**UNITEDSTATES********SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-K**

** **

**x****     ****ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe fiscal year ended December 31, 2009**

 

**Or**

** **

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

 

**Commissionfile number   001-32609**

 

**RockwoodHoldings, Inc.**

(Exact name ofRegistrant as specified in its charter)

 

| **Delaware**                     | ** ** | **52-2277366**       |
|----------------------------------|------------|----------------------|
| (State or other  jurisdiction of |       | (I.R.S. Employer     |
| incorporation or  organization)  |       | Identification  No.) |

 

| **100  Overlook Center, Princeton, New Jersey** | ** ** | **08540**  |
|-------------------------------------------------|------------|------------|
| (Address of  principal executive offices)       |       | (Zip Code) |

 

**(609)514-0300**

(Registrant’stelephone number, including area code)

 

 

Securitiesregistered pursuant to Section 12(b) of the Act:

 

| **Title of each class**   | ** ** | **Name of each exchange on which registered** |
|------------------------------------------|------------|-----------------------------------------------------------------------------|
| Common Stock,  par value $0.01 per share |       | New York Stock  Exchange                                                    |

 

 

Securitiesregistered pursuant to section 12(g) of the Act:

 

**None**

(Title of class)

 

Indicate by check mark ifthe Registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.  x Yes  o No

 

Indicate by check mark ifthe Registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.  o Yes  x No

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities  ExchangeAct of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  x Yes  o No

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWebsite, 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 mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, tothe best of Registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K. x

 

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

 

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

 

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

 

The aggregate marketvalue of the voting and non-voting common equity held by non-affiliatescomputed by reference to the price at which the common equity was last sold asof June 30, 2009 was $755,300,263.

 

As of February 22,2010, there were 74,263,996 outstanding shares of common stock, par value $0.01per share, of the Registrant.

 

DOCUMENTSINCORPORATED BY REFERENCE

 

The definitive proxystatement relating to the registrant’s Annual Meeting of Stockholders, to beheld on May 6, 2010, is incorporated by reference in Part III to theextent described therein.

 

 

 

----

 

**TABLE OF CONTENTS**

 

**FORM 10-K**

 
| ** **    | ** ** | ** **                                                                                                          | ** ** | **Page No.** |
|---------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|-------------------|
| PART I   |       |                                                                                                                |       |              |
| Item 1        |       | Business                                                                                                            |       | 3                 |
| Item 1A       |       | Risk Factors                                                                                                        |       | 20                |
| Item 1B       |       | Unresolved Staff  Comments                                                                                          |       | 29                |
| Item 2        |       | Properties                                                                                                          |       | 29                |
| Item 3        |       | Legal Proceedings                                                                                                   |       | 32                |
| Item 4        |       | Submission of  Matters to a Vote of Security Holders                                                                |       | 33                |
| PART II  |       |                                                                                                                |       |              |
| Item 5        |       | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities |       | 33                |
| Item 6        |       | Selected Financial  Data                                                                                            |       | 34                |
| Item 7        |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |       | 39                |
| Item 7A       |       | Quantitative  and Qualitative Disclosures about Market Risk                                                         |       | 67                |
| Item 8        |       | Financial  Statements and Supplementary Data                                                                        |       | 69                |
| Item 9        |       | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                               |       | 115               |
| Item 9A       |       | Controls and  Procedures                                                                                            |       | 115               |
| Item 9B       |       | Other Information                                                                                                   |       | 118               |
| PART III |       |                                                                                                                |       |              |
| Item 10       |       | Directors,  Executive Officers and Corporate Governance                                                             |       | 118               |
| Item 11       |       | Executive  Compensation                                                                                             |       | 118               |
| Item 12       |       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    |       | 118               |
| Item 13       |       | Certain  Relationships and Related Transactions, and Director Independence                                          |       | 118               |
| Item 14       |       | Principal  Accounting Fees and Services                                                                             |       | 118               |
| PART IV  |       |                                                                                                                |       |              |
| Item 15       |       | Exhibits,  Financial Statement Schedules                                                                            |       | 119               |

 

2

----

 

**PART I**

 

**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 North America and Europeand in other locations in which we currently do business;

·                  competitive pricing or product development activities affecting demandfor our products;

·                  fluctuations in interest rates, exchange rates and currency values;

·                  availability and pricing of raw materials;

·                  fluctuations in energy prices;

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

·                  our ability to access capital markets;

·                  technological changes affecting production of our materials;

·                  governmental and environmental regulations and changes in thoseregulations;

·                  hazards associated with chemicals manufacturing;

·                  our high level of indebtedness;

·                  risks associated with negotiating, consummating and integratingacquisitions;

·                  risks associated with competition and the introduction of new competingproducts, especially in the Asia-Pacific region; and

·                  risks associated with international sales and operations.

 

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.

 

**Item1. Business.**

 

Unless we indicateotherwise or the context otherwise requires, any references to “we,” “our,” “us,”the “Company” or “Rockwood” refer to Rockwood Holdings, Inc. and itsconsolidated subsidiaries.

 

Unless otherwise noted,all balance sheet related items as of December 31, 2009 which aredenominated in euros are converted at the December 31, 2009 exchange rateof €1.00 = $1.4321.

 

**General**

 

Rockwood is a globaldeveloper, manufacturer and marketer of high value-added specialty chemicalsand advanced materials used for industrial and commercial purposes. Rockwoodwas incorporated in Delaware in September 2000 in connection with anacquisition of certain assets, stock and businesses from Laporte plc (“Laporte”)on November 20, 2000 (the “KKR Acquisition”) by affiliates of KohlbergKravis Roberts & Co. L.P. (“KKR”). Effective November 2007, affiliates of KKR control less than amajority of the voting power of the Company’s outstanding common stock.  Rockwood is focused on surface treatment andlithium chemicals; advanced ceramics, titanium dioxide pigments, specialtycompounds, iron-oxide pigments, timber-treatment chemicals and clay-basedadditives.

 

Our products consistprimarily of inorganic chemicals and solutions and engineered materials. Theyare often customized to meet the complex needs of our customers and to enhancethe value of their end products by improving performance, providing essentialproduct attributes, lowering costs and/or making them more environmentallyfriendly. We generally compete in niche markets in a wide range of end-usemarkets, including metal treatment and general industry, chemicals and plastics,construction, life sciences (including pharmaceutical and medical markets),automotive, specialty coatings and electronics and telecommunications.  Nosingle end-use market accounted for more than 17% of our 2009 net sales.

 

3

----

 

We have a number ofgrowth businesses, such as our Fine Chemicals and Advanced Ceramics businesses,which are complemented by a diverse portfolio of businesses that historicallyhave generated stable revenues. Our high margins, diverse customer andend-use market base, capital discipline and ongoing productivity improvementsprovide us with a platform to capitalize on market growth opportunities.

 

We operate globally,manufacturing our products in 87 facilities in 24 countries and selling ourproducts and providing our services to more than 60,000 customers, includingsome of the world’s preeminent companies. We believe our products are generallycritical to our customers’ products’ performance, but account for a smallpercentage of the total cost of their products. No single customer accountedfor more than 2% of our 2009 net sales. For a geographic description of theorigin of our net sales and location of our long-lived assets, see Note 3, “SegmentInformation,” in the accompanying consolidated financial statements.

 

We operate our businessthrough the following five business segments: (1) Specialty Chemicals; (2) PerformanceAdditives; (3) Titanium Dioxide Pigments; (4) Advanced Ceramics and (5) SpecialtyCompounds. The following table sets forth net sales of each segment, and thepercentage of our net sales for the year ended December 31, 2009, as wellas our principal products and our principal end-use markets. For financialinformation about each segment, see Note 3, “Segment Information.”

 
| ** **                | ** ** | **2009 Net Sales** | ** ** | ** **    | ** ** | ** **                  | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|---------------------------|------------|--------------------|------------|---------------|------------|-----------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                | ** ** | **$ in**      | ** ** | **% of** | ** ** | ** **                  | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | ** ** | ** ** |
| **Segment**               | ** ** | **Millions**       | ** ** | **Total**     | ** ** | **Principal Products** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | **Principal End-Use Markets** | ** ** |
| Specialty Chemicals       |       | $                  | 996.6      |          | 34         | %                           | ·                    Lithium  compounds and chemicals

·                    Metal surface  treatment chemicals including corrosion protection/ prevention oils

·                    Synthetic metal  sulfides

·                    Maintenance  chemicals                                                                                                     |   | ·                    Automotive  pre-coating metal treatment and car body pre-treatment

·                    Steel and metal  working

·                    Life sciences  (pharmaceutical synthesis and polymers)

·                    Polymerization  initiators for elastomers

·                    Steel and metal  working

·                    Batteries

·                    Disc brakes

·                    Aircraft  industry |   |
| Performance Additives     |       | $                  | 671.5      |          | 23         | %                           | ·                    Iron-oxide  pigments

·                    Wood protection  products

·                    Inorganic  chemicals

·                    Synthetic and  organic thickeners

·                    Flocculants

                       |   | ·                    Residential and  commercial construction, coatings and plastics

·                    Coatings

·                    Personal care,  paper manufacturing, foundries

·                    Water treatment |   |
| Titanium Dioxide Pigments |       | $                  | 666.3      |          | 22         | %                           | ·                    Titanium  dioxide pigments

·                    Barium  compounds

·                    Zinc compounds                                                                                                                                                                                                                                                                                                                                        |   | ·                    Synthetic  fibers for clothing

·                    Plastics

·                    Paper

·                    Paints and  coatings

·                    Pharmaceutical  contrast media |   |
| Advanced Ceramics         |       | $                  | 412.2      |          | 14         | %                           | ·                    Ceramic ball  head and liner components used in hip joint prostheses systems

·                    Ceramic tapes

·                    Cutting tools

·                    Wear and  corrosion

·                    Armor  components |   | ·                    Medical (hip  replacement surgery)

·                    Industrial

·                    Electronics

·                    Automotive

·                    Defense  (vehicle protection) |   |

 

4

----

 
| Specialty Compounds     |   | $ | 210.7   |   | 7      | % | ·                    High specification compounds such as  polyvinyl chloride (PVC) and thermoplastic elastomer (TPE) |   | ·       Voice and data transmission

·       Cables

·       Food and beverage

·       Packaging

·       Medical applications

·       Footwear

·       Automotive |   |
|-------------------------|--------|---|---------|--------|--------|---|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Corporate and other (a) |   | $ | 5.6     |   | — | % | ·       Wafer recycling and repair                                                                                                                                                     |   | ·       Semiconductors manufacturing                                                                                                                                                                                                                                                                                                                                                    |   |
|                    |   | $ | 2,962.9 |   | 100    | % |                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                       |   |

 

(a)                Represents our European wafer reclaim business thatwas not included as part of the sale of our Electronics business in December 2007. Ourwafer reclaim business provides semiconductor wafer reclaim services, waferthinning/grinding services and wafer supply services. This business workson silicon and sapphire substrates with semiconductor and solar cellsmanufacturers.

 

***Diverse Customer and End-Use Market Base.*** We operate a diverse portfolio ofdistinct specialty chemicals and advanced materials businesses. We have morethan 60,000 customers worldwide that cover a wide variety of industries andgeographic areas. Of our 2009 net sales, 52% were shipments to Europe, 27% toNorth America (predominantly the United States) and 21% to the rest of theworld. No customer accounted for more than 2% of such net sales, and our topten customers represented only approximately 8% of such net sales. Our largestend-use market represented approximately 17% of such net sales.

 

The following chartprovides a breakdown of our 2009 net sales by end-use markets:

 

 

5

----

 

Within these end-usemarkets, there is further diversification by sector, product and region. Forexample, within the construction end-use market, our Performance Additivessegment companies provide materials for new construction as well as companiesthat focus on remodeling and renovation. In addition, we serve constructionmaterials clients in both the residential and commercial sectors located inNorth America, Europe and Asia. Within the life sciences end-use market, weserve a number of sectors, including the medical applications sector throughour Specialty Compounds and Advanced Ceramics segments and the pharmaceuticalsector through our Specialty Chemicals segment.

 

**OperatingSegments**

 

The following describeseach of our operating segments, as well as the principal products or principaldivisions within each segment.

 

**SpecialtyChemicals (34*% of 2009 net sales*)**

 

Our Specialty Chemicalssegment operates under the*Chemetall*brand name and develops and manufactures metal surface treatment products and services,lithium chemicals and fine chemicals for a wide range of industries and endmarkets. This segment is comprised of two business lines: (1) SurfaceTreatment, which supplies surface treatment products and solutions for metalprocessing industries; and (2) Fine Chemicals, which supplies lithiumproducts across the entire value chain from raw materials to specialty lithiumcompounds and advanced metal-based specialty chemicals to niche markets. OurSpecialty Chemicals segment generated net sales of $996.6 million, $1,232.6million and $1,082.9 million for the years ended December 31, 2009, 2008and 2007, respectively. See Note 3, “Segment Information,” for additionalfinancial information regarding our Specialty Chemicals segment.

 

***Surface Treatment***

 

We believe that ourSurface Treatment business line is a leading global supplier of surfacetreatment products and solutions. Surface Treatment’s products are used for avariety of applications and serve the automotive, aerospace and generalindustrial markets, including steel and metal-working industries. This businessline supplies more than 5,000 different products, many of which are based onproprietary formulations and extensive application know-how, to over 50,000customers and operates in different locations for either production or researchand development in over 20 countries. Surface Treatment operates in thefollowing core end-markets: Automotive Technologies and Components, ColdForming and Coil Coating, General Industry and Aerospace Technologies.

 

In Surface Treatment, wedevelop and supply products and solutions for the chemical pre-treatment ofmetals and other substrates, some of which are customized for individualcustomers and applications. Our products and solutions are critical to manyareas of the metal processing industry because they protect metals fromcorrosion, facilitate forming and machining, allow parts to be processed in aclean and grease-free environment and ensure good coating adhesion. Otherproducts are used in the cleaning and maintenance of aircraft. As an integratedpart of the business, we also offer a full range of customer services,including process control and analysis of chemical baths at clients’facilities.

 

Surface Treatmentcompetes in markets characterized by significant barriers to entry, proprietarymanufacturing technologies and know-how, demanding product-handlingrequirements, rigorous product quality and performance standards andspecifications and longstanding service-intensive customer relationships. In orderto remain competitive, we are focused on developing new products, improvingprocess technologies, expanding our customer base and broadening our technologycapabilities in existing and new markets through internal research anddevelopment and bolt-on acquisitions.  New sites in Turkey, Brazil andAustralia should help gain further market share in these regions. In 2009, wealso undertook a number of research and development projects with industrialpartners and scientific institutes that help us fulfill our needs for more costefficient and environmentally compatible technologies.  As a result, newproducts and improved technologies were launched in 2009 and more are expectedin the future.

 

The core end-markets thatSurface Treatment operates in are as follows:

 

*AutomotiveTechnologies and Components.* We provide surface treatment products and solutionsfor automotive OEMs, including an entire range of products and services for usein the “paint shop” step of car-body manufacture and automotive component manufacturers.The products and services we provide typically represent a low percentage oftotal car body production costs, but have high value in terms of corrosionprotection and surface quality. Major applications include car-body treatment(zinc-phosphating), paint coagulation and cleaning and pre-treatment ofautomotive components such as aluminum wheels. Our services typically includeintensive process control and chemical management in the customer’s productionprocesses.  We believe that products forthe treatment of steel and aluminum wheels, including a new generation ofproducts based on self-assembling molecules, represent an attractive growtharea in this market.

 

*ColdForming and Coil Coating.* We provide products and services used to facilitate the cold formingof tubes, wire drawing and cold extrusion of metal. We provide products andservices used in forming, cleaning and pre-treating metal sheets used in theproduction of 

 

6

----

 

steel and aluminum coil.

 

*GeneralIndustry.* Generalindustry includes the largest number of customers among the Surface Treatmentbusinesses.  We offer a range of products and services to a broad range ofindustrial end-markets that have metal surface treatment applications,including cleaning, activation, conversion coating and final rinsing. Ourproducts include cleaners, iron phosphates, coolants, paint strippers andflocculants.  We have also expanded our product range in NorthAmerica and China, with products in the field of metalworking fluids. Over the last two years, we have introduced a new generation ofiron-phosphating products in the U.S. market, which we expect will providegrowth in the next few years, and began offering silane or oxsilan-based systems.The markets for General Industry include household appliances manufacturing,can producers, heating, ventilation, aluminum finishing and other diverseend-markets.  In addition, we producespecialty products, which are similar to metal surface treatment products, butare used on glass substrates for glass manufacturers, including specialtycleaners, polishing products, cutting oils and cooling lubricants.

 

*AerospaceTechnologies.* Weprovide products and services for Aerospace OEMs, airlines and maintenance companies.Aerospace Technologies focuses on four major application areas: cleaning;corrosion protection; maintenance chemicals; and sealants.  Cleaning products are used for the interiorand exterior cleaning of airplanes and range from daily cleaning to completeaircraft overhaul. Corrosion protection products include waxes used to protectairframes. Maintenance chemicals for aircraft engines and turbines include highperformance cleaners and products for non-destructive testing of engines, andaircraft sealants provide high technology sealing solutions for airplanes andare expected to contribute significantly to growth in the next few years. Inthe last few years, we introduced further variances of low-density sealants inthe market place. A new production line for sealants was completed in 2009 tofulfill increasing demand.

 

*Competition*

 

We believe that the topfive competitors in the global metal surface treatment market held an estimatedmarket share of more than 50% in 2009. We believe that Henkel KGaA is theglobal market leader, followed by us. The remaining top competitors includeNihon Parkerizing Co., Ltd., PPG Industries, Inc. and Nippon Paint Co., Ltd.Competition in this market is based primarily on customer service, productquality and technological capabilities.

 

*Customers*

 

Surface Treatment servesa large customer base that is dependent on the industry served and its specificcustomer needs. Surface Treatment’s largest customers include Daimler AG,ArcelorMittal, Volkswagen AG and European Aeronautic Defence and Space Company(EADS) N.V. The composition of the customer base varies widely among productgroups and industries served. The Automotive Technologies and Componentsbusiness division serves approximately 20 customers, primarily global OEMs, andapproximately 500 small to large customers in the components markets. The ColdForming and Coil Coating business division serves approximately 800 mid-size tolarge customers and the General Industry business division serves approximately45,000 small to large customers in a broad range of industries worldwide. TheAerospace Technologies business division serves approximately 4,000 small tolarge customers worldwide.

