   |
| (Loss) income  from continuing operations                                |       | (36.1                                                          | )          |   |   |   |   |   |   |
| Income (loss)  from discontinued operations, net of tax                  |       | 3.3                                                            |       |   |   |   |   |   |   |
| Net (loss)  income                                                       |       | (32.8                                                          | )          |   |   |   |   |   |   |
| Net loss  (income) attributable to the noncontrolling interest           |       | 3.6                                                            |       |   |   |   |   |   |   |
| Net (loss)  income attributable to Rockwood Specialties Group, Inc. |       | $                                                              | (29.2      | ) |   |   |   |   |   |   |
| **Adjusted  EBITDA:**                                                    |       |                                                           |       |   |   |   |   |   |   |
| Specialty  Chemicals                                                     |       | $                                                              | (30.2      | ) | (37.5 | )% | $ | (3.9 | ) | $ | (26.3 | ) |
| Performance  Additives                                                   |       | (13.1                                                          | )          | (38.9 | ) | (1.7 | ) | (11.4 | ) |
| Titanium Dioxide  Pigments                                               |       | (0.7                                                           | )          | (3.2 | ) | (2.3 | ) | 1.6 |   |
| Advanced  Ceramics                                                       |       | (20.7                                                          | )          | (53.8 | ) | (2.6 | ) | (18.1 | ) |
| Specialty  Compounds                                                     |       | (0.9                                                           | )          | (10.3 | ) | (0.7 | ) | (0.2 | ) |
| Corporate and  other                                                     |       | 5.6                                                            |       | 38.9 |   | 0.4 |   | 5.2 |   |
| Total Adjusted  EBITDA                                                   |       | $                                                              | (60.0      | ) | (35.5 | )% | $ | (10.8 | ) | $ | (49.2 | ) |

 

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(a)               The constant currency effect is thetranslation impact calculated based on the change in the applicable rate,primarily the euro, to the U.S. dollar exchange rate for the applicable period.

 

43

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***Three months ended March 31, 2009 compared to threemonths ended March 31, 2008***

 

**Overview**

 

Net sales decreased$183.8 million in the first quarter of 2009 compared with the same period inthe prior year primarily due to lower volumes and the negative impact ofcurrency changes of $71.7 million, partially offset by increased selling pricesof $41.8 million and bolt-on acquisitions, particularly the Titanium DioxidePigments venture with Kemira. See further discussion by segment below.

 

Operating income andAdjusted EBITDA decreased in the first quarter of 2009 compared with the sameperiod in the prior year primarily due to lower sales volumes, higher rawmaterial costs in most businesses and the negative impact of currency changes.This was partially offset by higher selling prices and lower corporate costsdue to decreased incentive compensation-related costs and lower professionalfees, as well as other cost control measures throughout the Company.

 

Net income fromcontinuing operations decreased $36.1 million compared with the same period inthe prior year due to the reasons noted above and decreased foreign exchangegains on financing activities. This was partially offset by lower interestexpense recorded in the first quarter of 2009 due to a decrease inmark-to-market losses on our interest rate hedging instruments and net gains of$2.2 million related to the repurchase of a portion of the 2014 Notes and therepayment of a portion of the senior secured term loans in the first quarter of2009.

 

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

 

Net income attributableto Rockwood Specialties Group, Inc. decreased $29.2 million in the firstquarter of 2009 compared with the same period in the prior year due to thereasons noted above.

 

**Netsales**

 

*SpecialtyChemicals*.  Net sales decreased $86.4 million over the prior year primarily due to lowervolumes and the negative impact of currency changes of $28.1 million.  In the Fine Chemicals business, lower volumesin most products, particularly in lithium and metal sulfide applications, werepartially offset by higher selling prices of lithium products. Net sales in theSurface Treatment business were lower on decreased volumes, particularly ingeneral industrial and automotive applications, partially offset by higherselling prices and the impact of a bolt-on acquisition in September 2008.

 

*PerformanceAdditives*.  Net sales decreased $56.0 million over the prior year primarily due to lowervolumes of construction-related products in our Color Pigments and Services andTimber Treatment Chemicals businesses, decreased demand in our Clay-basedAdditives business and the negative impact of currency changes of $14.9million.  This decrease was partiallyoffset by increased selling prices, cost control measures and the impact of abolt-on acquisition in August 2008.

 

*TitaniumDioxide Pigments*.  Net sales increased $23.1 million over the prior year due to the completion ofthe venture with Kemira on September 1, 2008, as well as increased sellingprices.  This was partially offset bylower volumes of titanium dioxide products, primarily commodity grade, andfunctional additives, and the negative impact of currency changes of $10.9million.

 

*AdvancedCeramics*.  Net sales decreased $45.3 million over the prior year primarily due to lowervolumes in most applications and the negative impact of currency changes of$11.3 million, partially offset by increased volumes of medical applicationsand the impact of a bolt-on acquisition in October 2008.