 

***Fine Chemicals***

 

Our Fine Chemicalsbusiness line consists of our lithium, special metals and metal sulfidesproduct lines. We believe that our Fine Chemicals business line is the leadingglobal producer of lithium salts, specialty lithium compounds and chemicals andadvanced metal-based specialty chemicals.

 

Fine Chemicals developsand manufactures a broad range of basic lithium compounds, including lithiumcarbonate, lithium hydroxide, lithium chloride, and value added lithiumspecialties and reagents, including butyllithium and lithium aluminum hydride.Lithium is a key component in products and processes used in a variety ofapplications and industries, which range from lithium batteries, highperformance greases, thermoplastic elastomers for car tires, rubber soles andplastic bottles to intermediates in the pharmaceutical industry. In our FineChemicals business, we operate our lithium business along the following fourbusiness divisions reflecting its core end-markets: (1) Specialities; (2) LithiumSalts; (3) Butyllithium/Lithium Metal and (4) Battery Products.

 

In addition to developingand supplying lithium compounds, we provide technical service, includingtraining of customers’ employees, relating to the handling of reactive lithiumproducts. We also offer our customers recycling services for lithium containingby-products resulting from synthesis with organolithium products, lithium metaland other reagents. We plan to continue to focus on the development of newproducts and applications. Currently, we are in the process of developinglithium compounds for several near- to medium-term, new and potentially highgrowth products for various applications, such as pharmaceuticals and batteriesfor electric vehicles.

 

In August 2009, theU.S. Department of Energy awarded $28.4 million in Recovery and ReinvestmentAct funds, subject to certain 

 

7

----

 

conditions, to our FineChemicals business within our Specialty Chemicals segment. We expect touse the funds to expand and upgrade the production of lithium compounds used inlithium ion batteries for hybrid and electric vehicles at our Silver Peak,Nevada and Kings Mountain, North Carolina facilities. In addition to thefunds from this grant, we are required to invest an additional $28.4 million inthe project over the next few years. In addition, in September 2009, theGerman Federal Ministry for the Environment, Nature Conservation and NuclearSafety awarded €5.7 million to our Fine Chemicals business to set up a pilotplant for the recycling of lithium ion batteries, subject to customary termsand conditions. Including the funds from this grant, we expect to invest anadditional €8.8 million in the project over the next three years.

 

Fine Chemicals alsodevelops and manufactures advanced metal-based specialty chemicals along twobusiness divisions based on its principal product groups: (1) MetalSulfides, which develops and manufactures natural and synthetic metal sulfidesused in brake pads, clutch facings and cutting and grinding wheels and (2) SpecialMetals, which develops and manufactures cesium products for the chemical andpharmaceutical industries and zirconium, barium and titanium products forvarious pyrotechnical applications, including airbag igniters. In order tofurther strengthen our competitive position in the metal-based specialtychemicals market, we are focused on the production of new variations ofsynthetic metal sulfides and new cesium products in the chemicals industry, thepharmaceuticals industry, the defense industry and for use in catalyticapplications. We also continuously monitor our customers’ industries for potentialnew applications for our products. In addition, we expect to expand ourbusiness by penetrating growth areas such as India and China.

 

Although results werelower in 2009 due to the economic slowdown, we expect that demand for syntheticmetal sulfides to increase, particularly in Europe, as a result of thecontinuing substitution for asbestos-based friction linings, the transitionfrom natural sulfides to synthetic sulfides spurred in part by environmentalconcerns and the transition from drum to disk brakes in Asia and the Americas.

 

*PrincipalBusiness Divisions*

 

*Lithium*

 

*Specialities.* We develop and manufacture lithiumcompounds and other products for life science applications, such as specialreagents for the synthesis of drug intermediates as well as for the flavor andfragrances industry. The two principal products in this business division arebutyllithium and lithium aluminum hydride, for which we believe we hold leadingmarket positions. We also produce various other compounds which include lithiummetal, grignard reagents and alkoxides. Our research and development team oftenworks closely with research and development departments of pharmaceuticalcompanies, especially in the European market, in order to develop products andsolutions tailored for their needs. In addition, broad variations of ourspecialities are designed to produce liquid crystals for flat screens.

 

*LithiumSalts.* We developand manufacture basic lithium compounds, which serve a wide range of industriesand applications. Our products include (1) lithium carbonate, for whichthe leading application is the production of thin, light weight lithium-ionbatteries.  It is also used as a fluxing agent for enamels, glass andceramic production to lower process temperature in aluminum electrolysis, andas a cement additive for construction applications; (2) lithium hydroxide,which is principally used in high performance greases for automotive andindustrial applications and has become more important for the development ofhigh-performance lithium-ion batteries; (3) lithium nitrate, which isprincipally used in the rubber industry and (4) lithium chloride, which isprincipally used in gas and air treatment.

 

*Butyllithium/LithiumMetal.* Our mainproduct, butyllithium, is used as a polymerization initiator for syntheticrubber and thermoplastic elastomers and as a reagent for the synthesis ofactive pharmaceutical ingredients and Agrochemicals. Lithium metal is used inorganic synthesis processes, primarily in the area of steroid chemistry andvitamins.  Generally, these products require a high degree of handling,transport and application know-how and customer service due to their highreactivity. We benefit from being a major supplier with butyllithiummanufacturing facilities in the United States, Germany and Taiwan.

 

*BatteryProducts.* Wedevelop and manufacture lithium products for electronic applications, mainlyfor the primary (disposable) and secondary (rechargeable) battery industries.Our major product is battery grade lithium metal, which is used as anodematerial for primary batteries. Lithium ion-based batteries are usedextensively in consumer electronics, such as mobile phones, camcorders andlaptops. We are currently developing a new generation of conductive lithiumsalts used for the battery market, which, we believe, has the potential todrive significant growth in the future.

 

*Metal-basedSpecialty Chemicals*

 

*MetalSulfides.* Thisbusiness division has two major product lines: friction stabilizers andabrasive additives. Friction stabilizers enhance the power and performance ofbrake pads and clutch facings and primarily serve the automotive supplierindustry while abrasive additives are additive compounds.  The demand formetal sulfides is driven primarily by the demand in the automotive supplierindustry.

 

8

----

 

*SpecialMetals*. Wedevelop and manufacture a unique range of products based on special metalcompounds derived from cesium, zirconium, titanium, barium and rubidium. These productsare used in highly specialized, technology-driven end-applications such asX-ray diagnostic systems and airbags, and serve various end-markets, such aschemical, pharmaceutical, metallurgical, automotive, electronics andpyrotechnical industries.

 

*Competition*

 

*Lithium*. We believe the global lithium marketconsists of three major producers and a number of other small producers mainlyfrom China. We believe that we are the global market leader in the lithiummarket. While we offer a diverse range of products from raw materials tospecialty lithium compounds, FMC Corporation offers mainly specialty lithiumcompounds, and Sociedad Quimica y Minera de Chile S.A. (“SQM”) offers a morelimited product line focused on basic lithium compounds. Competition in thismarket is based on product quality, reliability of products and customerservice.

 

*Metal-basedSpecialty Chemicals*.We believe that in the metal-based specialty chemicals business, Fine Chemicalsholds a leading market position in its niche markets. We have a leadingposition in friction materials and are the only supplier offering a fullproduct range of friction stabilizers and abrasive additives based on metalsulfides.  Key competitors include: Dow Corning Corporation, Catalise Industriae Comercio de Metals Ltda and American Minerals, Inc. in the MetalSulfides division and Cabot Corporation and Sigma Aldrich Corporation in theSpecial Metals division. Competition in the metal-based specialty chemicalsmarkets in which Fine Chemicals competes is based on product quality andproduct diversity.

 

*Customers*

 

Fine Chemicals servesapproximately 1,000 customers worldwide in its lithium business and 700customers worldwide in its metal-based specialty chemicals products business.Fine Chemicals’ customers of lithium products include Bayer CropScience (adivision of Bayer AG), Kraton Performance Polymers Inc., Energizer Holdings, Inc.and Royal DSM N.V.

 

**PerformanceAdditives*(23% of 2009 net sales)***

 

Our Performance Additivessegment consists of business lines which develop and manufacture a range ofspecialty chemicals used in industrial and consumer products and processes toenhance performance or create unique characteristics. This segment manufacturesand markets products that are based on a focused research and developmenteffort and a strong technology base. Our Performance Additives segmentgenerated net sales of $671.5 million, $835.6 million and $798.5 million forthe years ended December 31, 2009, 2008 and 2007, respectively. See Note3, “Segment Information,” for additional financial information regarding ourPerformance Additives segment.

 

***Color Pigments and Services***

 

Our Color Pigments andServices business line is a global producer of synthetic iron-oxide and otherinorganic pigments in a wide range of yellow, red, orange, ultramarine blue,black, manganese violet or blended shades, and serves the construction, paintsand coatings, plastics, and specialty application markets with powder, granularand liquid grades. Color Pigments and Services focuses on developing andmanufacturing high value-added inorganic pigments. The business also offers anumber of unique pigment dispensing systems. Our Color Pigments and Servicesbusiness line has been driven by product innovation, our brand names and our customerand technical service, including customer-specific color blending.

 

*PrincipalProducts*

 

*ConstructionColor Pigments and Services.* We develop and manufacture principally iron-oxidepigments for manufacturers of construction products for use in the coloring ofconcrete products, including paving stones, bricks, concrete blocks, roofingtiles, stucco and mortar. Color Pigments and Services’ major U.S. brand is*Davis Colors* and its key products include*Granufin/Granumat, Hydrotint, Mix-Ready*and*Chameleon*.*Granufin* is a unique, dry,microgranulated pigment that combines the flow characteristics of a liquid withthe storage and handling advantages of a powder. The*Granumat* dispensing system offers a variety ofconfigurations and features designed to accommodate the varying requirementsand budgets of concrete product manufacturers.*Granufin* pigments and the*Granumat* system improve product handling and color consistency forour customers. Our*Chameleon*system, which works in combination with our liquid pigments, automaticallyweighs, blends and conveys colors into a ready-mix truck using a standardpersonal computer and custom-developed Windows-based software. ColorPigments and Services has an agreement pursuant to which an affiliate of W.R.Grace & Co. sells admixtures and fibers, distributes our liquidpigments and*Chameleon* dispensingsystems to ready-mix and pre-cast producers in the concrete industry. Ourcombined efforts provide ready mix and pre-cast customers with added value inthe form of colored, ready-mix concrete.

 

*Paints,Coatings and Colorants.* We also develop and manufacture color pigments for the paints,coatings, plastics, paper and rubber 

 

9

----

 

end-use markets includingthe brands*Ferroxide, Trans-oxide, Solaplex*and*Colourplex*. We produce a widevariety of pigments for these markets that include synthetic iron-oxides,corrosion inhibitor pigments, complex inorganic color pigments and processnatural pigments such as burnt umbers and siennas. The largest application forthese products is colorant used in architectural, industrial and specialpurpose paints and coatings. Color, ease of dispersion and chemical stabilityare the primary characteristics of our products, which can be used in a wide varietyof both solvent and water-borne systems. We believe that a number of ColorPigments and Services’ products are considered industry standards in themarkets in which we compete, such as our Mapico yellow and Copperas redpigments for architectural and industrial applications and our heat stabletans, which can tolerate applications requiring high temperature processing,such as plastic compounding and roofing granules.

 

*Specialties*. Our iron-oxide pigments are also usedin a wide variety of specialty applications such as toner for large printersand copiers, security inks used to print bank notes, catalysts for styreneproduction and cosmetics. Each of these markets requires specialized pigmentswith unique properties which are often as important as the coloringcharacteristics. For example, printer toners require specific magneticproperties whereas pigments used in cosmetics require color and purity.

 

*Competition*

 

We believe that there area significant number of producers of iron-oxide pigments across the globe atboth the pigment synthesis and finishing levels with whom we compete. Webelieve these producers include Lanxess AG, Cathay Pigments Group, Interstar MaterialsInc. and Shanghai Yipin Pigments Co., Ltd. as well as other producers in Japanand China. Competition in this segment is based on customer service, productattributes, such as product form and quality and price. Product quality iscritical in the higher end of the business on which Color Pigments and Servicesfocuses, as inconsistent product quality can have an adverse impact on thecolor consistency of the end-product.

 

*Customers*

 

Color Pigments andServices’ key customers include Akzo Nobel, Oldcastle (CRH plc), TheSherwin-Williams Company, Evonik Degussa GmbH, and WR Grace & Co.,each of which has been our customer for at least ten years. Color Pigments andServices’ customer base is highly fragmented.

 

***Timber Treatment Chemicals***

 

The Timber TreatmentChemicals business line is a manufacturer of wood protection products primarilyin North America and Europe and we market these products through our jointventure formed in 2007. Wood protection products enhance the performance ofwood by increasing its longevity through protection from decay and fungal orinsect attack. Our specialty timber chemicals also add water repellency, fireretardancy, mold inhibition and other properties to wood products. TimberTreatment Chemicals’ products include wood protection products based on ouralkaline copper quaternary, or ACQ technology, which was awarded theEnvironmental Protection Agency (“EPA”) Presidential Green Chemistry ChallengeAward in 2002,*Ecolife*, our newnon-metallic wood preservative technology and chromated copper arsenate, orCCA.  In 2008, we introduced our newest*Ecolife* system which utilizes*Ecovance*, a high-performance non-metallic preservative with enhancedenvironmental benefits.**Commercialization began in 2008, but did nothave a significant impact in 2008 or 2009. We expect*Ecolife*to take advantage of market desire for non-metallic wood protection productsand the growth potential in the development and commercialization of the nextgeneration of wood protection products.  However, we do not expect *Ecolife* to have a significant impact in2010. Other products include Clearwood, our wood protection product for woodwindows and doors, as well as a range of specialty additives with fireretardant, water repellent or moldicide properties. Applications for ourproducts include wood protection products used for decking, fencing, playgroundequipment, garden furniture, house construction materials, utility poles, andother wood constructions.

 

In addition, TimberTreatment Chemicals provides a broad range of technical expertise and servicesto its customers. In particular, Timber Treatment Chemicals works closely withits customers to assist them in reducing the total cost of their manufacturingprocess by supplying timber treatment chemicals as well as treatment equipmentalong with technical support.  We believe that Timber Treatment Chemicalsis a leading provider in North America, Europe and Japan of new generationalternative timber treatment chemicals, such as ACQ and*Ecolife*, which provide enhancedenvironmental benefits as they do not contain chrome or arsenic.  Many of our Timber Treatment products areregistered pesticides and subject to extensive regulation.

 

Our Timber TreatmentChemicals business also manufactures inorganic chemicals such as nitrates andchlorides for various industrial applications including chemicals that are addedto concrete as curing accelerants and corrosion inhibitors, chemicals that areused for odor control in water treatment, galvanizing fluxes, micronutrients,pesticides and catalysts used in the manufacture of textile resins.

 

*PrincipalProducts*

 

We develop andmanufacture a broad range of wood protection products, fire retardant andspecialty chemicals for use in residential and industrial wood applications. Inaddition, we provide treatment equipment, which facilitates the handling andtreatment of wood 

 

10

----

 

and chemicals and weprovide comprehensive technical support services to our customers. TimberTreatment Chemicals’ key brands include*Ecolife, Preserve, Preserve Plus, Ultrawood, D-Blaze, Clearwood* and*SupaTimber.*

 

We also develop andmanufacture inorganic metallic chemicals for certain specialty markets. Theseinclude zinc chloride-based products, other chlorides, and a range of nitratesand other chemicals. Some of these products are manufactured using by-productsfrom other large chemical companies.

 

*Competition*

 

We believe that TimberTreatment Chemicals is one of the leading manufacturers of wood protectionproducts in North America, along with Arch Chemicals, Inc. and Osmose, Inc. BASFGroup, Kurt Obermeier GmbH & Co. KG and Rutgers AG are othercompetitors, particularly in Europe. Competition for wood protection productsis mainly based on price, customer support services, innovative technology andproduct range. In the inorganic chemicals market, we operate in niche areas,and therefore have few competitors overall. Competition in the inorganicchemicals market is mainly based on quality, customer support services andprice.

 

*Customers*

 

Timber TreatmentChemicals sells its products primarily to wood processors who pressure-treatwood. Major customers include Coos Head Forest Products, Inc., C.M. TuckerLumber Companies, LLC., Envirofor Preservers Ltd., Georgia-Pacific Corporation,Jeld-Wen, Inc., Koshii Preserving Co. Ltd., Land and Sea Forest Productsof Pennsylvania Corporation, Spartanburg Forest Products, Inc., SunbeltForest Products Corporation, and Sundre Forest Products, Ltd. Customers of ourinorganic chemicals product line include Evonik Degussa GmbH, Rohm and HaasCompany (a subsidiary of The Dow Chemical Company), Nalco Company and W.R.Grace & Co. Most of these companies have been our customers for atleast ten years.

 

***Clay-based Additives***

 

Our Clay-based Additivesbusiness develops and manufactures a range of specialty rheology modifiers andadditives. These products are used in a wide variety of applications to modifyviscosity, thickness and flow characteristics, and keep solids in suspension.End products in which these additives are used include industrial andarchitectural coatings, oilfield drilling fluids, inks, household care productsand composites.

 

*PrincipalProducts*

 

*Coatingsand Inks*. Weoffer a comprehensive line of additives which modify the viscosity, flow andsuspension properties of coatings and inks, including*Claytone* for the manufacture of industrial and specialpurpose coatings, such as bridge, marine and maintenance paints, architecturalcoatings and associative thickeners;*Optigel*clays for water-based coatings and*Laponite*for the manufacture of automotive coatings. Our*Garamite* additives are used in the manufacture of high solids andlow volatile organic content epoxy coatings for industrial applications.

 

*Paper*. We serve the paper industry with aproduct line that includes bentonite retention aids, which are used in thepaper-making process to reduce fiber losses and aid in water drainage from thesheet and an additive, which provides fade-resistant color for carbonless copypaper. We also produce a grade of*Laponite*which is used in the production of clear, flexible and moisture-resistant filmsand coatings with conductive, anti-static and anti-sticking properties, thatare used in the manufacture of specialty photographic and anti-static papers,ink jet papers and anti-static packaging.  Our*Fulacolor* clay product range is used in the colordeveloping system for carbonless copy paper.

 

*Consumerand Household Care Products*. We develop and manufacture a wide range of naturalclay-based rheology modifiers, including*Gelwhite* and*Bentolite*,for the consumer and household care markets. In addition,*Laponite* also has functional propertiesthat improve the performance of a wide range of consumer products, such aspersonal care products, creams, lotions, cosmetics and hard surface householdcleaning products for the kitchen and bathroom.

 

*Oilfield*. We offer a line of*Claytone* organoclays, which are a type ofspecially treated clays, for use in diesel and synthetic oilfield drillingfluids, which help to control viscosity and flow properties. These additivesalso help to suspend the cuttings in the fluid, so that they can be expelledfrom the well efficiently. We recently introduced a*Garamite* additive for use in deep well drilling thatrequires higher performance.

 

*Composites*. We developed and introduced the*Cloisite* range of clays for themanufacture of nanocomposite plastics and composites. While the majority of ourcustomers purchase*Cloisite* fordevelopmental products and applications, a key commercial development in 2007was the introduction of a new, high-strength, lightweight plastic by Yamaha forpersonal watercraft hulls and deck lids utilizing*Cloisite* nanoclay. Our *Nanofil*business extends our range of product offerings for nanocomposites, and bringsvaluable know-how 

 

11

----

 

and intellectual propertyfor flame retardant applications. Our*Garamite* range of clays is used in the manufacture of fiberglasscomposites.

 

*WaterChemistry.* We area leading manufacturer of polyaluminium chloride, or PAC, and polyaluminiumnitrate-based flocculants in Central Europe. Flocculants are added to water toimprove its purity before, during and after its use in industrial, commercialand municipal applications. PAC flocculants are widely used in public,industrial and swimming pool water treatment and as a process agent in thepaper industry. As discussed, we completed the formation of the TitaniumDioxide Pigments venture in September 2008.  The water treatmentbusiness, formerly part of the Titanium Dioxide Pigments segment, is now beingreported in Clay-based Additives.

 

*Competition*

 

Clay-based Additivesoperates in specialty markets, and competes based on its research anddevelopment capabilities, its ability to produce innovative high-value productsolutions and its sales and technical support. Our direct competitors in thesemarkets include Elementis plc, Laviosa Chimica Mineraria S.p.A., R.T.Vanderbilt Company, Inc., Cytec Industries, Inc. and Amcol, FeralcoAB.  We also compete with manufacturers who produce non-clay-basedalternatives to our end-users.

 

*Customers*

 

We supply major coatingsmanufacturers such as International Paint Limited (Akzo Nobel N.V.), BASFGroup, E.I. duPont de Nemours and Company, PPG Industries Inc., and TheSherwin-Williams Company; paper chemical and paper-making companies such asMitsubishi Hi Tec Paper Bielefeld GmbH, Sappi Limited, Brenntag AG, LEIPA GeorgLeinfelder GmbH and Stora Enso Oyj; ink-makers such as Sun Chemical Corporationand oil drilling and services companies such as M-I SWACO L.L.C.

 

**TitaniumDioxide Pigments*(22% of 2009 net sales)***

 

Our Titanium DioxidePigments segment operates under the*Sachtleben* brand name and is a leading producer of high qualitychemical products with a unique range of small inorganic particles that addsignificant value to customers’ products and reduce the cost of customers’production processes. Titanium Dioxide Pigments comprises two business lines: (1) TitaniumDioxide; and (2) Functional Additives. Our Titanium Dioxide Pigmentssegment generated net sales of $666.3 million, $534.8 million and $442.9million for the years ended December 31, 2009, 2008 and 2007,respectively. See Note 3, “Segment Information,” for additional financialinformation regarding our Titanium Dioxide Pigments segment.

 

In September 2008,we completed the formation of a venture with Kemira Oyj (“Kemira”) that focuseson producing and marketing specialty titanium dioxide pigments. Thisventure combines our existing titanium dioxide pigments and functionaladditives business and Kemira’s titanium dioxide business.

 

***Titanium Dioxide***

 

Our Titanium Dioxidebusiness line through the venture completed in September 2008 is a leadingproducer of specialty grade titanium dioxide (“TiO2”), serving a wide varietyof customers in the synthetic fibers, plastics, paints, packaging inks,coatings, cosmetics, pharmaceuticals and paper industries. TiO2 is a fine whitepowder that derives its value from its unparalleled whitening strength andopacifying ability, which is commonly referred to as hiding power. Our TitaniumDioxide business line’s principal products include TiO2 in anatase grade, TiO2in rutile grade and titanium specialties. This business line also providesrecycling services for sulfuric waste acid.

 

There are two ways ofproducing TiO2: the sulfate process and the chloride process. The chlorideprocess permits production of only rutile TiO2 and is primarily suited forlarge volume production of standard TiO2 grades.  We believe most of theglobally installed TiO2 capacity uses the chloride process as opposed to thesulfate process.  Unlike the chloride process, the sulfate process iscapable of producing both the rutile and anatase grade of TiO2.  We employthe sulfate process for TiO2 production and thus, the output from most of the globallyinstalled TiO2 production capacity does not compete with our anatase products.

 

We believe that we have acompetitive advantage in fiber anatase production and special sophisticatedanatase applications based on our strong technological capabilities, long-termcustomer relationships and extensive test runs with regular monitoring ofproduct and process parameters. Although it represents a negligible part of thefiber material cost, TiO2 application know-how and a longstanding applicationtrack record of homogeneous anatase crystals, both of which avoid productioninterruptions and excessive wear or breakdown of our customers’ equipment, arecritical to our customers. We intend to focus our rutile business on selectedmarkets and applications and to further develop our titanium specialtiesbusiness. We expect this segment to benefit from sales of newly introducednano-particle titanium dioxide pigments that are used to provide ultravioletlight protection for cosmetics, plastics and coatings.

 

12

----

 

*PrincipalProducts*

 

*TiO2 inAnatase Grade*. Wedevelop and manufacture high quality anatase TiO2 pigments. These pigments aresold primarily to the global synthetic fiber industry, as well as paper, foodand pharmaceutical industries. We believe our anatase pigment, sold under thebrand name*Hombitan*, is a leadingglobal selling TiO2 product for applications in the synthetic fiber industry.

 

*TiO2 inRutile Grade*. Wedevelop and manufacture rutile TiO2 pigments, which are mainly used in specialapplications such as selected coatings, paints, packaging inks, plastics andlaminated paper production processes. In this product area, we aregeographically focused on the European market. Rutile-based TiO2 pigmentsgenerally possess performance characteristics different from anatase-basedpigments. Rutile-based pigments significantly improve the weatherability anddurability of polymer products by providing protection against yellowing andpreventing embrittlement of the material. Our rutile grades are state of theart products and are used in applications with high technical requirements.

 

*TitaniumSpecialties*. Ourtitanium specialties products primarily include “nano-particles,” which areexceptionally fine-particled, transparent and easy-to-use pigment formulationsthat are used across a large and diverse range of applications in smallvolumes. For example, the specialty grade TiO2 products are used asUV-absorbers in sun protection cosmetics. In addition, the new nano-particlesform the basis for innovative wood-protection products and innovative colorvariations by the paints and coatings industry. Other uses include catalysts,gas cleansing, photocatalysts and intermediates for special ceramics.

 

*Competition*

 

Titanium Dioxide Pigments’key competitors include: (1) Fuji Titanium Industry Co., Ltd. and KronosWorldwide, Inc. for anatase-based TiO2; (2) DuPont TitaniumTechnologies, Cristal Global, Tronox Incorporated, and Huntsman LLC forrutile-based TiO2; and (3) Tayca Corporation, Ishihara Corporation andEvonik Degussa for TiO2 specialties. Competition in the markets in whichTitanium Dioxide competes is generally based on technological capabilities,product quality, price in rutile grade and customer service.

 

*Customers*

 

Titanium Dioxide Pigments’customers include leading manufacturers of paints, such as Akzo Nobel Coatings,Inc., PPG Industries, Inc., BASF Group and E.I. duPont de Nemours and Company;printing inks such as Sun Chemical Corporation, Flint Group and SiegwerkDruckfarben AG; fibers, such as Nan Ya Plastics Corporation and Invista Inc.;plastics, such as Ampacet Corporation and Ineos Group Limited; and paper, suchas Munksjo Inc. and Papierfabrik August Koehler AG.

 

***Functional Additives***

 

Our Functional Additivesbusiness line is a leading global manufacturer of barium-based and zinc-basedinorganic fine white pigments and additives. The main function of theseproducts is to improve brilliance of colors and shine of coatings, improve themechanical strength of plastic parts and prevent degradation due to exposure tolight. Our Functional Additives business line serves diverse end-markets,including the plastics industry, the coatings industry and the pharmaceuticalindustry.

 

*PrincipalProducts*

 

*Barium-basedAdditives*. Weproduce highly dispersed powders of barium sulfate and are the largest globalproducer of precipitated synthetic barium sulfates (Blanc Fixe). We provide aunique range of barium-based additives customized for applications in coatings,plastic, colorants, lubricants, PVC stabilizers and thermoplastics, fibers andpaper to improve optical, chemical and mechanical properties. We also producean X-ray-grade barium sulfate used as a contrast agent in medical applications,such as X-rays for the stomach and intestine area.

 

*Zinc-basedAdditives*. Webelieve we are also a leading producer of pure zinc sulfide pigments, mainlyused in glass fiber reinforced plastic parts and coatings and a leadingsupplier of Lithopone, a white zinc sulfide pigment which is used in plasticsand coatings.

 

*Competition*

 

Key competitors forbarium-based additives include Solvay S.A., Gruppo Chimico Dalton S.p.A., SakaiChemical Industry Co., Ltd. and Chinese barium-producers. Key competitors forzinc-based additives include Chinese Lithopone producers. Competition in thefunctional additives market is primarily based on application know-how, brandrecognition, product quality and, to a certain extent, price.

 

*Customers*

 

Functional Additives’customers include E.I. duPont de Nemours and Company, Ampacet Corporation, BASFGroup, Akzo Nobel

 

13

----

 

Coatings, Inc. and A.Schulman, Inc.

** **

**AdvancedCeramics*(14% of 2009 net sales)***

 

Our Advanced Ceramicssegment operates under the*CeramTec*brand name and is a leading global producer of high-performance advancedceramics materials and products. Advanced Ceramics serves four principalend-markets: (1) medical; (2) electronics; (3) industrial; and (4) automotive,with strong market positions in various niche markets such as medical products,cutting tools and mechanical applications. Our Advanced Ceramics segmentgenerated net sales of $412.2 million, $505.9 million and $452.5 million forthe years ended December 31, 2009, 2008 and 2007, respectively. See Note3, “Segment Information,” for additional financial information regarding ourAdvanced Ceramics segment.

 

The global ceramicsmarket comprises products and components based on inorganic, non-metallic,microcrystalline materials that are manufactured at high temperatures. Theglobal ceramics market can be divided into traditional ceramics, such asbricks, tiles and white ware, and high-performance ceramics, which are ceramicmaterials and products optimized for special purposes. High performance ceramicshave superior physical, electrical, chemical or biological properties ascompared to traditional ceramics and competing materials, like metals orplastics.  High-performance ceramicsmaterials include ceramic powders, ceramic additives, structural ceramics andfunctional ceramics.  Accordingly, theyhave increasingly replaced plastics and metals as key engineering materials. Wecompete in the high-performance ceramics segment of the market, offering a widerange of high-performance ceramics products from sealing discs for sanitaryfittings to ceramic components for hip joint prostheses. These products servethe market’s needs for materials that are light, strong, corrosion-resistantand capable of performing in high-temperature environments.

 

We believe that we haveachieved success in the Advanced Ceramics segment as a result of our focus onselected segments of the high-performance ceramics market and our closecustomer relationships. Almost all of Advanced Ceramics’ products are made toorder, taking into account specific customer requirements. In many cases, ourengineers work in close cooperation with our customers during the design anddevelopment phase of new products to ensure highest quality and customersatisfaction. Through its extensive experience, Advanced Ceramics has gaineddetailed expertise and know-how in its applications areas.

 

*PrincipalProducts*

 

*Medical*. We currently serve the medicalapplications market with two product groups - ceramic components for hip jointprostheses, such as ball heads and inserts and ceramic glove formers forhigh-quality latex gloves. The ceramic components for hip joint prostheses aremainly supplied to orthopedic implant manufacturers in the United States andEurope. Besides their high wear resistance and good friction behavior,high-performance ceramics are biologically inert, making them one of the fewmaterials that are durable and stable enough to withstand the corrosive effectsof bodily fluids. As a result, we expect high-performance ceramics will increasinglybecome more common for medical applications, such as for repair and replacementof hips, knees and other human body parts.

 

We believe thatceramic-on-ceramic hip implants benefit from additional substitution effects asyoung people and more active elderly people are better suited to use ceramicimplants given their numerous attractive properties. Currently, the penetrationrate for ceramic-on-ceramic hip implants in Europe is significantly higher thanin North America because the first Food and Drug Administration (“FDA”)approval for ceramic-on-ceramic hip joint prostheses systems was granted in2003. However, given the relative superior performance and positive earlyacceptance levels in the United States, we expect the market forceramic-on-ceramic hip joint prostheses systems to grow significantly in futureyears. We believe we are well positioned to take advantage of the growingmarket as we are currently the only manufacturer of ceramic-on-ceramic hipimplant components used in FDA-approved hip joint prostheses systems in theUnited States. Given the difficulties and time involved in obtaining an FDAapproval, we believe that we will be the sole supplier in the intermediateterm. We also enjoy strong relationships with the largest U.S. and European orthopedicsimplant manufacturers and are also expanding our focus to possible newapplications in knee joint replacements.

 

*Electronics*. We develop and manufacture substrates,electrical resistor cores and ceramic tapes as carriers for electronic circuits.Substrates are ceramic plates with electrical, thermal and mechanicalproperties that serve as carriers in electronic applications. These highlyspecialized products are used in a wide range of industries, such as theautomotive, consumer electronics, aeronautics and telecommunicationsindustries. The demand for these products is driven, in large part, by theactivity levels of the semiconductor market as well as a positive substitutioneffect for ceramic applications.  Webelieve that increasing demand for electronic components will continue to offersignificant growth opportunities for high-performance ceramics, such as piezoceramics. As a leading supplier of electronic ceramics materials, we believe weare well positioned to take advantage of these growth opportunities.

 

*CuttingTools*. We developand manufacture products used in cutting tools, other tools and toolingsystems. Ceramic material properties such as high melting points, excellenthardness and good wear resistance make ceramics an excellent high-speed cuttingtool material.  In addition, the longer life and faster cutting speedspossible with ceramic tools allow customers to save costs by increasing theirthroughput and reducing the downtimes for replacing their cutting tools. We believe we are a leading supplier of

 

14

----

 

ceramic cutting tools,other tools and tooling systems for high speed processing in the automotive,metalworking and mechanical engineering industries with automotive OEMs andtheir suppliers being our main customers.

 

*MechanicalApplications and Systems*. We also develop and manufacture high performance ceramic componentsthat are used in mechanical applications and systems. Key product groups inmechanical applications include cutting blades, drawing and forming tools,drawing cones and capstans, guide elements, precision parts, pre-forms,friction discs, ceramic discs and cartridges for faucets. We primarily supplythe general industrial, machinery, metalworking, automotive and textileindustries with a large number of products customized to the customer requirements.Mechanical systems include products used in the sanitary fittings andautomotive supplier industries in areas where fluids are pumped, compressed orstirred, such as bushings, face seal rings, pump components and valve shims anddiscs.

 

*Otherproducts*. We alsoproduce products used for applications in certain niche markets, such aselectrical/thermal and ceramic metal connections and pre-forms for the castingprocess of piston engines, mainly for diesel engines. In October 2008, weacquired a business that focuses on solutions for wear and corrosion protectionin industrial plants and armor components used in vehicle protection.

 

*Competition*

 

Advanced Ceramics’ keycompetitors are Kyocera Corporation, CoorsTek, Inc., Compagnie de Saint-Gobain,The Morgan Crucible Company plc, Ceradyne Inc. and NGK Insulators, Ltd. However,each of these competitors has either a different geographical focus or productstrategy with respect to small niche applications. Competition in the highperformance ceramics market is primarily based on product quality, productspecifications and customer service.

 

*Customers*

 

Advanced Ceramics’ keycustomers include Robert Bosch GmbH, Stryker Corporation, EPCOS AG, Siemens AG,DePuy Orthopaedics, Inc. Vishay Intertechnology, Inc., Ideal Standard InternationalBVBA and Zimmer, Inc.

 

**SpecialtyCompounds*(7% of 2009 net sales)***

 

Our Specialty Compoundssegment develops and manufactures thermoplastic materials possessingspecialized characteristics, such as fire and smoke retardance, reduced weightor barrier properties which are tailored to the specific needs of eachcustomer. These products are grouped into several key end-product areas: wireand cable, consumer performance products, medical applications and regulatedpackaging. Our Specialty Compounds segment had net sales of $210.7 million,$261.5 million and $276.6 million for the years ended December 31, 2009,2008 and 2007, respectively. See Note 3, “Segment Information,” for additionalfinancial information regarding our Specialty Compounds segment.

 

Our Specialty Compoundssegment focuses on sales of higher margin products and operates as a globalspecialty performance plastic compounding business. We developed andcommercialized*SmokeGuard*, ourspecialty compound for use in high-end data and video communication wire andcable, which must meet stringent fire retardant and low smoke generationstandards. We also developed a compound for beverage closure seals andcaps.  This compound prevents ozone from attacking the seal and does notaffect the taste of water and carbonated beverages, therefore significantlyincreasing the shelf life of these beverages. We also focus on thermoplasticelastomer, or TPE, compounds in our consumer performance and automotiveproducts areas. In addition to our product offerings, we provide strong,comprehensive customer service and technical expertise by developing innovativeproducts to satisfy our customers’ unique needs.

 

We have invested in nextgeneration plastic compounding technologies, including the development offluoropolymer materials and the improvement of our production of zero halogenmaterials. Specialty Compounds has worked closely with our Clay-based Additivesbusiness to create a patented composite material that exhibits superior flameretardancy for wire and cable jacketing and sheathing.