 

*SpecialtyCompounds*.  Net sales decreased $17.9 million over the prior year primarily due to lowervolumes in most businesses, particularly in wire and cable applications and thenegative impact of currency changes of $6.3 million.

 

*Corporateand other*.  Net sales decreased $1.3 million over the prior year primarily due to lowervolumes in the European wafer reclaim business.

 

**Grossprofit**

 

Gross profit decreased$90.4 million over the prior year primarily due to the sales volume decreasesnoted above, raw material cost increases and the negative impact of currencychanges of $19.6 million. Raw material costs increased, particularly fromthe impact of higher phosphoric acid costs in our Specialty Chemicals segmentand higher iron-oxide costs in our Color Pigments and Services business.  In addition, depreciation and amortizationcosts were higher in most businesses primarily from the impact ofacquisitions. Gross profit as a percentage of net sales decreased to 27.6%in the first quarter of 2009 from 32.3% in the first quarter of 2008.

 

44

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**Selling,general and administrative expenses**

 

Selling, general andadministrative expenses, or SG&A, decreased $21.5 million primarily due tothe impact of currency changes of $16.0 million, lower compensation-relatedcosts and professional fees, as well as other cost control measures undertakenthroughout the Company.  Lowercompensation-related costs include the reversal of discretionary profit-sharingplan accruals of $2.6 million and the reversal of certain long-term incentivecompensation program accruals of $1.3 million for which related targets are nolonger expected to be achieved.  SG&Aexpenses as a percentage of net sales were 22.0% and 19.7% in the first quarterof 2009 and 2008, respectively.

 

**Restructuringand other severance costs**

 

We recorded $7.8 millionof restructuring and other severance costs in the first quarter of 2009throughout the Company.  These chargesprimarily relate to headcount reductions as part of our global cost controlinitiatives.  We recorded $0.8 million ofrestructuring charges in the first quarter of 2008 for restructuring actions inthe Performance Additives and Advanced Ceramics segments for miscellaneousheadcount reductions. See Note 13, “Restructuring and Other SeveranceCosts,” for further details.

 

**Operatingincome**

 

*SpecialtyChemicals*.  Operating income decreased $34.4 million over the prior year primarily due tothe lower volumes discussed above, higher raw material costs of $10.2 million,primarily for phosphoric acid, increased depreciation and amortization costs of$2.7 million, as well as the negative impact of currency changes of $1.8million.

 

*PerformanceAdditives*.  Operating income decreased $13.7 million over the prior year due to the lowervolumes discussed above, higher raw material costs of $4.4 million,particularly iron-oxide costs in the Color Pigments and Services business andquat costs in our Timber Treatment Chemicals business, and increasedrestructuring and other severance costs of $2.3 million.

 

*TitaniumDioxide Pigments*.  Operating income decreased $7.5 million over the prior year primarily due tothe lower volumes noted above, increased depreciation and amortization costs of$5.7 million primarily related to the Kemira venture completed on September 1,2008 and higher energy costs of $1.5 million. This was partially offset byincreased sales related to the Kemira venture, cost control measures, as wellas the termination of a long-term incentive plan of $2.6 million and receipt ofa vendor rebate related to prior years of $1.7 million.

 

*AdvancedCeramics*.  Operating income decreased $23.7 million over the prior year primarily due tothe lower volumes noted above and increased restructuring and other severancecosts of $2.9 million. This decrease was partially offset by higher volumes ofmedical applications and the impact of a bolt-on acquisition in October 2008.

 

*SpecialtyCompounds*.  Operating income decreased $0.6 million over the prior year primarily due tothe lower volumes noted above, partially offset by lower raw material costs of$1.3 million, particularly PVC resin and plasticizer costs.

 

*Corporateand other. *Operatingloss decreased $4.0 million primarily due to lower compensation-related costsand professional fees, as well as other cost control measures undertakenthroughout the Company, partially offset by the lower sales volumes notedabove.  Lower compensation-related costsinclude the reversal of certain long-term incentive compensation accruals of$1.3 million related to performance targets that are no longer expected to beachieved.

 

**Otherincome (expenses)**

 

*Interestexpense*.  Interestexpense decreased $24.0 million in the first quarter of 2009 compared to thesame period in the prior year. The first quarter of 2009 and 2008 includednon-cash losses of $9.6 million and $30.8 million, respectively, representingthe movement in the mark-to-market valuation of our interest rate hedginginstruments. Excluding the impact of these losses, interest expense decreased$2.8 million primarily due to lower interest rates and debt repayments,partially offset by debt incurred during 2008 related to the Titanium DioxidePigments venture with Kemira.

 

*Interestincome*.  Interestincome decreased $1.8 million in the first quarter of 2009 compared to the sameperiod in the prior year due to lower short-term average interest rates.

 

*Gain onearly extinguishment of debt*.  In the first quarter of 2009, we recorded anet gain of $2.2 million related to the repurchase of €12.2 million ($15.5 millionbased on the exchange rate in effect on the date of repurchase) of our seniorsubordinated notes due in 2014, and the prepayment of €63.2 million($85.1 million based on the exchange rate in effect on the date ofpayment) and $17.2 million of our senior secured term loans related toamortization payments due between 2009 - 2011.