 

*PrincipalProducts*

 

*Wireand Cable Compounds*.We develop and manufacture low-smoke vinyl and flouropolymer alloys, such as*SmokeGuard*, which are used in high-enddata and video communication, fiber optic and fire alarm wire and cable;halogen-free plastics, such as*Megolon*,which are used in industrial, aerospace, shipboard or oil rig cables as well asin communication cables and a variety of TPE compounds, such as*Garaflex*, which are used in flexiblecords, tray cables, booster cables, welding cables and automotive wiring. Webelieve that there is significant growth potential for the wire and cableproduct line in Europe as a result of the evolution of a common market standardwith higher specifications for wire and cable compounds. European wire andcable standards dictating certain safety specifications such as fire and smokeresistance are expected to be implemented within the next several years,providing significant new market opportunities for the*SmokeGuard* and*Megolon* product lines.*Megolon* is the trade name for a variety of halogen-free 

 

15

----

 

wire and cable productsand is the leading brand name for such products in Europe.

 

*ConsumerPerformance Products*.We develop and manufacture custom-made plastic compounds for use in productssuch as moldings, sealing gaskets, tool handles, writing instruments and ladderfeet as well as other TPE-based products. Our product line includes*Garaflex*,*Garaflex V*,*Garaflex E*,*GE Series *and*GM Series*. We have also developed asoft-touch compound,*Evoprene*,that has been approved for a number of applications, including seals forconsumer storage devices. We also develop and manufacture compounds forinterior and exterior automotive applications such as airbag covers, steeringwheel covers, gear shift knobs and boots, handle grips, body side molding andwindow gaskets. In addition, we develop and manufacture a broad range ofcompounds for unit soles, uppers, mid-soles, slippers and heels for the diverserequirements of the footwear market.

 

*MedicalApplications Compounds*. We develop and manufacture a series of high-quality polyvinylchloride, or PVC, compounds which are used to manufacture products such astubing, disposable masks, and extraction resistant compounds used to makeproducts to handle blood and bodily fluids.

 

*RegulatedPackaging.* Underthe*Alphaseal* trademark, wedevelop and manufacture specialty closure materials for soft drinks, beer,bottled water, juice, and other beverage applications which improve purity intaste and odor and provide reliable carbonation retention.

 

*Competition*

 

Specialty Compounds’ keycompetitors are Colorite Plastics Company, ACTEGA DS, European VinylCorporation, Georgia Gulf Corporation, Norsk Hydro ASA, PolyOne Corporation,Teknor Apex Company and W.R. Grace & Co., most of which serve only asubset of Specialty Compounds’ markets. We believe that only Teknor Apex isactive in all of Specialty Compounds’ markets. Competition in SpecialtyCompounds occurs primarily on the basis of quality, product innovation and theability to meet demanding customer and regulatory specifications.

 

*Customers*

 

Specialty Compounds sellsproducts to a wide range of customers, including closure systemsInternational, Inc., Belden Inc., Nexans, Inc., Coleman Cable, Inc., CommScope, Inc.,Corning Incorporated and Judd Wire Inc. Each of these companies has been ourcustomer for at least ten years.

 

**RawMaterials**

 

We purchase raw materialsand chemical intermediates from a large number of third parties. We have abroad raw material base with the cost of no single raw material representingmore than 3% of our cost of products sold in 2009. Raw materials constitutedapproximately 47% of our 2009 cost of products sold. The table below lists theten most significant raw materials in 2009 (in terms of dollars) and theprincipal products for which the materials were used.

 
| **Raw  Material**                     | ** ** | **Segment**                                                            | ** ** | **Products**                                                                  |
|---------------------------------------|------------|------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|
| Titanium-bearing slag                 |       | Titanium Dioxide  Pigments                                             |       | Titanium Dioxide                                                              |
| Ilmenite                              |       | Titanium Dioxide  Pigments                                             |       | Titanium Dioxide                                                              |
| Quaternary amines  (“quat”) |       | Performance Additives                                                  |       | Organoclays, wood  protection products                                        |
| Plasticizers                          |       | Specialty Compounds                                                    |       | Compounds                                                                     |
| Copper                                |       | Performance Additives                                                  |       | Wood protection  products                                                     |
| Tin                                   |       | Specialty Chemicals                                                    |       | Metal sulfides                                                                |
| Iron-oxide                            |       | Performance Additives                                                  |       | Iron-oxide pigments                                                           |
| Zinc/Zinc oxide                       |       | Specialty Chemicals,  Titanium Dioxide Pigments, Performance Additives |       | Conversion coating  zinc, zinc-based pigments, zinc phosphate, tan iron-oxide |
| Phosphoric Acid                       |       | Specialty Chemicals                                                    |       | Metal surface treatment                                                       |
| PVC resin                             |       | Specialty Compounds                                                    |       | Compounds                                                                     |

 

Titanium-bearing slag andilmenite, our two largest raw materials, are the most important raw materialsused in the production of specialty grade titanium dioxide in our TitaniumDioxide business line of our Titanium Dioxide Pigments segment. We purchaseTitanium-bearing slag primarily from two suppliers on a long-term basis andilmenite from three suppliers on a long-term basis.

 

In our Clay-basedAdditives business line of our Performance Additives segment, quaternary amineis sourced under a long-term contract, which expires at the end of 2010 and issubject to monthly adjustment for the price of tallow, the base component ofquat. In our Timber Treatment Chemicals business, we predominantly source quatunder a contract that expires in late 2010, with automatic annual renewalssubject to termination by either party.

 

16

----

 

In our Specialty Compoundssegment, many of the plasticizers that are used are generic and considered acommodity product, while other materials are specific and considered specialtyproducts. Our supply contracts for plasticizers do not specify a fixed price,and most of them contain market price and discount adjustments.

 

In our Timber TreatmentChemicals business, we source copper, a commodity, from several sources. Pricesfor our copper purchases are tied to market conditions. However, we expect thecommercialization of next generation wood protection products to partiallyreduce our exposure to copper prices.

 

In our SpecialtyChemicals segment, tin is used in the production of metal sulfides and ispurchased from two suppliers under annual supply agreements.

 

Historically, we havereceived iron-oxide from multiple sources and have not experienced anysignificant supply shortages. Iron-oxide is used in our Color Pigments andServices business within our Performance Additives segment and is purchasedfrom suppliers in China as a supplement to our iron-oxide production.

 

In our PerformanceAdditives segment, zinc oxide is used in the production of tan iron-oxide andzinc phosphate and is purchased from multiple suppliers. In our SpecialtyChemicals segment, zinc and zinc oxide are purchased from a few suppliers inEurope and the United States, and we have not experienced any supply shortages.Prices for these purchases are tied to market conditions. In our TitaniumDioxide Pigments segment, zinc is used to produce zinc-based pigments and ispurchased from a number of suppliers under long-term contracts. There are nolong-term zinc purchase contracts in our Specialty Chemicals or PerformanceAdditives segments.

 

Phosphoric acid is usedin our Specialty Chemicals segment and is purchased from various globalsources.  This raw material is used for metal surface treatment chemicalsin our Surface Treatment business.  Currently, there are no long-termpurchase contracts for this raw material.

 

PVC resin is a commodityproduct used in our Specialty Compounds segment and its pricing is directlyrelated to the price of ethylene and chlorine as well as PVC industry operatingrates and energy prices.  We purchase PVCresin from several suppliers under both short and long-term contracts.

 

In addition, lithiumbrine is a primary raw material source for all lithium chemicals and is foundin only a small number of locations, including most significantly for us, theAtacama Desert in Chile. We have a long-term contract with the Chileangovernment to mine lithium brine in the Atacama Desert in Chile, which webelieve provides a secure long-term access to lithium.

 

Major requirements forour key raw materials and energy are typically satisfied pursuant tocontractual agreements and/or medium- or long-term relationships withsuppliers. We are not generally dependent on any one supplier for a major partof our raw material requirements, but certain important raw materials areobtained from a few major suppliers. In general, where we have limited sourcesof raw materials, we have developed contingency plans to minimize the effect ofany interruption or reduction in supply, such as sourcing from differentfacilities, multiple suppliers or utilizing alternative formulations.

 

Temporary shortages ofraw materials may occasionally occur and cause temporary price increases. Inrecent years, these shortages have not resulted in unavailability of rawmaterials. However, the continuing availability and price of raw materials areaffected by unscheduled plant interruptions occurring during periods of highdemand, domestic and world market and political conditions, as well as thedirect or indirect effect of governmental regulations. During periods of highdemand, our raw materials are subject to significant price fluctuations, and,in the past, such fluctuations have had an adverse impact on the results ofoperations of our business.  The impact of any future raw materialshortages on our business as a whole or in specific geographic regions cannotbe accurately predicted.

 

**IntellectualProperty**

 

Our business is dependentto a large extent on our intellectual property rights, including patents andother intellectual property, trademarks and trade secrets. We believe that ourintellectual property rights play an important role in maintaining ourcompetitive position in a number of the markets we serve. We rely ontechnological know-how and formulation and application expertise in many of ourmanufacturing processes in order to develop and maintain our market positions. Whereappropriate, we protect our new technology, applications and manufacturingprocesses by seeking patent protection. We have more than 3,000 patents andpatent applications in key strategic markets worldwide, reflecting ourcommitment to invest in technology and covering many aspects of our productsand processes for making those products. We also own and register in multiplejurisdictions numerous trade names and trade marks applicable to our businessand products which we believe are important to our business. In addition, wehave entered into agreements, pursuant to which we license intellectualproperty from third parties for use in our business and we license certainintellectual property to third parties. For example, we commercialized*Ecolife*, our next generation timbertreatment preservative from

 

17

----

 

our Timber TreatmentChemicals business, through our joint venture. We also develop intellectualproperty with third parties as discussed below in “Research and Development.”

 

**Researchand Development**

 

We are committed tofurther investing in our businesses, through research and development. Ourresearch and development costs were approximately 2% of our net sales in 2009,which include certain expenses related to modifications and improvements incurrent products. We allocate our research and development resourcesselectively based on the needs and requirements of each business line todevelop innovative products. Research and development costs are charged toexpense, as incurred. Such costs were $46.4 million, $51.7 million and $44.0million for the years ended December 31, 2009, 2008 and 2007,respectively.

 

The objective of ourresearch and development effort is to develop innovative chemistries and technologieswith applications relevant within targeted key markets. Research anddevelopment efforts are generally focused on both process development, which isthe stage at which products move from development to manufacturing and newproduct development. Each business line, however, also has selected long-termstrategic projects with the aim to develop new competencies and technologies.For example, our Fine Chemicals business is in the process of setting up apilot plant for the recycling of lithium ion batteries.

 

Each of our businesslines manages its own research and development effort and has separate researchand development facilities dedicated to its specific area. However, wheretechnologically applicable, advances and findings are shared between businesslines to foster greater cross-fertilization of ideas and applications. Incertain cases, we conduct research and development efforts with third parties,including universities, customers and other entities. We endeavor to obtainownership of or license to, on terms favorable to us, the intellectual propertydeveloped with a third party.

 

**Seasonality**

 

There is a seasonaleffect on a portion of our net sales due to the end-use of some of ourproducts. Our Color Pigments and Services business line of our PerformanceAdditives segment shows some seasonality related to the construction marketwhich also depends upon weather conditions. As such, the first quarter hashistorically been the quarter where we experience the lowest net sales. Duringthis quarter, we typically build inventory for our construction relatedbusinesses, in anticipation of increased sales during the spring and summermonths. Thus, the first quarter is usually the quarter with the highest workingcapital requirements for us. Other than these seasonal trends in certainend-use markets, our overall results of operations tend to show few seasonaleffects.

 

**InternationalOperations**

 

The following tablepresents net sales based on geographic area (attributed based on seller’slocation):

 
| ** **               | ** ** | **Year ended December 31,** | ** ** |
|--------------------------|------------|----------------------------------|------------|
| **($ in millions)** | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Net sales:**           |       |                             |       |   |   |   |   |
| Germany                  |       | $                                | 1,176.0    |   | $ | 1,371.0 |   | $ | 1,298.6 |   |
| Rest  of Europe          |       | 751.5                            |       | 799.3 |   | 655.1 |   |
| United  States           |       | 733.5                            |       | 890.2 |   | 852.5 |   |
| Rest  of World           |       | 301.9                            |       | 319.6 |   | 259.0 |   |
|                     |       | $                                | 2,962.9    |   | $ | 3,380.1 |   | $ | 3,065.2 |   |

 

See Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” forfurther details.

 

The following tablepresents our long-lived assets located in the regions indicated:

 
| ** **               | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-----------------------|------------|
| **($ in millions)** | ** ** | **2009**              | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Long-lived assets:**   |       |                  |       |   |   |   |   |
| Germany                  |       | $                     | 782.2      |   | $ | 791.5 |   | $ | 798.7 |   |
| Rest  of Europe          |       | 427.7                 |       | 456.9 |   | 261.5 |   |
| United  States           |       | 275.9                 |       | 293.4 |   | 239.1 |   |
| Rest  of World           |       | 216.7                 |       | 210.4 |   | 209.2 |   |
|                     |       | $                     | 1,702.5    |   | $ | 1,752.2 |   | $ | 1,508.5 |   |

 

18

----

 

**Salesand Marketing**

 

We sell our products andservices globally primarily by using our direct sales forces, although we alsosell through distributors in certain of our business lines, such as ColorPigments and Services and Clay-based Additives of our Performance Additivessegment or by using third party sales representatives. Each of our direct salesforces is responsible for marketing only one of our business lines, and isadministered pursuant to policies established by the management of thatbusiness line. Within each business line, these direct sales forces areorganized based on geographic regions, end-use applications or sub-businessdivisions within the business line. As of February 1, 2010, our in-housesales forces consisted of approximately 1,600 personnel worldwide.

 

Our direct sales forcesinteract with our customers to provide both purchasing advice and technicalassistance. In general, our sales forces arrange and coordinate contact betweenour customers and our research and development or technical personnel toprovide quality control and new product solutions. In certain of ourbusinesses, such as the Surface Treatment and Fine Chemicals business lines ofour Specialty Chemicals segment, most sales managers have a chemicalengineering background with advanced degrees and significant technicalexperience in applying our products, and they play a critical role indeveloping client relationships and acquiring new clients. Our closeinteraction with our customers and tailored solutions have allowed us todevelop and maintain strong customer relationships as well as focus our salesefforts on those customers who we believe will provide us with higher profitmargins in recognition of our superior products, service and technical support.

 

Sales in each of ourbusiness lines are generally made on a purchase order basis. However,longer-term arrangements have been established with certain key customers.

 

Our marketing strategy isgenerally aimed at working directly with customers to gauge the success of ourproducts, evaluate the need for improvements in product and process technology,and identify opportunities to develop new product solutions for our customersand their end-use markets. We also use media activities, lectures andtradeshows as part of our sales and marketing effort.

 

**FDARegulation**

 

Our Advanced Ceramicssegment and to a lesser extent, our Specialty Chemicals segment, are subject toregulation by the FDA with respect to certain products we produce, including pharmaceuticalintermediates and ceramic ball head and liner components used in hip jointprostheses systems. Foreign, state, local and other authorities also mayregulate us and our products. Regulatory agencies have established requirementsthat apply to the design, manufacture and marketing of pharmaceutical andmedical device products. We sell our pharmaceutical intermediates andceramic-on-ceramic components to other companies that also may be regulated bysuch authorities.

 

*PremarketApproval.* Whilewe are not required to seek FDA approvals for our pharmaceutical intermediates,the customers to whom we supply such products may be subject to FDA approvalrequirements prior to testing a new drug on humans as well as marketing a newdrug for commercial use in the United States. Our customers with FDA approvalfor a finished drug may also be required to obtain FDA approval of design,manufacturing or labeling changes to the pharmaceutical intermediates used intheir finished products.

 

Medical devices also aresubject to extensive regulation by the FDA prior to commercial distribution inthe United States, including premarket approval, or PMA, which is required fordevices deemed to pose the greatest risk and certain other devices. OurAdvanced Ceramics segment currently supplies ceramic ball head and linercomponents to manufacturers for incorporation into their total hip prosthesessystems, which are subject to the FDA’s PMA requirements. In addition, ourAdvanced Ceramics business or our customers who have obtained PMA approval maybe required to obtain FDA approval for changes to the design, manufacturing orlabeling of our ceramic ball head and liner components. Also, any other medicaldevices which our Advanced Ceramics segment seeks to produce in the future,such as knee replacement products, would likely require FDA approval for salesin the United States.

 

*ComplianceRequirements*.Once on the market, drug manufacturers and medical device manufacturers aresubject to numerous post-market regulations. Finished device manufacturers suchas our customers who manufacture hip prostheses systems are subject to the FDA’sQuality System Regulation, or QSR, which requires quality assurance practicesand procedures that address, among other things: management responsibility;audits and training; design controls; purchasing controls; identification andtraceability of components; production and process controls; acceptanceactivities; handling of nonconforming products; the initiation of correctiveand preventive actions; labeling and packaging controls; handling, storage anddistribution of products and complaint handling and record keeping. The FDAdoes not directly require component suppliers of finished medical devices tocomply with the QSR. However, because our ceramic-on-ceramic ball head andliner components are critical elements of hip joint prostheses systems, ourcustomers may require us to comply with some or all of the QSR. Moreover, theFDA may in the future take the position that the types of components that wesupply meet the definition of a finished device and are thus subject to theQSR. Our current contracts with our customers of ceramic-on-ceramic ball headand liner components require us to comply or assist our customers in complyingwith various FDA regulatory requirements.

 

19

----

 

The FDA’s inspectionalauthority extends to component suppliers. Pursuant to this authority, the FDAhas the ability to conduct and has conducted inspections at our facilities atwhich we manufacture our ceramic-on-ceramic ball head and liner components.

 

If we or our customersviolate FDA or other governmental regulatory requirements during either thepre- or post-marketing stages, there may be various adverse consequences. Forexample, in the United States, the FDA has the authority to impose fines, injunctions,and civil penalties; recall or seize products; impose operating or importrestrictions, partial suspension or total shutdown of production; delay itsapproval or refuse to grant approval of new products; or withdraw thesubmission of the approved product from the market.

 

**Safety,Health and Environmental Matters**

 

See Note 20, “Commitmentsand Contingencies,” for a discussion of our safety, health and environmentalmatters.