 

*Foreignexchange, net*.  In the first quarter of 2009, we had foreign exchange losses of $5.6 millionprimarily due to the impact of the weaker euro as of March 31, 2009 versusDecember 31, 2008, in connection with non-operating euro-denominatedtransactions.  In 

 

45

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the first quarter of2008, foreign exchange gains of $15.1 million were reported due to the impactof the stronger euro as of March 31, 2008 versus December 31, 2007related to non-operating euro-denominated transactions.

 

**Provisionfor income taxes**

 

We recorded an income taxbenefit of $16.7 million in the first quarter of 2009 on a loss from continuingoperations before taxes of $23.5 million. The income tax provision in the firstquarter of 2009 was positively impacted by a $10.1 million nonrecurring benefitrelated to foreign currency changes, as well as $8.2 million in domestic taxbenefits allocated from other comprehensive income. The effective income taxrate was 40.2% for the first quarter of 2008 and was negatively impacted by theabsence of a tax benefit for the Company’s domestic losses as a result of afull valuation allowance.

 

**(Loss)income from continuing operations**

 

Net loss from continuingoperations for the first quarter of 2009 was $(6.8) million as compared to netincome from continuing operations of $29.3 million for the first quarter of2008 for the reasons described above.

 

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

 

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

 

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

 

Netloss (income) attributable to noncontrolling interest of $3.0 million and$(0.6) million for the first quarter of 2009 and 2008, respectively, wasrecorded.  Noncontrolling interest represents the noncontrollinginterest portion of the Viance, LLC joint venture that was completed in January 2007between our Timber Treatment Chemicals business and Rohm and Haas Company andthe noncontrolling interest portion of the Titanium Dioxide Pigments venturecompleted in September 2008 between our Titanium Dioxide Pigments segmentand Kemira.  The change from the prior year primarily relates to lowervolumes in these ventures.

 

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

 

Net loss attributable toRockwood Specialties Group, Inc. for the first quarter of 2009 was $1.5million (loss of $3.8 million from continuing operations attributable toRockwood Specialties Group, Inc. and earnings from discontinued operationsattributable to Rockwood Specialties Group, Inc. of $2.3 million) ascompared to net income attributable to Rockwood Specialties Group, Inc. of$27.7 million (earnings of $28.7 million from continuing operationsattributable to Rockwood Specialties Group, Inc. and a loss fromdiscontinued operations attributable to Rockwood Specialties Group, Inc.of $1.0 million) for the same period in the prior year for the reasons describedabove.

 

**AdjustedEBITDA**

 

*SpecialtyChemicals*.  Adjusted EBITDA decreased $30.2 million over the prior year primarily due tothe lower sales volumes and higher raw material costs of $10.2 million asdiscussed above, as well as the negative impact of currency changes of $3.9million.

 

*PerformanceAdditives*.  Adjusted EBITDA decreased $13.1 million over the prior year due to the lowersales volumes and higher raw material costs of $4.4 million as discussed above,as well as the negative impact of currency changes of $1.7 million.

 

*TitaniumDioxide Pigments*.  Adjusted EBITDA decreased $0.7 million over the prior year due to the negativeimpact of currency changes of $2.3 million and the lower sales volumes andhigher energy costs noted above. This was partially offset by increased salesrelated to the completion of the venture with Kemira, cost control measures, aswell as the termination of a long-term incentive plan of $2.6 million andreceipt of a vendor rebate related to prior years of $1.7 million.

 

*AdvancedCeramics*.  Adjusted EBITDA decreased $20.7 million over the prior year primarily due tothe lower sales volumes noted above and the negative impact of currency changesof $2.6 million. This increase was partially offset by higher volumes of medicalapplications and the impact of a bolt-on acquisition in October 2008.

 

*SpecialtyCompounds*.  Adjusted EBITDA decreased $0.9 million over the prior year due to the negativeimpact of currency changes of $0.7 million and the lower sales volumes noted above,partially offset by lower raw material costs of $1.3 million.

 

*Corporateand other. *AdjustedEBITDA increased $5.6 million primarily due to lower compensation-related costsand professional fees, as well as other cost control measures undertaken throughoutthe Company.  Lower compensation-relatedcosts include the reversal of certain long-term incentive compensation accrualsof $1.3 million related to performance targets that are no longer expected tobe achieved.