 

**Employees**

 

As of February 1,2010, we had approximately 9,500 employees, with 68% located in Europe, 17% inthe United States and the remaining 15% located in the rest of the world. Ofour employees, approximately 3,000, or 31%, are subject to either collectivebargaining agreements or other similar arrangements.

 

We observe local customs,legislation and practice in labor relations and, where applicable, innegotiating collective bargaining agreements. Management believes that itsrelations with employees and their representatives are good. We have notsuffered any material work stoppages or strikes in our worldwideoperations in the last five years.

 

**AvailableInformation**

 

Rockwood Holdings, Inc.files annual, quarterly and current reports, proxy statements and otherinformation with the Securities and Exchange Commission (the “SEC”). You mayread and copy any documents we file at the SEC’s public reference room at Room 1580,100 F Street, N.E., Washington D.C. 20549. Please call the SEC at1-800-SEC-0330 for information on the public reference room. The SEC maintainsa website that contains annual, quarterly and current reports, proxy statementsand other information that issuers file electronically with the SEC. The SEC’swebsite is*www.sec.gov.*

 

The Company’s website is*www.rocksp.com*. We have made available,free of charge through our website, our annual report on Form 10-K, andwill make available our quarterly reports on Form 10-Q and current reportson Form 8-K, as well as any amendments to those reports filed or furnishedpursuant to the Securities Exchange Act of 1934 (the “Exchange Act”) as soon asreasonably practicable after such material is electronically filed with, orfurnished to, the SEC. The Company’s proxy statement will be available whenfiled with the SEC.

 

From time to time,Rockwood may use its Web site as a channel of distribution of material companyinformation.  Financial and othermaterial information regarding the Company is routinely posted on and accessibleat *http://www.rockwoodspecialties.com/rock_english/news/compnews.asp.*  Inaddition, you may automatically receive email alerts and other informationabout Rockwood by enrolling your email by visiting the “Rockwood Holdings, Inc.Alert Form” section at *http://www.rockwoodspecialties.com/rock_english/ir/alertform.asp.* The foregoing information regarding our website and its content is forconvenience only.  The content of ourwebsite is not deemed to be incorporated by reference into this report norshould it be deemed to have been filed with the SEC.

 

**Item1A. Risk Factors.**

 

You should carefullyconsider these risk factors in evaluating our business. In addition to thefollowing risks, there may also be risks that we do not yet know of or that wecurrently think are immaterial that may also affect our business. If any of thefollowing risks occur, our business, results of operations, cash flows orfinancial condition could be adversely affected.

 

***Substantial Leverage—Our available cash and access toadditional capital may be limited by our substantial leverage.***

 

We are highly leveragedand have significant debt service obligations. As of December 31, 2009, wehad $2,528.3 million of indebtedness outstanding and total equity of $1,140.8million. This level of indebtedness could have important negative consequencesto us and you, including:

 

·                  we may have difficulty obtaining financing in thefuture for working capital, capital expenditures, acquisitions or otherpurposes;

 

20

----

 

·                  we will need to use a substantial portion of ouravailable cash flow to pay interest and principal on our debt, which willreduce the amount of money available to finance our operations and otherbusiness activities;

 

·                  some of our debt, including borrowings under thesenior secured credit facilities, have variable rates of interest, which willexpose us to the risk of increased interest rates;

 

·                  our debt level increases our vulnerability to generaleconomic downturns and adverse industry conditions;

 

·                  our debt level could limit our flexibility in planningfor, or reacting to, changes in our business and in our industry in general;

 

·                  our substantial amount of debt and the amount we needto pay to service our debt obligations could place us at a competitivedisadvantage compared to our competitors that have less debt; and

 

·                  our failure to comply with the financial and otherrestrictive covenants in our debt instruments which, among other things,require us to maintain specified financial ratios and limit our ability toincur debt and sell assets, could result in an event of default that, if notcured or waived, could cause our lenders to terminate commitments under ourdebt agreements, declare all amounts, including accrued interest, due andpayable, and enforce their rights in respect of collateral.

 

Our cash interest expensefor the year ended December 31, 2009 was $174.1 million. At December 31,2009, we had $1,877.4 million of variable rate debt ($1,506.9 million of whichis subject to a Libor or Euribor floor of 2.00%). After including the notionalamounts of variable to fixed interest rate swaps, the variable amount was$1,186.9 million. A 1% increase in the average interest rate would increasefuture interest expense by approximately $11.9 million per year. As of December 31,2009, our debt service for 2010, which represents expected principal paymentsof our long-term debt and estimated scheduled cash interest payments, wasexpected to be $263.6 million.  See Item 7, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations — Liquidity andCapital Resources — Liquidity — Contractual Obligations” for years beyond 2010.

 

***Additional Borrowings Available—Despite our substantialleverage, we and our subsidiaries may be able to incur more indebtedness. Thiscould further exacerbate the risks described above, including our ability toservice our indebtedness.***

 

We and our subsidiariesmay be able to incur substantial additional indebtedness in the future.Although our indirect, wholly-owned subsidiary, Rockwood Specialties Group, Inc.’s(“Group” or “Group’s”) senior secured credit facilities and the indenturegoverning the senior subordinated notes due 2014 (the “2014 Notes”) containrestrictions on the incurrence of additional indebtedness, such restrictionsare subject to a number of qualifications and exceptions, and under certaincircumstances indebtedness incurred in compliance with such restrictions couldbe substantial.  For example, the termloans under the senior secured credit facilities may be increased by up to$250.0 million in the aggregate, subject to certain exemptions andprovided that Group procures lender commitments for such increase. As of December 31,2009, the revolving credit facility under the senior secured credit facilitiesprovided for additional borrowings of up to $223.6 million, after giving effectto $26.4 million of letters of credit issued on our behalf.  As of December 31, 2009, the TitaniumDioxide Pigments venture facility provided for a revolving credit facility of€30.0 million ($43.0 million), of which €10.0 million ($14.3 million) wasoutstanding, as well as an outstanding bank guarantee of €10.0 million ($14.3million) related to a defined benefit pension obligation that further reducedavailability under this facility. To the extent new debt is added to our debtlevels, the substantial leverage risks described above would increase.

 

***Restrictive Covenants in Our Debt Instruments—Our debtinstruments contain a number of restrictive covenants which may limit ourability to finance future operations or capital needs or engage in otherbusiness activities that may be in our interest.***

 

Group’s senior securedcredit agreement and indenture governing the 2014 Notes and the TitaniumDioxide Pigment’s venture facility agreement impose, and the terms of anyfuture indebtedness may impose, operating and other restrictions on us. Suchrestrictions will affect, and in many respects limit or prohibit, among otherthings, our ability to take certain actions. See Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Liquidity and Capital Resources” section for further details. Inaddition, Group’s senior secured credit facilities require us and the TitaniumDioxide Pigment’s venture facility requires the venture to achieve certainfinancial and operating results and maintain compliance with specifiedfinancial ratios. Our ability to comply with these ratios may be affected byevents beyond our control such as an economic downturn. The restrictions andfinancial covenants contained in Group’s senior secured credit agreement andindenture governing the 2014 Notes and the Titanium Dioxide Pigment’s venturefacility could adversely affect our ability to finance our operations,acquisitions, investments or strategic plans or other capital needs or toengage in other business activities that would be in our interest.

 

A breach of any of thesecovenants or our inability to comply with the required financial ratios couldresult in a default under the facilities described above. If an event ofdefault occurs under any of these facilities, which includes an event ofdefault under the indenture governing the 2014 Notes, the lenders could electto:

 

21

----

 

·                  declare all borrowings outstanding, together withaccrued and unpaid interest, to be immediately due and payable;

 

·                  require us to apply all of our available cash to repaythe borrowings; or

 

·                  prevent us from making any principal, premium orinterest payments;

 

any of which would resultin an event of default. The lenders will also have the right in thesecircumstances to terminate any commitments they have to provide furtherfinancing. If we were unable to repay or otherwise refinance these borrowings whendue, our lenders could sell the collateral securing the senior secured creditfacilities, which constitutes substantially all of our and our subsidiaries’assets.

 

***Downturns in certain industries and general economicconditions could adversely affect our profitability and liquidity.***

 

In the event anothereconomic downturn or recession or disruption in the capital markets occurs, ourresults of operations, cash flows and financial position could be materiallyand adversely affected. Under such circumstances, the demand for our productscould decrease, which would adversely affect our results of operations. Inaddition, our products are used in certain industries, such as the automotive,data and communications and construction industries. Prolonged downturns orbankruptcies in one or more of these industries could severely reduce demandfor our products. For example, sales in our Performance Additives business havebeen adversely impacted by downward trends in commercial and residentialconstruction, housing starts and trends in residential repair and remodeling.Further, a downturn in the automotive industry, particularly in Europe, mayadversely affect the results of operations of our Surface Treatment business inour Specialty Chemicals segment. Moreover, if the value of one or more of ourbusinesses deteriorates, we may be required to record additional impairmentcharges that could adversely affect our results of operations. If we are unableto successfully anticipate or respond to changing economic conditions, ourresults of operations and financial position may be materially and adverselyaffected.

 

Further, another economicdownturn or recession or market disruption in the capital and credit marketsmay adversely impact our future cash flows from operations and our liquidity.For example, we have pension plans located in Germany, Finland, the UnitedKingdom and the United States that were adversely impacted by market conditionsin late 2008 and early 2009.  In thefuture, we may have to make a significant payment via a one-time payment and/orlong-term funding arrangement to one or more of these plans. Our fundingobligations could also change significantly based on the investment performanceof the pension plan assets. Any deterioration of the capital markets or returnsavailable in such markets may materially and adversely impact our pension planassets and increase our funding obligations for one or more of these plans andadversely impact our liquidity.  We cannotpredict the impact of this or any market disruption on our pension fundingobligations.

 

***Risks Associated with Acquisitions—We may not be able tosuccessfully integrate completed acquisitions or consummate acquisitions we mayseek to make in the future.***

 

The process of combiningor acquiring businesses with Rockwood involves risks. We may face difficultycompleting the integration of the new operations, technologies, products andservices of acquisitions or combinations, and may incur unanticipated expensesrelated to those integrations. The difficulties of combining operations may bemagnified by integrating personnel with differing business backgrounds andcorporate cultures. Failure to successfully manage and integrate acquisitionswith our existing operations could lead to the potential loss of customers ofthe acquired business, the potential loss of employees who may be vital to thenew operations, the potential loss of business opportunities or other adverseconsequences that could affect our financial condition and results of operations.Even if integration occurs successfully, failure of any future acquisition orcombination to achieve levels of anticipated sales growth, profitability orproductivity comparable with those achieved by our existing operations, orotherwise not perform as expected, may adversely impact our financial conditionand results of operations. In addition, certain acquisitions may triggerregulations designed to monitor competition and would therefore requireregulatory approval. We cannot predict whether such authorities will approveacquisitions we seek to accomplish in the future.

 

***Currency Fluctuations—Because a significant portion of ouroperations is conducted in foreign currencies, fluctuations in currencyexchange rates may adversely impact our financial condition and results ofoperations and may affect the comparability of our results between financialperiods.***

 

Our operations areconducted by subsidiaries in many countries. The results of their operationsand financial condition are reported in the local currency and then translatedinto U.S. dollars at the applicable exchange rates for inclusion in ourconsolidated financial statements. The exchange rates between some of thesecurrencies and the dollar in recent years have fluctuated significantly and maycontinue to do so in the future. A significant portion of our net sales andcost of products sold is denominated in Euros. Approximately 56% of our 2009net sales were derived from subsidiaries whose local currency is the euro. Thisincreases the impact of the fluctuation of the euro against the U.S. dollar.

 

22

----

 

Furthermore, because aportion of our debt is denominated in Euros, which as of December 31, 2009equaled an aggregate of €863.8 million ($1,237.0 million), we are subject tofluctuation in the exchange rate between the U.S. dollar and the euro. Forexample, the dollar-euro noon buying rate announced by the Federal Reserve Bankof New York increased from €1.00 = $0.939 on December 31, 2000 to€1.00 = $1.4321 on December 31, 2009. Being subject to this currencyfluctuation may have an adverse effect on the carrying value of our debt andmay also affect the comparability of our results of operations betweenfinancial periods. As of December 31, 2009, a weakening or strengtheningof the euro against the U.S. dollar by $0.01 would decrease or increase,respectively, by $8.6 million the U.S. dollar equivalent of our totaleuro-denominated debt of €863.8 million. In addition, because our consolidatedfinancial statements are reported in U.S. dollars, the translation effect ofsuch fluctuations has in the past significantly impacted, and may in thefuture, significantly impact the carrying value of our debt and results ofoperations and may affect the comparability of our results between financialperiods. We also incur currency transaction risk whenever we enter into eithera purchase or sale transaction using a currency other than the local currency ofthe transacting entity. We may not be able to effectively manage our currencytranslation and/or transaction risks, and as a result, volatility in currencyexchange rates may have a material adverse effect on the carrying value of ourdebt and results of operations.

 

***Regulation of Our Raw Materials, Products and Facilities—Ourbusiness could be adversely affected by regulation to which our raw materials,products and facilities are subject.***

 

Some of the raw materialswe handle, and our products and facilities, are subject to governmentregulation. These regulations affect the manufacturing processes, handling,uses and applications of our products. In addition, some of our subsidiaries’ products contain raw materials,such as arsenic pentoxide, carbon disulfide, lithium carbonate,tetrahydrofuran, copper, chromic acid, silica, zinc chromate and lead that aredeemed hazardous materials in certain situations. The use and handling of thesematerials is regulated and some of these regulations require product registrations,which also are subject to renewal and potential revocation.  For example, in February 2002, the EPAannounced a voluntary decision by CCA manufacturers, including oursubsidiaries, to amend their registrations for CCA to limit use of CCA-treatedlumber in most residential settings, effective December 31, 2003. Theseregulations may affect our ability to market certain chemicals we produce.

 

There is also a risk thatother key raw materials or one or more of our products may be found to have, orbe recharacterized as having, a toxicological or health-related impact on theenvironment or on our customers or employees. If such a discovery orrecharacterization occurs, the relevant materials, chemicals or products,including products of our customers incorporating our materials or chemicals,may be recalled or banned or we may incur increased costs in order to complywith new regulatory requirements. Change in regulations, or theirinterpretation, may also affect the marketability of certain of our products. We cannot predict how these and other findings from regulatory agencies mayaffect our cash flows or results of operations.

 

***Manufacturing Hazards—Hazards associated with chemicalmanufacturing could adversely affect our results of operations.***

 

Due to the nature of ourbusiness, we are exposed to the hazards associated with chemical manufacturingand the related storage and transportation of raw materials, products andwastes in our manufacturing facilities or our distribution centers, such as fires,explosions and accidents. These hazards could lead to an interruption orsuspension of operations and have an adverse effect on the productivity andprofitability of a particular manufacturing facility or on our company as awhole. Other hazards include piping and storage tank leaks and ruptures,mechanical failure, employee exposure to hazardous substances, chemical spillsand other discharges or releases of toxic or hazardous substances or gases,inclement weather and natural disasters. These hazards may cause personalinjury and loss of life, damage to property and contamination of theenvironment, which could lead to government fines or work stoppage injunctionsand lawsuits by injured persons. For example, our subsidiary is named asdefendants in a wrongful death suit filed by the family of an employee whoworked in our Clay-based Additives facility in Gonzales, Texas. While we areunable to predict the outcome of this case and other such cases, if determinedadversely to us, we may not have adequate insurance to cover such claims and,if not, we may not have sufficient cash flow to pay for such claims. Suchoutcomes could adversely affect our customer goodwill, cash flow and results ofoperations.

 

***Raw Materials—Fluctuations in costs of our raw materials or,our access to supplies of our raw materials could adversely affect our resultsof operations.***

 

Although no single rawmaterial represented more than 3% of our cost of products sold in 2009, rawmaterial costs generally account for a high percentage of our total costs ofproducts sold. In 2009, raw materials constituted approximately 47% of our costof products sold. We generally purchase raw materials based on supplyagreements linked to market prices and therefore our results of operations aresubject to short-term fluctuations in raw materials prices. These fluctuationslimit our ability to accurately forecast future raw material costs and henceour profitability.

 

Many of the raw materialswe use are commodities, and the price of each can fluctuate widely for avariety of reasons, including changes in availability, major capacity additionsor reductions or significant facility operating problems. Historically, therehave been 

 

23

----

 

some price increases wehave not been able to pass through to our customers. This trend may continue inthe future. In addition, titanium-bearing slag used in our Titanium DioxidePigments segment, is our largest raw material (in terms of dollars) and issourced primarily from two suppliers. If one of our suppliers is unable to meetits obligations under our present supply agreement or we are unable to enterinto new supply arrangements on competitive terms when our existing short-termsupply arrangements expire, we may be forced to pay higher prices to obtainthese necessary raw materials. In addition, a significant portion of ourlithium compounds are processed at a single location of a supplier. Anydisruption at this facility could adversely affect our ability to meet marketdemand for these products, our relationships with our customers and our resultsof operations.  Furthermore, certain ofour raw materials, such as cesium and lithium salts, are sourced from countrieswhere political, economic and social conditions may be subject to instability.In addition, one of our raw materials, lithium brine, requires a period ofgestation before it can be used to produce lithium compounds. In the eventthere is an increase in market demand for lithium products, or of unfavorable weatherconditions at the lithium ponds, as we experienced in early 2006, we may not beable to respond to such market demand on a timely basis. Any interruption ofsupply or any price increase of raw materials could result in our inability tomeet demand for our products, loss of customer goodwill and higher costs ofproducing our products.

 

***Energy Costs—Fluctuations in energy costs could have anadverse effect on our results of operations.***

 

Energy purchases in 2009constituted approximately 8% of Rockwood’s cost of products sold. Fluctuationsin the price of energy limit our ability to accurately forecast future energycosts and consequently our profitability. For example, natural gas prices werevolatile and increased in 2008 in Europe, due in part to global politicalconditions and weather conditions. Rising energy costs may increase our rawmaterial costs and negatively impact our customers and the demand for ourproducts. These risks will be heightened if our customers or productionfacilities are in locations experiencing severe energy shortages. For example,our lithium facility in Chile has experienced a shortage of natural gas in thepast due to the Argentine government’s decision to ration its supply of naturalgas to Chile. If energy prices fluctuate significantly, or we experience severeenergy shortages, our business, in particular, our Titanium Dioxide segment, orresults of operations may be adversely affected.