 

46

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

 

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

 
| ** **                                                               | ** ** | **Three months ended** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                               | ** ** | **March 31,**     | ** ** |
| **($ in millions)**                                                 | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Net (loss)  income attributable to Rockwood Specialties Group, Inc. |       | $                      | (1.5       | ) | $ | 27.7 |   |
| Net (loss)  income attributable to noncontrolling interest               |       | (3.0                   | )          | 0.6 |   |
| Net (loss)  income                                                       |       | (4.5                   | )          | 28.3 |   |
| Income tax  (benefit) provision                                          |       | (16.7                  | )          | 19.7 |   |
| (Income) loss  from discontinued operations, net of tax                  |       | (2.3                   | )          | 1.0 |   |
| (Loss) income  from continuing operations before taxes                   |       | (23.5                  | )          | 49.0 |   |
| Interest expense  (a)                                                    |       | 49.7                   |       | 73.7 |   |
| Interest income                                                          |       | (0.4                   | )          | (2.2 | ) |
| Depreciation and  amortization                                           |       | 68.1                   |       | 61.5 |   |
| Restructuring  and other severance costs                                 |       | 7.8                    |       | 0.8 |   |
| Systems/organization  establishment expenses                             |       | 2.1                    |       | 1.2 |   |
| Inventory  write-up charges                                              |       | —                 |       | 0.4 |   |
| Gain on early  extinguishment of debt                                    |       | (2.2                   | )          | — |   |
| Loss on sale of  assets and other                                        |       | 0.1                    |       | 0.1 |   |
| Foreign exchange  loss (gain)                                            |       | 5.6                    |       | (15.1 | ) |
| Other                                                                    |       | 1.9                    |       | (0.2 | ) |
| Total Adjusted  EBITDA (b)                                               |       | $                      | 109.2      |   | $ | 169.2 |   |

 

----

(a)               Includes losses of $9.6 million and $30.8million for the three months ended March 31, 2009 and 2008, respectively,representing the movement in the mark-to-market valuation of the Company’sinterest rate and cross-currency hedging instruments.

 

(b)              This amount does not include $(0.8)million of Adjusted EBITDA for the three months ended March 31, 2008 fromthe pool and spa chemicals business sold in October 2008.

 

**Liquidityand Capital Resources**

 

**CashFlows**

 

*OperatingActivities*.  Net cash provided by operating activities was $44.5 million and $27.2 millionfor the three months ended March 31, 2009 and 2008, respectively. Net cashfrom operating activities increased primarily from the lower use of operatingcash from working capital changes, operating cash outflows in the prior yearrelated to operating the pool and spa business that was sold in October 2008and lower cash interest expense.

 

*InvestingActivities*.  Netcash used in investing activities was $43.3 million for the three months ended March 31,2009 and was primarily comprised of capital expenditures.  Net cash used in investing activities was$40.1 million for the three months ended March 31, 2008 and was primarilycomprised of capital expenditures and funds used for bolt-on acquisitions,partially offset by funds received related to the claim settlement between theCompany and GEA Group and GEA North America in the first quarter of 2008.

 

*FinancingActivities*.  Net cash used in financing activities was $145.9 million and $38.7 million forthe three months ended March 31, 2009 and 2008, respectively, and includedscheduled payments for long-term debt and revolver payments.  Net cashused in financing activities increased due to the repurchase of €12.2 million ($15.5 million based on the exchange rate in effect on the date ofrepurchase) of our senior subordinated notes due in 2014, and the prepayment of€63.2 million ($85.1 million based on the exchange rate in effect on thedate of payment) and $17.2million of our senior secured term loans in the first quarter of 2009.

 

47

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**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 quarter of 2009, we recorded a gain of$2.2 million related to the repurchaseof €12.2 million ($15.5 millionbased on the exchange rate in effect on the date of repurchase) of our seniorsubordinated notes due in 2014, and the voluntarily prepayment of €63.2 million ($85.1 million based on the exchange rate in effect on thedate of payment) and $17.2million of our senior secured term loans related to amortization payments duebetween 2009 - 2011.

 

·                  On May 5, 2009, we commenced a tender offer inEurope to purchase up to €115.0 million($153.3 million based on a rate of €1.00 = $1.333 on May 5, 2009) of ouroutstanding €348.3 million 7.625% Senior Subordinated Notes due in 2014 (“2014Notes”) pursuant to a modified Dutch Auction. On May 12, 2009, we announced that we have accepted for purchase €89.5 million($122.1 million based on a rate of €1.00 = $1.3648 on May 12, 2009)aggregate principal amount of 2014 Notes at €980.00 per €1,000 principal amountof 2014 Notes for an aggregate purchase price of €87.7 million ($119.7million based on a rate of €1.00 = $1.3648 on May 12, 2009) plus accruedand unpaid interest.