 

***Environmental, Health and Safety Regulation—Compliance withextensive environmental, health and safety laws could require materialexpenditures or changes in our operations.***

 

Our operations aresubject to extensive environmental, health and safety laws and regulations atnational, international and local levels in numerous jurisdictions. Inaddition, our production facilities and a number of our distribution centersrequire operating permits that are subject to renewal. The nature of thechemicals industry exposes us to risks of liability under these laws andregulations due to the production, storage, transportation, disposal and saleof chemicals and materials that can cause contamination or personal injury ifreleased into the environment. In 2009, our capital expenditures for safety,health and environmental matters (“SHE”) were $17.9 million. For 2010, weestimate capital expenditures for compliance with SHE laws to be at similarlevels. We may be materially impacted in the future by the Registration,Evaluation and Authorization of Chemicals, or REACH, legislation which becameeffective in the European Union (“EU”) on June 1, 2007. We estimate ourcost of compliance with REACH to be approximately $5.0 million in 2010 andapproximately $3.0 million per year from 2011 through 2018, although we mayincur additional costs.

 

Compliance with environmentallaws generally increases the costs of manufacturing, the cost ofregistration/approval requirements, the costs of transportation and storage ofraw materials and finished products, as well as the costs of the storage anddisposal of wastes, and could have a material adverse effect on our results ofoperations. We may incur substantial costs, including fines, damages, criminalor civil sanctions and remediation costs, or experience interruptions in ouroperations, for violations arising under these laws or permit requirements.Furthermore, environmental laws are subject to change and have tended to becomestricter over time. Such changes in environmental laws or their interpretation,or the enactment of new environmental laws, could result in materiallyincreased capital expenditures and compliance costs.  For example, proposed regulation related togreenhouse gases and carbon dioxide emissions, such as the cap and traderequirements, and potential revisions to the Toxic Control Substances Act, couldmaterially and adversely impact our results of operations.

 

In addition, thediscovery of contamination arising from historical industrial operations atsome of our former and present properties has exposed us, and in the future maycontinue to expose us, to cleanup obligations and other damages. For example,soil and groundwater contamination is known to exist at several of ourfacilities. At December 31, 2009, we had approximately $55.1 million inreserves for estimated environmental liabilities and estimated the potentialrange of exposure for such liabilities to be between $55.1 million and $91.2million.

 

***Environmental Indemnities—We may be subject to environmentalindemnity claims relating to properties we have divested.***

 

The discovery ofcontamination arising from properties that we have divested may expose us toindemnity obligations under the sale agreements with the buyers of suchproperties or cleanup obligations and other damages under applicableenvironmental laws. For example, we have obligations to indemnify the buyers ofthe former explosives business and automotive ignition systems business ofDynamit Nobel for certain environmental matters. Under such sale agreements,these indemnities are not limited as to amount. In 

 

24

----

 

addition, we agreed toindemnify the buyer of our former Electronics business for five and sevenyears, for on-site and off-site environmental liabilities, respectively,related to such business. We may not have adequate insurance coverage or cashflows to make such indemnity payments. Such payments may be costly and mayadversely affect our financial condition and results of operations.

 

***Product Liability—Due to the nature of our business andproducts, we may be liable for damages arising out of product liability claims.***

 

The sale of our productsinvolves the risk of product liability claims. For example, some of thechemicals or substances that are used in our businesses, such as arsenicpentoxide, have been alleged to represent potentially significant health andsafety concerns. Class action suits have been filed in Louisiana, Floridaand Arkansas, for example, naming one of our subsidiaries and a number ofcompetitors of our Timber Treatment Chemicals business line, as well astreaters and retailers, as defendants. In addition, our subsidiary has beennamed as a defendant in personal injury suits in several jurisdictions withretailers and treaters named as other defendants. Furthermore, there are othersimilar suits, including putative class actions, pending against retailers,treaters and other formulators to which we may be eventually named as adefendant. These suits allege, among other things, product liability claims inconnection with the use of timber products treated with CCA, which utilizesarsenic pentoxide as a raw material.

 

Other legal actions inwhich we participate or which relate to our business include the following:

 

·                  a subsidiary in our Advanced Ceramics segment has been named as adefendant in several product liability lawsuits in Europe relating to brokenartificial hip joints, which allege negligent manufacturing by our subsidiaryof ceramic components used in the production of artificial hip joints.

 

·                  a subsidiary that formerly manufactured sealants for insulated glasshas been named as a defendant in several lawsuits related to alleged negligentmanufacturing of these products in Europe.

 

Also, because many of ourproducts are integrated into our customers’ products, we may be requested toparticipate in or share in the costs of a product recall conducted by acustomer. For example, some of our businesses, including those within ourSpecialty Chemicals, Advanced Ceramics and Specialty Compounds segments, supplyproducts to customers in the automotive industry. In the event one of thesecustomers conducts a product recall that it believes is related to one of ourproducts, we may be asked to participate in or fund in whole or in part such arecall.

 

We are unable to estimateour exposure, if any, to the above-mentioned lawsuits at this time. We may besubject to future claims with regard to these suits or others like them and wemay not be able to avoid significant product liability exposure. A successfulproduct liability claim or series of claims against us for which we are nototherwise indemnified or insured could materially increase our operating costsor prevent such operating subsidiary from satisfying its financial obligations.For example, for policies renewed on or after November 2002, our insurersexcluded CCA from our insurance coverage under our general liability policies.We may not have sufficient cash flow from operations or assets to pay ajudgment resulting from a product liability claim or product recall, if any,for which there is no or inadequate insurance coverage. Any such judgment orproduct recall could materially increase our operating costs or prevent suchoperating subsidiary from satisfying its financial obligations.

 

***Product Liability—Due to the nature of our business andproducts, we may be liable for damages arising out of certain indemnity claims.***

 

We may be subject toindemnity claims for product liability lawsuits relating to products we havesold. For example, our Timber Treatment Chemicals business has entered intoindemnity agreements with various customers who purchased CCA-based woodprotection products. Pursuant to those agreements, one of our subsidiariesagreed to defend and hold harmless those customers for certain causes ofaction, based on domestic mammalian, and in some cases, human toxicity, causedby our CCA-based wood protection products, subject to certain conditions. OurTimber Treatment Chemicals business, and several of our customers were named asdefendants in several suits, including putative class actions, relating toCCA-based wood protection products. Our Timber Treatment Chemicals business hasreceived and may in the future receive claims for indemnity from customers inconnection with litigation relating to CCA-based wood protection products andmay be required to pay indemnity claims under such agreements to one or more ofits customers. If our Timber Treatment Chemicals business is required to payone or more indemnity claims, insurance or indemnity arrangements from EvonikDegussa GmbH (the successor to Laporte, from which the specialty chemicalsbusiness lines that formed Rockwood in the KKR Acquisition were acquired) maynot cover such claims and, if not, our subsidiary may not have sufficient freecash flow to pay such claims. We are unable to estimate our exposure, if any,to these claims and lawsuits at this time.

 

In addition, ourSpecialty Chemicals segment’s subsidiary that formerly manufactured sealantsfor insulating glass and resins for laminated glass has been named as adefendant in several lawsuits relating to alleged negligent manufacturing ofthose products. 

 

25

----

 

Pursuant to the sale andpurchase agreement with respect to the divested “glass” business, thissubsidiary may be required to pay indemnity claims, mainly re-glazingcosts.  Our insurance may not cover such claims and, in such a case, oursubsidiary may not have sufficient cash flow to pay these claims. One or moreof these claims could adversely affect our financial condition or results ofoperations.

 

***FDA Regulation—Some of our manufacturing processes andfacilities, pharmaceutical customers and medical device customers are subjectto regulation by the FDA or similar foreign agencies. These requirements couldadversely affect our results of operations.***

 

Regulatory requirementsof the FDA are complex. Any failure to comply with them could subject us and/orour customers to fines, injunctions, civil penalties, lawsuits, recall orseizure of products, total or partial suspension of production, denial ofgovernment approvals, withdrawal of marketing approvals and criminalprosecution. Any of these actions could adversely impact our net sales,undermine goodwill established with our customers, damage commercial prospectsfor our products and materially adversely affect our results of operations.

 

The manufacture andsupply of ceramic ball head and liner components for hip joint prosthesessystems by our Advanced Ceramics segment may be subject to the FDA’s QualitySystem Regulation, which imposes current Good Manufacturing Practicerequirements on the manufacture of medical devices. Certain lithium compoundsmanufactured by our Fine Chemicals business line of our Specialty Chemicalssegment are also subject to FDA regulation.

 

In addition, medicaldevice customers of our Advanced Ceramics segment to whom we supply our ceramicball head and liner components are subject to FDA regulation, includingpremarket approval of their products and post market compliance requirements.The FDA may take three years or longer to grant premarket approval, if at all.Once approved, our customers’ total hip prostheses systems may be withdrawnfrom the market either voluntarily by our customers or as a result of the FDA’sor a foreign equivalent’s withdrawal of marketing approval or removal of suchproducts for a number of reasons including safety, current Good ManufacturingPractice or Quality System Regulation problems with our products or ourcustomers’ final products. For example, a customer in our Advanced Ceramicssegment initiated a voluntary recall in January 2008 of its hip implantsystem. Any such regulatory action could significantly limit our net salesgenerated by our Advanced Ceramics segment and may have a material adverseeffect on our financial condition and results of operations.

 

***Competition—Our industry is highly competitive. The end-usemarkets in which we compete are also highly competitive. This competition mayadversely affect our results of operations.***

 

We face significantcompetition from major international producers as well as smaller regionalcompetitors. Our most significant competitors include major chemicals andmaterials manufacturers and diversified companies, a number of which haverevenues and capital resources exceeding ours. In addition, there is increasingcompetition from market participants in China.

 

Within the end-usemarkets in which we compete, competition between products is intense.Substitute products also exist for many of our products. Therefore, we facesubstantial risk that certain events, such as new product development by ourcompetitors, changing customer needs, production advances for competingproducts, price changes in raw materials and products, our failure to securepatents or the expiration of patents, could result in declining demand for ourproducts as our customers switch to substitute products or undertakemanufacturing of such products on their own. If we are unable to develop,produce or market our products to effectively compete against our competitors,our results of operations may materially suffer.

 

We believe that ourcustomers are increasingly looking for strong, long-term relationships with afew key suppliers that help them improve product performance, reduce costs, orsupport new product development. To satisfy these growing customerrequirements, our competitors have been consolidating within product linesthrough mergers and acquisitions. We may also need to invest and spend more onresearch and development and marketing costs to strengthen existing customerrelationships, as well as attract new customers. As a result, our substantialdebt level could limit our flexibility to react to these industry trends andour ability to remain competitive.

 

***Product Innovation—If we are not able to continue ourtechnological innovation and successful commercial introduction of newproducts, our profitability could be adversely affected.***

 

Our industries and theend-use markets into which we sell our products experience periodictechnological change and product improvement. Manufacturers periodicallyintroduce new generations of products or require new technological capacity todevelop customized products. Our future growth will depend on our ability togauge the direction of the commercial and technological progress in all keyend-use markets and upon our ability to fund and successfully develop,manufacture and market products in such changing end-use markets. We will haveto continue to identify, develop, market and in certain cases, secureregulatory approval for innovative products on a timely basis to replace orenhance existing products in order to maintain our profit margins and ourcompetitive position. We may not be successful in developing new productsand/or technology, either alone or with third parties, or 

 

26

----

 

licensing intellectualproperty rights from third parties on a commercially competitive basis. Our newproducts may not be accepted by our customers or may fail to receive regulatoryapproval. If we fail to keep pace with the evolving technological innovationsin our end-use markets on a competitive basis, our business, financialcondition and results of operations could be adversely affected.

 

***Dependence on Intellectual Property—If our intellectualproperty were copied by competitors, or if they were to develop similarintellectual property independently, our results of operations could benegatively affected.***

 

Our success depends to asignificant degree upon our ability to protect and preserve our intellectualproperty rights, which rights we own or use pursuant to licenses granted to usby third parties. The confidentiality and patent assignment agreements we enterinto with most of our key employees and third parties to protect the confidentiality,ownership and use of intellectual property may be breached, may not beenforceable, or may provide for joint ownership or ownership by a third party.In addition, we may not have adequate remedies for a breach by the other party,which could adversely affect our intellectual property rights. The use of ourintellectual property rights or intellectual property similar to ours by othersor our failure to protect such rights could reduce or eliminate any competitiveadvantage we have developed, adversely affecting our net sales. If we must sueto protect, defend or enforce our intellectual property rights, any suits orproceedings could result in significant costs and diversion of companyresources and management attention, and we may not prevail in suchaction.  We are periodically involved in actions related tomisappropriation of our intellectual property by former employees.  Inaddition, when our patents expire, competitors or new market entrants maymanufacture products substantially similar to our products previously protectedby a patent. For example, our patent in ACQ technology expired in May 2007and as a result, there may be new entrants into this market.

 

We conduct research anddevelopment activities with third parties and license certain intellectualproperty rights from third parties and we plan to continue to do so in thefuture. For example, in our Timber Treatment Chemicals business, wecommercialized Ecolife, our next generation timber treatment preservative fromour Timber Treatment Chemicals business, through our joint venture with Rohmand Haas Company (a subsidiary of The Dow Chemical Company). We endeavor tolicense or otherwise obtain intellectual property rights on terms favorable tous. However, we may not be able to license or otherwise obtain intellectualproperty rights on such terms or at all. Our inability to license or otherwiseobtain such intellectual property rights could have a material adverse effecton our ability to create a competitive advantage and create innovative solutionsfor our customers, which will adversely affect our net sales and ourrelationships with our customers.

 

The steps we take toprotect our intellectual property may not provide us with any competitiveadvantage and may be challenged by third parties. We have been subject tooppositions of our patents and trademarks by third parties before regulatorybodies in certain jurisdictions. Our failure to defend these patents orregistered trademarks may limit our ability to protect the intellectual propertyrights that these applications were intended to cover. In addition, a failureto obtain and defend our trademark registrations may impede our marketing andbranding efforts and competitive position. A failure to protect ourintellectual property rights could have a material adverse effect on demand forour products and our net sales.

 

***Risk of Intellectual Property Litigation—Our products orprocesses may infringe the intellectual property rights of others, which maycause us to pay unexpected litigation costs or damages or prevent us fromselling our products.***

 

Although it is ourintention to avoid infringing or otherwise violating the intellectual propertyrights of others, our processes and products may infringe or otherwise violatethe intellectual property rights of others. We may be subject to legalproceedings and claims, including claims of alleged infringement by us or ourlicensees of the patents, trademarks and other intellectual property rights ofthird parties. Intellectual property litigation is expensive andtime-consuming, regardless of the merits of any claim, and could divert ourmanagement’s attention from operating our businesses. If we were to discover orbe notified that our processes or products potentially infringe or otherwiseviolate the intellectual property rights of others, we may need to obtainlicenses from these parties or substantially re-engineer our products andprocesses in order to avoid infringement. We might not be able to obtain thenecessary licenses on acceptable terms, or at all, or be able to re-engineerour products successfully. Moreover, if we are sued for infringement and losethe suit, we could be required to pay substantial damages and/or be enjoinedfrom using or selling the infringing products or technology. Any of theforegoing could cause us to incur significant costs and prevent us from sellingour products.

 

***International Operations—As a global business, we areexposed to local business risks in different countries which could have amaterial adverse effect on our financial condition or results of operations andthe value of our common stock.***

 

We have significantoperations in many countries, including manufacturing facilities, research anddevelopment facilities, sales personnel and customer support operations.Currently, we operate, or others operate on our behalf, facilities in countriessuch as Brazil, Chile, China, Czech Republic, India, Malaysia, Poland,Singapore, South Africa, South Korea, Taiwan and Turkey. Of our total net salesin 2009 of $2,962.9 million, approximately 73% were generated by shipments tocountries outside North America. Our operations are affected directly andindirectly by global regulatory, economic and political conditions, including:

 

·                  new and different legal and regulatory requirements inlocal jurisdictions;

 

27

----

 

·                  managing and obtaining support and distribution forlocal operations;

 

·                  increased costs of, and availability of, transportationor shipping;

 

·                  credit risk and financial conditions of localcustomers and distributors;

 

·                  potential difficulties in protecting intellectualproperty;

 

·                  risk of nationalization of private enterprises byforeign governments;

 

·                  potential imposition of restrictions on investments;

 

·                  potentially adverse tax consequences, includingimposition or increase of withholding and other taxes on remittances and otherpayments by subsidiaries;

 

·                  capital controls; and

 

·                  local political, economic and social conditions,including the possibility of hyperinflationary conditions and politicalinstability in certain countries.

 

In addition, ourfacilities may be targets of terrorist activities that could result in full orpartial disruption of the activities of such facilities. We may not succeed indeveloping and implementing policies and strategies to counter the foregoingfactors effectively in each location where we do business. Our failure to do socould limit our ability to sell products, compete or receive payments forproducts sold in such locations.

 

Furthermore, oursubsidiaries are subject to rules and regulations of the United States,such as anti-bribery prohibitions and export controls and economic embargos,violations of which may carry substantial penalties. For example, exportcontrol and economic embargo regulations limit the ability of our subsidiariesto market, sell, distribute or otherwise transfer their products or technologyto prohibited countries or persons. Failure to comply with these regulationscould subject our subsidiaries to fines, enforcement actions and/or have anadverse affect on our reputation and the value of our common stock.

 

***Retention of Key Personnel—If we lose certain key personnelor are unable to hire additional qualified personnel, we may not be able toexecute our business strategy.***

 

Our success depends, inpart, upon the continued services of our highly skilled personnel involved inmanagement, research, production, sales and distribution, and, in particular,upon the efforts and abilities of our executive officers and key employees.Although we believe that we are adequately staffed in key positions and that wewill be successful in retaining key personnel, we may not be able to retainsuch personnel on acceptable terms or at all. Furthermore, if we lose theservice of any executive officers or key employees, we may not be able toexecute our business strategy. We do not have key-person life insurancecovering any of our employees.