 

Our primary liquidityrequirements are working capital, debt service, capital expenditures andacquisitions. Our debt service requirements and other contractual obligationsand commitments over the next several years are significant and aresubstantially higher than historical amounts.  We believe that based oncurrent conditions in our industry and markets, our cash reserves, cash flowsfrom operations and borrowings available under our revolving credit facilitywill be adequate sources of liquidity for the remainder of 2009. However,a prolonged economic downturn or recession may have a material adverse impacton our results of operations, cash flows from operations and our liquidity. Ifour operating results deteriorate, we may need to use some or all of ouravailable cash to reduce our leverage in order to comply with the leverageratios in our debt agreements. If these sources are insufficient to fund ourneeds, we may need to use other means available to us, such as reduce or delaycapital expenditures, take other cost cutting measures, seek to refinance ourdebt obligations, seek additional sources of capital or any combination of theabove. In addition, any future major acquisitions, business combinations orother such events may require us to seek additional capital resources, such asthrough additional borrowings, equity issuances by Holdings or other sources,to satisfy our liquidity needs.  The recent unprecedented adverseconditions in the global capital and credit markets may limit our ability tosecure capital or obtain it on terms and conditions that are acceptable tous.  We cannot predict with any certainty the impact of this or anyfurther disruption in these markets or our ability to access these markets inthe future. See Item 1, “Business,” and Item 1A, “Risk Factors” in our2008 Form 10-K.

 

In addition, ourliquidity may be negatively impacted due to funding obligations related tocertain pension plans. We have several pension plans located in Germany,Finland, the United Kingdom and the United States, which have been adverselyimpacted by market conditions. For example, based upon recent investmentperformance of pension assets in a pension plan covering the majority of ouremployees in Finland, we may have to increase funding and/or make a significantpayment to the plan via a one-time payment and/or long-term fundingarrangement. However, this could change significantly based on the investmentperformance of the pension plan and the future performance of the pension planassets. Any further deterioration of the capital markets or returns availablein such markets may materially and adversely impact our pension plan assets andincrease our funding obligations for one or more of these plans and adverselyimpact our liquidity. We cannot predict the impact of this or any furthermarket disruption on our pension funding obligations.

 

As of March 31,2009, we had actual total indebtedness of $2,586.0 million. The revolvingcredit facility under the senior secured credit facilities provided foradditional borrowings of up to $225.1 million as of March 31, 2009. Therewere no outstanding borrowings under this revolving credit facility as of March 31,2009. The revolving credit facility under the Titanium Dioxide Pigments venturefacility provided for additional borrowings of up to €30.0 million ($39.8million). As of March 31, 2009, there were no outstanding borrowings underthis revolving credit facility.

 

As of March 31,2009, we had cash and cash equivalents of $321.8 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.*   The senior secured credit facilities, asamended, consist of:

 

·                  tranche A-1 term loans in an aggregate principalamount of €4.6 million ($6.1 million) and tranche A-2 term loans in anaggregate principal amount of €39.8 million ($52.7 million), each maturing on July 30,2011 and bearing interest at Euribor plus 1.75%;

 

·                  tranche E term loans in an aggregate principal amountof $1,082.0 million, maturing on July 30, 2012 and bearing interest atLibor plus 1.75%;

 

·                  tranche G term loans in an aggregate principal amountof €261.1 million ($346.0 million) maturing on July 30, 2012 and bearinginterest of Euribor plus 2.00%; and

 

·                  a revolving credit facility in an aggregate principalamount of $250.0 million maturing on July 30, 2010, bearing interestat the 

 

48

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Company’s option ofeither (i)  Libor plus 2.00% or (ii) ABR plus 0.75%. As of March 31,2009, we had no borrowings outstanding under this facility and had outstandingletters of credit of $24.9 million that reduced our availability under thecredit facility.

 

In each case, theinterest rates are subject to step-downs determined by reference to aperformance test. Libor is the London inter-bank offered rate. ABR is thealternate base rate, which is the greater of Credit Suisse’s prime rate and thefederal funds effective rate plus 0.50%. Tranche A-1 and A-2 term loansare payable in January and July of each year at escalatingpercentages of the original principal amount. Tranche E and tranche Gterm loans are payable in January and July of each year at amountsequal to 0.50% of the principal amount of the former tranche D term loansand tranche F term loans, respectively, with the remainder due at thefinal maturity date.

 

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

 

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

 

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

 

·                  a leverage ratio: for the twelve-month period ended March 31,2009, net debt (total debt plus capital lease obligations, minus cash up to amaximum of $100.0 million) to Adjusted EBITDA must be less than 4.25 to 1; forsuch period, our ratio equaled 4.11 to 1; and

 

·                  an interest coverage ratio: for the twelve-monthperiod ended March 31, 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 3.84 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, and intereston the then outstanding notes immediately due and payable.  The seniorsecured credit agreement contains a cross default provision for indebtedness inexcess of $30.0 million; therefore, a default under the indenture governing the2014 Notes, the Titanium Dioxide Pigments term loans or other indebtedness maycause the lenders to declare the principal and interest on the then outstandingsenior secured credit facilities immediately due and payable.

 

As discussed above, theleverage ratio under the senior secured credit agreement must be less than 4.25to 1, with no further reductions.  We may use available cash in excess of$100.0 million to pay down debt at any time in order to reduce this leverageratio.  As of March 31, 2009, we had cash and cash equivalents of$321.8 million.  As discussed above, weannounced that we have accepted for purchase €89.5 million ($122.1 million based on a rate of €1.00 = $1.3648 on May 12, 2009) aggregateprincipal amount of 2014 Notes at €980.00 per €1,000 principal amount of 2014Notes for an aggregate purchase price of €87.7 million ($119.7 million based ona rate of €1.00 = $1.3648 on May 12, 2009) plus accrued and unpaidinterest.  We will fund this purchasewith available cash and cash equivalents and expect to complete the purchase onMay 15, 2009.

 

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

 

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

 

*2014Notes.*  As of March 31, 2009, the 2014 Notes have an aggregate principal amount of€351.8 million ($466.1 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 15.Interest on the 2014 Notes accrues at the rate of 7.625% in the case of theEuro notes and 7.500% in the case of the U.S. Dollar notes. Certain of ourdomestic subsidiaries guarantee the 2014 Notes on a senior subordinatedunsecured basis (see Note 15, “Consolidating Financial Information,” forfurther details).  In the first quarter of 

 

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2009, we repurchased €12.2 million ($15.5 million based on the exchange rate ineffect on the date of repurchase) of our 2014 Notes at a discount. We may use available cash to repurchase additional 2014 Notes at any time toreduce our leverage ratio.

 

The 2014 Notes contain variousaffirmative and restrictive covenants. The restrictive covenants limit ourability, 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 March 31, 2009, the fixed charge coverageratio equaled 3.84 to 1. This covenant is a material term of the indenturegoverning the 2014 Notes.

 

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

 

*TitaniumDioxide Pigments venture term loans, revolving credit facility and assumeddebt.*  During June 2008, as amended in August 2008, the Titanium DioxidePigments venture entered into a facility agreement that provides for a termloan facility in an aggregate amount of €250.0 million ($331.3 million) and arevolving credit facility in an aggregate amount of €30.0 million ($39.8million), both maturing on June 17, 2013. The Titanium DioxidePigments venture borrowed €250.0 million under the term loan facility.  Inaddition, the Titanium Dioxide Pigments venture has assumed debt of €24.1million ($31.9 million) at March 31, 2009 from Kemira, primarily due to adefined benefit plan, at interest rates ranging from 3.75% to 5.00%.  Asof March 31, 2009, there were no outstanding borrowings under therevolving credit facility.

 

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

 

The interest rate on theloans is Euribor (or Libor if the currency is in USD) plus 3.00%, subject to astep down determined by reference to a leverage ratio test. The term loan shallbe repaid in installments over a five-year period from the date of the facilityagreement, with payments commencing twelve months from such date; both loansmay be repaid 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 March 31, 2009, net debt to EBITDA, subject to certain adjustments,(which is substantially similar to the definition of Adjusted EBITDA in oursenior secured credit agreement) must be less than 4.00 to 1: for such period,our ratio equaled 3.58 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 3.54 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 1.53 to 1.

 

As discussed above, theleverage ratio under the facility agreement must be less than 4.00 to 1. We may use available cash to pay down debt at any time in order to reduce thisleverage ratio.

 

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

 

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 to Adjusted EBITDA:

 
| ** **                                                                                                             | ** ** | **Three months ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                             | ** ** | **March 31,**     | ** ** |
| **($ in millions)**                                                                                               | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Net cash  provided by operating activities from continuing operations                                                  |       | $                      | 44.5       |   | $ | 36.7 |   |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions                |       | 9.7                    |       | 79.7 |   |
| Current portion  of income tax provision                                                                               |       | 5.8                    |       | 12.4 |   |
| Interest  expense, net, excluding amortization of deferred financing costs and  unrealized losses/gains on derivatives |       | 37.3                   |       | 38.4 |   |
| Restructuring  and other severance costs                                                                               |       | 7.8                    |       | 0.8 |   |
| Systems/organization  establishment expenses                                                                           |       | 2.1                    |       | 1.2 |   |
| Inventory  write-up charges                                                                                            |       | —                 |       | 0.4 |   |
| Bad debt  provision                                                                                                    |       | —                 |       | (0.3 | ) |
| Loss on sale of  assets and other                                                                                      |       | 0.1                    |       | 0.1 |   |
| Other                                                                                                                  |       | 1.9                    |       | (0.2 | ) |
| Total Adjusted  EBITDA                                                                                                 |       | $                      | 109.2      |   | $ | 169.2 |   |

 

***Contractual Obligations***

 

The Company is obligatedto make future payments under various contracts such as debt agreements(including scheduled cash interest payments), operating lease agreements, andunconditional purchase obligations.  Inaddition, liabilities for unrecognized tax benefits in the amount of $28.0million as of December 31, 2008 related to Financial Accounting StandardsBoard (“FASB”) Interpretation (“FIN”) No. 48,*Accounting for Uncertainty in Income Taxes — An Interpretation of FASBStatement No. 109,* were excluded from the ContractualObligations table as we were unable to make a reasonably reliable estimate ofthe period of cash settlement with the respective taxing authorities.Liabilities for these unrecognized tax benefits are classified as non-currentincome tax liabilities (other liabilities) unless expected to be paid in oneyear. A discussion of these contractual obligations is included in the Company’s2008 Form 10-K.  As noted above, we repurchased $15.5 million of our senior subordinated notes due in 2014 andvoluntarily prepaid $102.3million of our senior secured term loans in the first quarter of 2009.  Except for the debt repayments made in thefirst quarter of 2009, there have not been significant changes to thesecontractual obligations as of March 31, 2009.