 

***Relations with Employees—We are subject to stringent laborand employment laws in certain jurisdictions in which we operate, and ourrelationship with our employees could deteriorate, which could adversely impactour operations.***

 

A majority of ourfull-time employees are employed outside the United States, particularly inGermany where many of our businesses are located. In certain jurisdictionswhere we operate, particularly in Germany, labor and employment laws arerelatively stringent and, in many cases, grant significant job protection to certainemployees, including rights on termination of employment. In addition, incertain countries where we operate, including Germany, our employees aremembers of unions or are represented by a works council as required by law. Weare often required to consult and seek the consent or advice of these unionsand/or respective works’ councils. These regulations and laws coupled with therequirement to consult with the relevant unions or works’ councils couldsignificantly limit our flexibility in managing costs and responding to marketchanges.

 

Furthermore, with respectto our employees that are subject to collective bargaining arrangements orsimilar arrangements (approximately 31% of our full-time employees as of February 1,2010), we may not be able to negotiate labor agreements on satisfactory termsand actions by our employees may disrupt our business. If these workers were toengage in a strike, work stoppage or other slowdown, we could experience asignificant disruption of our operations and/or higher ongoing labor costs. Inaddition, if our other employees were to become unionized, we could experiencea significant disruption of our operations and/or higher ongoing labor costs.

 

28

----

 

***Tax Liabilities—If mg technologies ag (now known as GEAGroup Aktiengesellschaft) or Degussa UK Holdings, Ltd. fail to satisfytheir contractual obligations, we may be subject to increased tax exposureresulting from pre-acquisition periods.***

 

Under the terms ofcertain purchase agreements, third party sellers have agreed to substantiallyindemnify us for tax liabilities pertaining to the pre-acquisition periods. Tothe extent such companies fail to indemnify or satisfy their obligations, or ifany amount is not covered by the terms of the indemnity, we would be requiredto record an adjustment to goodwill to satisfy any such liabilities and couldbe negatively impacted in future periods through increased tax expense.

 

***Net Loss—We have experienced losses in the past and mayexperience losses in the future and cannot be certain that our net operatingloss carryforwards will continue to be available to offset our tax liability.***

 

We have incurred netlosses in the past and we may incur net losses in the future. We may notgenerate cash flow sufficient to meet debt service obligations and othercapital requirements, such as working capital and maintenance capitalexpenditures. As of December 31, 2009, we had deferred tax assets of$166.0 million related to worldwide net operating loss carryforwards.Additionally, at December 31, 2009, we had a total valuation allowance of$132.9 million. If our operating performance deteriorates in the future incertain tax jurisdictions, we may be unable to realize these net operating losscarryforwards and we may be required to record an additional valuationallowance.

 

***Anticipated Capital Expenditures—Our required capitalexpenditures may exceed our estimates.***

 

Our capital expenditures,excluding capital leases, for the year ended December 31, 2009 were $154.1million, which consisted of expenditures to maintain and improve existingequipment and substantial investments in new equipment. Capital expendituresfor 2010 are expected to be above 2009 levels. However, future capital expendituresmay be significantly higher, depending on the investment requirements of eachof our business lines, and may also vary substantially if we are required toundertake actions to compete with new technologies in our industry. We may nothave the capital necessary to undertake these capital investments. If we areunable to do so, we may not be able to effectively compete in some of ourmarkets.

 

***Control—A conflict may arise between our interests and thoseof KKR.***

 

Affiliates of KKR ownapproximately 29.8% of our common stock on an undiluted basis. Althoughaffiliates of KKR no longer hold a majority of our outstanding common stock,they continue to have a significant impact on the vote in any election ofdirectors. In addition, representatives of KKR occupy two of the seven seats onour board of directors. As a result, even though representatives of KKR do notoccupy a majority of the seats on our board of directors, affiliates of KKRhave substantial influence over our decisions to enter into any corporatetransaction and whether any transaction that requires the approval of thestockholders is approved. For example, affiliates of KKR could seek to cause usto sell revenue-generating assets, which could impair our long-term ability todeclare dividends or grow our business. Additionally, KKR is in the business ofmaking investments in companies and may from time to time acquire and holdinterests in businesses that compete directly or indirectly with us. They mayalso pursue acquisition opportunities that may be complementary to ourbusiness, and as a result, those acquisition opportunities may not be availableto us.

 

**Item1B. Unresolved Staff Comments.**

 

None.

 

**Item2. Properties.**

 

We have globaloperations, serving customers worldwide. To service our customers efficiently,we maintain 87 manufacturing facilities in 24 countries around the world with astrategy of global, regional and local manufacturing to optimize our serviceoffering and minimize production cost to our customers. We believe these facilitiesare suitable and adequate for their intended use. The table below presentssummary information with respect to these facilities:

 
| **Segment**              | ** ** | **Country** | ** ** | **Locations**          | ** ** | **Leased/Owned** | ** ** | **Major  Applications/Industry**                                   |
|--------------------------|------------|-------------|------------|------------------------|------------|------------------|------------|--------------------------------------------------------------------|
| **Specialty  Chemicals** | ** ** | ** **  | ** ** | ** **             | ** ** | ** **       | ** ** | ** **                                                         |
| Surface Treatment        |       | Australia   |       | Bayswater North        |       | Owned            |       | General Industry,  Aerospace, and other pre-treatment technologies |
|                     |       | Brazil      |       | Jundiai/Săo Paulo |       | Owned            |       | Automotive and other  pre-treatment technologies                   |
|                     |       | China       |       | Changchun (JV)         |       | Leased           |       | Automotive and other  pre-treatment technologies                   |

 

29

----

 
|           |   |          |   | Chongqing (JV)                  |   | Leased |   | Automotive and other pre-treatment  technologies                                                                  |
|----------------|--------|---------------|--------|---------------------------------|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------|
|           |   |          |   | Shanghai (JV)                   |   | Leased |   | Automotive and other  pre-treatment technologies                                                                  |
|           |   |          |   | Nanjing (JV)                    |   | Leased |   | Automotive, cold  forming and other pre-treatment technologies                                                    |
|           |   | France        |   | Sens                            |   | Owned  |   | Automotive and other  pre-treatment technologies                                                                  |
|           |   |          |   | Soissons                        |   | Owned  |   | Aerospace                                                                                                         |
|           |   | Germany       |   | Mönchengladbach            |   | Owned  |   | General industry                                                                                                  |
|           |   |          |   | Langelsheim (1)                 |   | Owned  |   | Automotive  technologies, other pre-treatment technologies and aerospace (sealants)                               |
|           |   | India         |   | Chennai (JV)                    |   | Leased |   | Automotive and other pre-treatment  technologies                                                                  |
|           |   |          |   | Pune (JV)                       |   | Owned  |   | Automotive and other  pre-treatment technologies                                                                  |
|           |   | Italy         |   | Giussano                        |   | Owned  |   | Automotive and other  pre-treatment technologies                                                                  |
|           |   |          |   | Roveredo in Piano               |   | Leased |   | General industry                                                                                                  |
|           |   | Mexico        |   | El Marqués, Querétaro |   | Leased |   | Automotive  technologies, other pre-treatment technologies and aerospace                                          |
|           |   | Singapore     |   | Singapore                       |   | Leased |   | Advanced technologies  and non-automotive pre-treatment technologies                                              |
|           |   | South Africa  |   | Boksburg                        |   | Owned  |   | Automotive and other  pre-treatment technologies                                                                  |
|           |   | Spain         |   | Canovelles                      |   | Owned  |   | Automotive and other  pre-treatment technologies                                                                  |
|           |   | Sweden        |   | Bålsta                     |   | Owned  |   | Automotive and other  pre-treatment technologies                                                                  |
|           |   | Turkey        |   | Cayirova-Kocaeli                |   | Owned  |   | Automotive and other  pre-treatment technologies                                                                  |
|           |   | United States |   | Jackson, MI                     |   | Owned  |   | General industry                                                                                                  |
|           |   |          |   | La Mirada, CA                   |   | Leased |   | Pre-treatment  technologies and aerospace                                                                         |
|           |   |          |   | Romulus, MI                     |   | Owned  |   | Automotive  technologies, other pre-treatment technologies and aerospace                                          |
| Fine Chemicals |   | Austria       |   | Arnoldstein                     |   | Leased |   | Metal sulfides                                                                                                    |
|           |   | Chile         |   | La Negra                        |   | Owned  |   | Lithium-carbonate and  lithium chloride                                                                           |
|           |   |          |   | Salar de Atacama                |   | Owned  |   | Lithium brine and  Potash                                                                                         |
|           |   | Germany       |   | Langelsheim (1)                 |   | Owned  |   | Butyllithium,  lithium-chloride, specialty products, lithium metal, lithium-hydrides, cesium,  and special metals |
|           |   | Taiwan        |   | Taichung                        |   | Owned  |   | Butyllithium                                                                                                      |
|           |   | United States |   | Kings Mountain, NC              |   | Owned  |   | Metal and battery                                                                                                 |
|           |   |          |   | New Johnsonville, TN            |   | Owned  |   | Butyllithium and  specialty products                                                                              |
|           |   |          |   | Pasadena, TX                    |   | Owned  |   | Butyllithium                                                                                                      |
|           |   |          |   | Phoenix, AZ                     |   | Leased |   | Zirconium products                                                                                                |
|           |   |          |   | Silver Peak, NV                 |   | Owned  |   | Lithium-carbonate and  lithium hydroxide                                                                          |

 

30

----

 
| **Performance  Additives**     |       |           |       |                  |       |       |       |                                                                                                      |
|--------------------------------|------------|----------------|------------|-----------------------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------|
| Color Pigments and  Services   |       | China          |       | Shenzhen              |       | Owned      |       | Coatings and construction                                                                                 |
|                           |       |           |       | Taicang               |       | Owned      |       | Coatings and  specialties                                                                                 |
|                           |       |           |       | Xinzhuang, Changshu   |       | Leased     |       | Construction                                                                                              |
|                           |       | France         |       | Comines               |       | Owned      |       | Coatings                                                                                                  |
|                           |       | Germany        |       | Hainhausen            |       | Owned      |       | Construction and  coatings                                                                                |
|                           |       |           |       | Walluf                |       | Owned      |       | Construction and  coatings                                                                                |
|                           |       | Italy          |       | Turin                 |       | Owned      |       | Coatings, specialties  and construction                                                                   |
|                           |       | United Kingdom |       | Birtley               |       | Owned      |       | Driers                                                                                                    |
|                           |       |           |       | Kidsgrove             |       | Owned      |       | Coatings and  specialties                                                                                 |
|                           |       |           |       | Sudbury               |       | Owned      |       | Coatings and  specialties                                                                                 |
|                           |       | United States  |       | Beltsville, MD        |       | Owned      |       | Coatings, specialties  and construction                                                                   |
|                           |       |           |       | Cartersville, GA      |       | Owned      |       | Construction                                                                                              |
|                           |       |           |       | East St. Louis, IL    |       | Owned      |       | Specialties                                                                                               |
|                           |       |           |       | Easton, PA            |       | Owned      |       | Coatings, specialties  and construction                                                                   |
|                           |       |           |       | Harleyville, SC       |       | Owned      |       | Construction                                                                                              |
|                           |       |           |       | King of Prussia, PA   |       | Owned      |       | Construction                                                                                              |
|                           |       |           |       | Los Angeles, CA       |       | Owned      |       | Coatings, specialties  and construction                                                                   |
|                           |       |           |       | Ocala, FL             |       | Owned      |       | Coatings, specialties  and construction                                                                   |
|                           |       |           |       | St. Louis, MO         |       | Owned      |       | Coatings, specialties  and construction                                                                   |
| Timber Treatment  Chemicals    |       | United Kingdom |       | Barrow-in-Furness     |       | Leased     |       | Wood protection  products and treatment                                                                   |
|                           |       | United States  |       | Freeport, TX          |       | Owned      |       | Construction and other  industrial markets                                                                |
|                           |       |           |       | Harrisburg, NC        |       | Owned      |       | Wood protection  products and treatment                                                                   |
|                           |       |           |       | Valdosta, GA          |       | Owned      |       | Wood protection  products and treatment                                                                   |
| Clay-based Additives           |       | Germany        |       | Duisburg (2)          |       | Owned      |       | Flocculants                                                                                               |
|                           |       |           |       | Ibbenbueren           |       | Leased     |       | Flocculants                                                                                               |
|                           |       |           |       | Moosburg              |       | Leased     |       | Paints and inks                                                                                           |
|                           |       |           |       | Schwarzheide          |       | Leased     |       | Flocculants                                                                                               |
|                           |       | United Kingdom |       | Widnes, Cheshire      |       | Owned      |       | Paper-making, consumer  and household care and coatings and paper                                         |
|                           |       | United States  |       | Gonzales, TX          |       | Owned      |       | Paints, inks and  oilfields and paper-making                                                              |
|                           |       |           |       | Louisville, KY        |       | Owned      |       | Paints and inks                                                                                           |
| **Titanium  Dioxide Pigments** | ** ** | ** **     | ** ** | ** **            | ** ** | ** ** | ** ** | ** **                                                                                                |
| Titanium Dioxide               |       | Finland        |       | Pori                  |       | Owned      |       | Plastics, paints,  packaging inks, coatings and paper                                                     |
|                           |       | Germany        |       | Duisburg (2) (3) |       | Owned      |       | Fibers, plastics,  paints, coatings and paper                                                             |
| Functional Additives           |       | Germany        |       | Duisburg (2) (3) |       | Owned      |       | Coatings, plastics,  fibers, paper, pharmaceuticals, PVC stabilizers and glass fiber reinforced  plastics |
| **Advanced  Ceramics**         | ** ** | ** **     | ** ** | ** **            | ** ** | ** ** | ** ** | ** **                                                                                                |
|                           |       | Brazil         |       | Nova Odessa           |       | Leased     |       | Automotive                                                                                                |
|                           |       | China          |       | Suzhou                |       | Leased     |       | General industry                                                                                          |
|                           |       | Czech Republic |       | Sumperk               |       | Owned      |       | General industry                                                                                          |
|                           |       |           |       | Dolni Rychnov         |       | Owned      |       | Electronics                                                                                               |

 

31

----

 
|                     |       | Germany        |       | Ebersbach             |       | Owned                |       | Automotive and general  industry                                                                             |
|--------------------------|------------|----------------|------------|-----------------------|------------|----------------------|------------|--------------------------------------------------------------------------------------------------------------|
|                     |       |           |       | Lauf                  |       | Owned                |       | Automotive, electronics  and general industry                                                                |
|                     |       |           |       | Lohmar                |       | Owned, partly leased |       | Ballistic protection,  wear/corrosion protection                                                             |
|                     |       |           |       | Marktredwitz          |       | Owned                |       | Electronic, automotive,  medical and general industry                                                        |
|                     |       |           |       | Plochingen            |       | Owned                |       | Medical, automotive and  general industry                                                                    |
|                     |       |           |       | Wilhermsdorf          |       | Leased               |       | Automotive                                                                                                   |
|                     |       |           |       | Wittlich              |       | Leased               |       | General industry                                                                                             |
|                     |       | Malaysia       |       | Seremban              |       | Owned                |       | Medical and general  industry                                                                                |
|                     |       | Mexico         |       | Puebla                |       | Owned                |       | Automotive                                                                                                   |
|                     |       | Poland         |       | Gorzyce               |       | Leased               |       | Automotive                                                                                                   |
|                     |       | South Korea    |       | Suwon                 |       | Leased               |       | Electronics                                                                                                  |
|                     |       | United Kingdom |       | Colyton               |       | Owned                |       | Electronics                                                                                                  |
|                     |       | United States  |       | Birmingham, AL        |       | Owned                |       | Wear/corrosion  protection                                                                                   |
|                     |       |           |       | Laurens, SC           |       | Owned                |       | Automotive, electronics  and general industry                                                                |
| **Specialty  Compounds** | ** ** | ** **     | ** ** | ** **            | ** ** | ** **           | ** ** | ** **                                                                                                   |
|                     |       | Canada         |       | Stoney Creek, Ontario |       | Owned                |       | Footwear, automotive  and consumer products                                                                  |
|                     |       | Italy          |       | Azeglio               |       | Owned                |       | Rubber compounds                                                                                             |
|                     |       | United Kingdom |       | Melton Mowbray        |       | Owned                |       | TPE/Consumer products,  packaging, medical, automotive and wire and cable sheathing products                 |
|                     |       | United States  |       | Leominster, MA        |       | Owned                |       | Wire and cable  sheathing, consumer goods, footwear, automotive and industrial products                      |
|                     |       |           |       | Pineville, NC         |       | Owned                |       | Wire and cable  sheathing, packaging, medical, consumer goods, footwear, automotive and  industrial products |
| **Corporate  and other** | ** ** | ** **     | ** ** | ** **            | ** ** | ** **           | ** ** | ** **                                                                                                   |
| Wafer Reclaim            |       | France         |       | Greasque              |       | Owned                |       | Wafer reclaim                                                                                                |

 

----

(1)                This facility is shared by both business divisions ofthe Specialty Chemicals segment.

 

(2)                This facility is shared by both the PerformanceAdditives segment and the Titanium Dioxide Pigments segment.

 

(3)                This facility is shared by the two business divisionsof the Titanium Dioxide Pigments segment.

 

**Item3. 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.” However, we do not believethat 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 cannotpredict the outcome of any litigation or the potential for futurelitigation.  See also Note 20, “Commitmentsand Contingencies.”

 

32

----

 

**HospiraMatter**

 

In April 2005,Hospira Incorporated filed suit in Mecklenburg County, North Carolina SuperiorCourt against one of our wholly-owned subsidiaries in our Specialty Compoundssegment alleging claims for negligence, negligent misrepresentation, estoppel,fraud, third party beneficiary breach of contract and unfair trade practices asa result of our subsidiary providing PVC compound to its customer. Hospirasought damages of approximately $16.0 million for costs allegedly related toits recall and destruction of intravenous administration kits that incorporatedcomponents made with this compound, and further sought treble damages ofapproximately $48.0 million, plus attorneys’ fees and interest, under the NorthCarolina unfair trade practice statute. The Court dismissed Hospira’snegligence and estoppel claims, but initially denied our subsidiary’s motion todismiss the other claims. Following discovery, our subsidiary filed a motionfor summary judgment to dismiss the remaining claims and, on November 9,2007, the trial court granted our motion for summary judgment and dismissed allof the plaintiff’s claims. The plaintiff appealed this decision and, in early2009, the appellate court affirmed on all counts with the exception of thenegligence claim, which it reversed and remanded to the trial court. Theplaintiff and our subsidiary each filed a petition with the North CarolinaSupreme Court for review of the appellate court’s ruling. In August 2009,the North Carolina Supreme Court denied both parties petitions for review ofthe appellate court’s ruling. In November 2009, the parties entered into asettlement agreement. This settlement did not have a material impact on ourresults of operations.