 

***Capital Expenditures***

 

Rockwood’s capitalexpenditures for the three months ended March 31, 2009 consisted primarilyof replacements of worn, obsolete or damaged equipment as well as investmentsin new equipment.

 

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For the three monthsended March 31, 2009 and 2008, our capital expenditures, excluding capitalleases, were $44.3 million and $55.6 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** | ** ** |
| Three months  ended March 31, 2009 |       | $             | 16.3       |            | $          | 7.0          |       | $            | 10.5       |          | $          | 7.8               |       | $                | 2.4        |   | $ | 0.3 |   | $ | 44.3 |   |
| Three months  ended March 31, 2008 |       | 17.1          |       | 8.7             |       | 11.1         |       | 13.0         |       | 3.5           |       | 2.2               |       | 55.6             |       |
|                                         |            |               |            |                 |            |              |            |              |            |               |            |                   |            |                  |            |  |  |  |  |  |  |  |

 

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,because capital expenditures for these matters are subject to changes in andnew SHE laws, we cannot provide assurance that our recent expenditures will beindicative of future amounts required to comply with these laws, including theEU’s Registration, Evaluation and Authorization of Chemicals (“REACH”)legislation. See Note 14, “Commitments and Contingencies,” “RegulatoryDevelopments” for a discussion of REACH.

 

***Foreign currency related transactions***

 

As of March 31,2009, $1,289.5 million of the debt outstanding is denominated in euros.

 

**RecentAccounting Pronouncements**

 

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

 

**Off-BalanceSheet Arrangements**

 

In the normal course ofbusiness, the Company incurs obligations which include guarantees related tocontract completion, regulatory compliance and product performance. Undercertain circumstances, these obligations are supported through the issuance ofletters of credit and other bank guarantees. As of March 31, 2009, theCompany had approximately $27.9 million of letters of credit and other bankguarantees, of which $26.3 million will expire in 2009 through 2014. Theremaining guarantees have no specified expiration date. This amount includesoutstanding letters of credit of $24.9 million that reduced our availabilityunder the senior secured credit facility. In the opinion of management, suchobligations will not significantly affect the Company’s financial position,results of operations or cash flows as the Company anticipates fulfilling itsperformance obligations.

 

**Commitmentsand Contingencies**

 

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

 

**CriticalAccounting Policies and Estimates**

 

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

 

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

 

·                  the use and recoverability of inventory;

 

·                  the valuation of deferred tax assets;

 

·                  the amount of unrecognized tax benefits in accordancewith FIN 48;

 

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

 

·                  the useful lives of tangible and intangible assets.

 

We evaluate our estimateson an ongoing basis, based on historical experience and various otherassumptions that we believe to be reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying valuesof assets and 

 

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liabilities that are notreadily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions.

 

The significantaccounting policies of the Company are described in Note 1,”Description ofBusiness and Summary of Significant Accounting Policies,” to the unaudited condensedconsolidated financial statements and the critical accounting policies andestimates are described in the “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” section in the Company’s 2008 Form 10-K.There have been no significant changes to these critical accounting policiesand estimates as of March 31, 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. Theseforward-looking statements are made based on expectations and beliefsconcerning future events affecting us and are subject to uncertainties andfactors relating to our operations and business environment, all of which aredifficult to predict and many of which are beyond our control, that could causeour actual results to differ materially from those expressed in or implied bythese forward-looking statements. In particular, these factors include, amongother things:

 

·                  our business strategy;

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

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

·                  fluctuations in interest rates, exchange rates andcurrency values;

·                  availability and pricing of raw materials;

·                  fluctuations in energy prices;

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

·                  our ability to access capital markets;

·                  technological changes affecting production of ourmaterials;

·                  governmental and environmental regulations and changesin those regulations;

·                  hazards associated with chemicals manufacturing;

·                  our high level of indebtedness;

·                  risks associated with negotiating, consummating andintegrating acquisitions;

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

·                  risks associated with international sales andoperations.

 

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

 

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

 

We are exposed to marketrisk from changes in interest rates, foreign currency exchange rates andcommodity prices. We manage our exposure to these market risks through regularoperating and financing activities and through the use of derivatives. Whenused, derivatives are employed as risk management tools and not for tradingpurposes. A discussion and analysis of the Company’s market risk isincluded in the Company’s 2008 Form 10-K. There have been no significantchanges to these market risks as of March 31, 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 March 31, 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 thefirst quarter of 2009.

 

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**PART II — OTHER INFORMATION**

 

**Item1.  Legal Proceedings.**

 

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

 

The European Commission (“EC”)is investigating possible infringement of certain antitrust regulations in themarket for heat stabilizers from 1986 to 2000 by certain industry participants,which included a business sold by a subsidiary in our Specialty Chemicalssegment in 2000. On March 23, 2009, the EC confirmed that it commenced aproceeding against certain participants in the heat stabilizers market,including the business formerly owned by this subsidiary and the Company’ssubsidiary. Neither the Company nor any of its subsidiaries are active in thismarket for heat stabilizers; however, the business sold in 2000 was active inthis market.  The Company will vigorouslydefend this matter.  While the Company believes its subsidiary hasmeritorious defenses against these claims and does not believe that resolutionof this matter will have a material adverse effect on its business or financialcondition, the Company cannot predict the ultimate outcome of this proceedingand resolution of this matter may have a material adverse effect on its resultsof operations or cash flows.

 

However, we do notbelieve that there is any other individual, governmental, legal proceeding orarbitration that is likely to have a material adverse effect on our business,results of operations, cash flows or financial condition. We cannot predict theoutcome of any legal proceeding or the potential for future legalproceedings. See Note 14, “Commitments and Contingencies,” and Item 3,Legal Proceedings in our 2008 Form 10-K for descriptions of other legalmatters.

 

**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.**

 

 On April 23, 2009, Holdings held its 2009Annual Meeting of Stockholders (the “Annual Meeting”), at which Holdings’stockholders approved the 2009 Rockwood Holdings, Inc. Stock IncentivePlan (the “Stock Incentive Plan”). The Board of Directors of Holdingspreviously approved the Stock Incentive Plan on March 11, 2009, subject tothe approval of Holdings’ stockholders. The Stock Incentive Plan will replacethe existing stock incentive plan, the 2008 Amended and Restated Stock Purchaseand Option Plan for Rockwood Holdings, Inc. and Subsidiaries.

 

At the Annual Meetingheld on April 23, 2009, Holdings’ stockholders also approved the 2009Rockwood Holdings, Inc. Short-Term Incentive Plan (the “Short-TermIncentive Plan”). The Short-Term Incentive Plan is intended to replace theexisting short-term incentive plan, the Short-Term Incentive Plan for RockwoodHoldings, Inc. and Subsidiaries. The Short-Term Incentive Plan is intendedto provide performance-based incentive compensation within the meaning of Section 162(m) ofthe Internal Revenue Code of 1986, as amended. The Board of Directors of Holdings previously approved the Short-TermIncentive Plan on March 11, 2009, subject to the approval of Holdings’stockholders.

 

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The material features ofeach of the plans are described in Holdings’ definitive Proxy Statement for theAnnual Meeting, which descriptions are filed herewith and incorporated hereinby reference. The above descriptions of each of the Stock Incentive Plan andthe Short-Term Incentive Plan are qualified in their entirety by reference tothe copies of such documents filed herewith as Exhibits 10.1 and 10.2 andincorporated herein by reference.

 

**Item6.  Exhibits.**

 

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

 

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**SIGNATURES**

 

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

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

 

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**Exhibit Index**

 
| **Exhibit No.** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                           |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                 |       | 2009 Rockwood  Holdings, Inc. Stock Incentive Plan (incorporated by reference to  Appendix A of the definitive Proxy Statement of Rockwood Holdings, Inc.  on Schedule 14A filed on March 24, 2009).                                                                                                                                                                                                                            |
| ** **           | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.2                 |       | 2009 Rockwood  Holdings, Inc. Short-Term Incentive Plan (incorporated by reference to  Appendix B of the definitive Proxy Statement of Rockwood Holdings, Inc.  on Schedule 14A filed on March 24, 2009).                                                                                                                                                                                                                       |
| ** **           | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 31.1*                |       | Rule 13a-14(a)/15d-14(a) Certification  of Chief Executive Officer.                                                                                                                                                                                                                                                                                                                                                                  |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 31.2*                |       | Rule 13a-14(a)/15d-14(a) Certification  of Chief Financial Officer.                                                                                                                                                                                                                                                                                                                                                                  |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 32.1                 |       | Section 1350  Certification of Chief Executive Officer. This certification accompanies this  report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and  shall not be deemed filed by the Company for purposes of Section 18 or  any other provision of the Securities Exchange Act of 1934, as amended.                                                                                                              |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 32.2                 |       | Section 1350  Certification of Chief Financial Officer. This certification accompanies this  report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and  shall not be deemed filed by the Company for purposes of Section 18 or  any other provision of the Securities Exchange Act of 1934, as amended.                                                                                                              |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 99.1                 |       | The sections entitled  “Proposal Three: Approval of the Rockwood Holdings, Inc. Stock Incentive  Plan” and “Proposal Four: Approval of the Rockwood Holdings, Inc.  Short-Term Incentive Plan,” of the definitive Proxy Statement of Rockwood  Holdings, Inc. (incorporated by reference to the definitive Proxy  Statement of Rockwood Holdings, Inc. on Schedule 14A filed on  March 24, 2009). |

 

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*       Filed herewith.

 

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