 

**AdvertisingMatter**

 

On March 3, 2009,Osmose, Inc. (“OI”) filed an action against Viance LLC (“Viance”), thejoint venture in the Timber Treatment Chemicals business, Rockwood Holdings, Inc.,and certain individuals, in the U.S. District Court, Northern District ofGeorgia, claiming that recent advertisements by Viance comparing its ACQproduct and OI’s MCQ product were false and misleading in violation of theLanham Act, constituted unfair competition, violated the Georgia DeceptiveTrade Practices Act, were defamatory and that Viance tortiously interfered withOI’s business relationships. OI is seeking damages related to their attorney’sfees and costs and punitive damages. OI also sought a temporary restrainingorder (“TRO”) and a preliminary injunction prohibiting Viance from continuingto make certain claims in advertisements related to their MCQ product.  OnMarch 20, 2009, the district court granted Osmose’s motion for aTRO. Viance raised certain counterclaims related to OI’s advertisementsand both parties’ claims were heard at a recent hearing. In September 2009,the district court issued a preliminary injunction prohibiting Viance from makingcertain claims related to MCQ in its advertisements and denied Viance’s requestfor a preliminary injunction related to certain claims in Osmose’sadvertisements, which we subsequently appealed. We will continue to vigorouslydefend this matter. While we believe the defendants have meritoriousdefenses against OI’s claims and do not believe that resolution of this matterwill have a material adverse effect on our business or financial condition, wecannot predict the ultimate outcome of this litigation, and the resolution ofthis matter may have a material adverse effect on our results of operations orcash flows in any quarterly or annual reporting period.

 

**LanxessMatter**

 

On January 18, 2010,Lanxess Deutschland GmbH filed suit in the District Court of Pori, Finlandagainst Sachtleben Pigments Oy (“Sachtleben”), a subsidiary of our TitaniumDioxide Pigments venture, claiming breach of contract in connection withSachtleben’s termination of a supply agreement with plaintiff.  The plaintiff is seeking up to €7.0 millionin damages plus accrued interest and legal fees.  We believe Sachtleben has meritoriousdefenses against the plaintiff’s claims, and although Sachtleben does notbelieve that resolution of this matter will have a material adverse effect onits business or financial condition, we cannot predict the ultimate outcome ofthis litigation, and the resolution of this matter may have a material adverseeffect on our results of operations or cash flows in any quarterly or annualreporting period.

 

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

 

During the fourth quarterof the year ended December 31, 2009, no matters were submitted to a voteof security holders.

 

**PART II**

 

**Item5. Market for Registrant’s Common Equity, Related Stockholder Matters andIssuer Purchases of Equity Securities.**

 

The Company’s commonstock is traded on the New York Stock Exchange under the ticker symbol ROC. Asof February 22, 2010, there were approximately 95 holders of record of theCompany’s common stock.

 

The following tablesummarizes the Company’s quarterly common stock information:

 
| **2009** | ** ** | **High** | ** ** | **Low** | ** ** |
|----------|------------|----------|------------|---------|------------|
| First    |       | $        | 12.85      |    | $          | 3.36 |   |
| Second   |       | 17.46    |       | 7.60    |       |
| Third    |       | 23.50    |       | 11.96   |       |
| Fourth   |       | 24.58    |       | 16.25   |       |
|          |            |          |            |         |            |  |  |

 

33

----

 
| **2008** | ** ** | **High** | ** ** | **Low** | ** ** |
|----------|------------|----------|------------|---------|------------|
| First    |       | $        | 34.76      |    | $          | 26.82 |   |
| Second   |       | 43.71    |       | 32.61   |       |
| Third    |       | 39.97    |       | 24.04   |       |
| Fourth   |       | 25.66    |       | 5.37    |       |
|          |            |          |            |         |            |  |  |

 

Rockwood’s operations areconducted through its subsidiaries and its ability to make payments on anyobligations it may have is dependent on the earnings and the distribution offunds from its subsidiaries. As a result, we are dependent upon cash dividendsand distributions and other transfers from our subsidiaries to make dividendpayments on our common stock. The amounts available to us to pay cash dividendsare restricted by our subsidiaries’ debt agreements. Under Group’s seniorsecured credit facilities and indenture governing the 2014 Notes, Group isgenerally restricted from making dividends or other distributions to us. Anydecision to declare and pay dividends in the future will be made at thediscretion of our board of directors and will depend on, among other things,our results of operations, cash requirements, financial condition, contractualrestrictions and other factors that our board of directors may deem relevant.See further discussion in liquidity section of Item 7, “Management’s Discussionand Analysis of Financial Condition and Results of Operations.”  For the years ended December 31, 2009and 2008, the Company did not pay any cash dividends.

 

There were no repurchasesof any of the Company’s common stock by or on behalf of the Company during thefourth quarter of 2009 and no sales of unregistered equity securities by theCompany during the fiscal year ended December 31, 2009.

 

**StockPerformance Graph**

 

The following graphcompares the performance through December 31, 2009 of a hypothetical $100investment made on August 17, 2005 in (a) our common stock, (b) theS&P 500 Index ® and (c) the S&P Supercomposite Specialty ChemicalsIndex (S15SPCH).

 

 

**Item6. Selected Financial Data.**

 

The following selectedconsolidated financial data of the Company’s five most recent years ended December 31,2009 should be read in conjunction with Item 7, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” and Item 8, “FinancialStatements and Supplementary Data.” The Statement of Operations data set forthbelow with respect to the three years in the period ended December 31,2009 and the Balance Sheet data as of December 31, 2009 and 2008, arederived from the Company’s audited financial statements included elsewhere inthis document. The Statement of Operations data for the years ended December 31,2006 and 2005 and the Balance Sheet data as of December 31, 2007, 2006 and2005 are derived from consolidated financial statements not includedherein.  All periods presented have been reclassified to account for thesale of the Groupe Novasep segment, the Electronics business sold, excludingthe European wafer reclaim business, in 2007 and the sale of the pool and spachemicals 

 

34

----

 

business in 2008 asdiscontinued operations.

 
| ** **                                                                                                                                         | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| **($ in millions, except per share data; shares in thousands)**                                                                               | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Statement of operations data:**                                                                                                                  |       |                             |       |   |   |   |   |   |   |   |   |
| Net  sales:                                                                                                                                        |       |                             |       |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                                                                                                                               |       | $                                | 996.6      |   | $ | 1,232.6 |   | $ | 1,082.9 |   | $ | 918.3 |   | $ | 842.0 |   |
| Performance  Additives                                                                                                                             |       | 671.5                            |       | 835.6 |   | 798.5 |   | 724.8 |   | 648.9 |   |
| Titanium  Dioxide Pigments                                                                                                                         |       | 666.3                            |       | 534.8 |   | 442.9 |   | 409.1 |   | 399.2 |   |
| Advanced  Ceramics                                                                                                                                 |       | 412.2                            |       | 505.9 |   | 452.5 |   | 389.6 |   | 369.6 |   |
| Specialty  Compounds                                                                                                                               |       | 210.7                            |       | 261.5 |   | 276.6 |   | 251.0 |   | 237.5 |   |
| Corporate  and other                                                                                                                               |       | 5.6                              |       | 9.7 |   | 11.8 |   | 21.9 |   | 24.4 |   |
| Total  net sales                                                                                                                                   |       | 2,962.9                          |       | 3,380.1 |   | 3,065.2 |   | 2,714.7 |   | 2,521.6 |   |
| Cost  of products sold                                                                                                                             |       | 2,107.7                          |       | 2,365.8 |   | 2,089.1 |   | 1,859.0 |   | 1,723.4 |   |
| Gross  profit                                                                                                                                      |       | 855.2                            |       | 1,014.3 |   | 976.1 |   | 855.7 |   | 798.2 |   |
| Selling,  general and administrative expenses                                                                                                      |       | 614.1                            |       | 661.3 |   | 597.6 |   | 540.4 |   | 481.6 |   |
| Impairment  charges (1)                                                                                                                            |       | —                           |       | 809.5 |   | — |   | 2.2 |   | 0.4 |   |
| Restructuring  and other severance costs (2)                                                                                                       |       | 20.8                             |       | 35.3 |   | 12.0 |   | 4.9 |   | 15.2 |   |
| Management  services agreement termination fee (3)                                                                                                 |       | —                           |       | — |   | — |   | — |   | 10.0 |   |
| Loss  (gain) on sale of assets and other (4)                                                                                                       |       | 0.5                              |       | (2.4 | ) | (4.7 | ) | (0.3 | ) | (4.4 | ) |
| Operating  income (loss)                                                                                                                           |       | 219.8                            |       | (489.4 | ) | 371.2 |   | 308.5 |   | 295.4 |   |
| Other  expenses, net:                                                                                                                              |       |                             |       |   |   |   |   |   |   |   |   |
| Interest  expense (5)                                                                                                                              |       | (180.2                           | )          | (231.1 | ) | (219.3 | ) | (199.9 | ) | (221.5 | ) |
| Interest  income                                                                                                                                   |       | 2.1                              |       | 6.0 |   | 11.5 |   | 2.4 |   | 9.9 |   |
| (Loss)  gain on early extinguishment of debt (6)                                                                                                   |       | (26.6                            | )          | 4.0 |   | (18.6 | ) | — |   | (26.2 | ) |
| Refinancing  expenses (7)                                                                                                                          |       | —                           |       | — |   | (0.9 | ) | — |   | (1.0 | ) |
| Foreign  exchange gain (loss) (8)                                                                                                                  |       | 16.0                             |       | (32.3 | ) | 7.8 |   | 8.6 |   | 112.2 |   |
| Other,  net (9)                                                                                                                                    |       | 0.6                              |       | 0.7 |   | — |   | 1.8 |   | 2.6 |   |
| Other  expenses, net                                                                                                                               |       | (188.1                           | )          | (252.7 | ) | (219.5 | ) | (187.1 | ) | (124.0 | ) |
| Income  (loss) from continuing operations before taxes                                                                                             |       | 31.7                             |       | (742.1 | ) | 151.7 |   | 121.4 |   | 171.4 |   |
| Income  tax provision (benefit)                                                                                                                    |       | 17.2                             |       | (23.9 | ) | 62.3 |   | 61.3 |   | 55.6 |   |
| Income  (loss) from continuing operations                                                                                                          |       | 14.5                             |       | (718.2 | ) | 89.4 |   | 60.1 |   | 115.8 |   |
| Income  (loss) from discontinued operations, net of tax (10)                                                                                       |       | 2.8                              |       | 3.3 |   | 25.3 |   | 48.1 |   | (23.0 | ) |
| Gain  on sale of discontinued operations, net of tax (11)                                                                                          |       | —                           |       | 42.9 |   | 210.4 |   | — |   | — |   |
| Net  income (loss)                                                                                                                                 |       | 17.3                             |       | (672.0 | ) | 325.1 |   | 108.2 |   | 92.8 |   |
| Net  loss (income) attributable to noncontrolling interest (12)                                                                                    |       | 3.8                              |       | 83.6 |   | (8.0 | ) | (5.2 | ) | 3.0 |   |
| Net  income (loss) attributable to Rockwood Holdings, Inc.                                                                                    |       | $                                | 21.1       |   | $ | (588.4 | ) | $ | 317.1 |   | $ | 103.0 |   | $ | 95.8 |   |
|                                                                                                                                               |       |                             |       |   |   |   |   |   |   |   |   |
| Amounts  attributable to Rockwood Holdings, Inc.:                                                                                             |       |                             |       |   |   |   |   |   |   |   |   |
| Income  (loss) from continuing operations                                                                                                          |       | $                                | 18.3       |   | $ | (634.6 | ) | $ | 81.5 |   | $ | 60.1 |   | $ | 115.8 |   |
| Income  (loss) from discontinued operations                                                                                                        |       | 2.8                              |       | 46.2 |   | 235.6 |   | 42.9 |   | (20.0 | ) |
| Net  income (loss)                                                                                                                                 |       | $                                | 21.1       |   | $ | (588.4 | ) | $ | 317.1 |   | $ | 103.0 |   | $ | 95.8 |   |
|                                                                                                                                               |       |                             |       |   |   |   |   |   |   |   |   |
| Income  (loss) from continuing operations attributable to Rockwood Holdings, Inc.  applicable to common shareholders - basic and diluted (13) |       | $                                | 18.3       |   | $ | (634.6 | ) | $ | 81.5 |   | $ | 60.1 |   | $ | 111.5 |   |
| Net  income (loss) attributable to Rockwood Holdings, Inc. applicable to common  shareholders - basic and diluted (13)                        |       | $                                | 21.1       |   | $ | (588.4 | ) | $ | 317.1 |   | $ | 103.0 |   | $ | 91.5 |   |
|                                                                                                                                               |       |                             |       |   |   |   |   |   |   |   |   |
| **Earnings (loss) per share attributable to Rockwood  Holdings, Inc. (14):**                                                                  |       |                             |       |   |   |   |   |   |   |   |   |
| Basic  earnings (loss) per share attributable to Rockwood Holdings, Inc.:                                                                     |       |                             |       |   |   |   |   |   |   |   |   |
| Earnings  (loss) from continuing operations                                                                                                        |       | $                                | 0.25       |   | $ | (8.58 | ) | $ | 1.10 |   | $ | 0.81 |   | $ | 1.89 |   |
| Earnings  (loss) from discontinued operations, net of tax                                                                                          |       | 0.03                             |       | 0.63 |   | 3.20 |   | 0.59 |   | (0.34 | ) |
| Basic  earnings (loss) per share                                                                                                                   |       | $                                | 0.28       |   | $ | (7.95 | ) | $ | 4.30 |   | $ | 1.40 |   | $ | 1.55 |   |
| Weighted  average number of shares outstanding                                                                                                     |       | 74,096                           |       | 73,983 |   | 73,817 |   | 73,782 |   | 59,133 |   |
| Diluted  earnings (loss) per share attributable to Rockwood Holdings, Inc:                                                                         |       |                             |       |   |   |   |   |   |   |   |   |
| Earnings  (loss) from continuing operations                                                                                                        |       | $                                | 0.24       |   | $ | (8.58 | ) | $ | 1.07 |   | $ | 0.80 |   | $ | 1.86 |   |
| Earnings  (loss) from discontinued operations, net of tax                                                                                          |       | 0.04                             |       | 0.63 |   | 3.09 |   | 0.57 |   | (0.34 | ) |
| Diluted  earnings (loss) per share                                                                                                                 |       | $                                | 0.28       |   | $ | (7.95 | ) | $ | 4.16 |   | $ | 1.37 |   | $ | 1.52 |   |
| Weighted  average number of shares outstanding                                                                                                     |       | 74,851                           |       | 73,983 |   | 76,279 |   | 75,044 |   | 60,002 |   |

 

35

----

 
| ** **                                            | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|
| **($ in millions)**                              | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Cash flow data:**                                   | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  cash provided by operating activities            |       | $                                | 369.6      |   | $ | 296.6 |   | $ | 368.5 |   | $ | 302.6 |   | $ | 257.6 |   |
| Net  cash (used in) provided by investing activities  |       | (204.3                           | )          | (295.5 | ) | 377.6 |   | (248.8 | ) | (276.6 | ) |
| Net  cash (used in) provided by financing activities  |       | (320.9                           | )          | 104.7 |   | (411.8 | ) | (102.7 | ) | 8.9 |   |
| Effect  of exchange rate changes on cash              |       | (12.6                            | )          | 12.8 |   | (10.3 | ) | (13.8 | ) | 1.0 |   |
| Net  (decrease) increase in cash and cash equivalents |       | $                                | (168.2     | ) | $ | 118.6 |   | $ | 324.0 |   | $ | (62.7 | ) | $ | (9.1 | ) |

 
| ** **                                            | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|
| **($ in millions)**                              | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Other data:**                                       |       |                             |       |   |   |   |   |   |   |   |   |
| Depreciation  and amortization                        |       | $                                | 283.0      |   | $ | 258.9 |   | $ | 211.7 |   | $ | 174.4 |   | $ | 156.7 |   |
| Capital  expenditures, excluding capital leases       |       | 154.1                            |       | 224.0 |   | 193.2 |   | 165.1 |   | 159.4 |   |
| EBITDA  (15)                                          |       | 492.8                            |       | (258.1 | ) | 571.2 |   | 493.3 |   | 539.7 |   |
| Non-cash  charges and (gains) included in EBITDA (16) |       | 4.9                              |       | 841.8 |   | (3.7 | ) | (6.4 | ) | (98.8 | ) |
| Other  special charges included in EBITDA (17)        |       | 42.8                             |       | 55.2 |   | 34.9 |   | 19.0 |   | 38.3 |   |
|                                                       |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                       | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|
| **($ in millions)**                         | ** ** | **2009**                    | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Balance sheet data:**                          |       |                        |       |   |   |   |   |   |   |   |   |
| Cash  and cash equivalents                       |       | $                           | 300.5      |   | $ | 468.7 |   | $ | 350.1 |   | $ | 27.7 |   | $ | 100.5 |   |
| Working  capital (18)                            |       | 766.7                       |       | 987.5 |   | 818.3 |   | 857.1 |   | 779.1 |   |
| Property,  plant and equipment, net              |       | 1,702.5                     |       | 1,752.2 |   | 1,508.5 |   | 1,296.3 |   | 1,156.8 |   |
| Total  assets                                    |       | 4,781.7                     |       | 5,177.3 |   | 5,514.9 |   | 5,219.9 |   | 4,816.5 |   |
| Total  long-term debt, including current portion |       | 2,528.3                     |       | 2,811.2 |   | 2,581.4 |   | 2,838.7 |   | 2,761.2 |   |
| Total  equity                                    |       | 1,140.8                     |       | 1,138.9 |   | 1,746.9 |   | 1,154.1 |   | 859.9 |   |
|                                                  |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)     As part of our annual goodwill impairment review, werecorded a goodwill impairment charge of $809.5 million in the fourth quarterof 2008 (See Note 9, “Goodwill,” for further details).  We recordedimpairment charges of $2.2 million related to the write-down of property, plantand equipment in 2006 within our Specialty Chemicals segment and $0.4 millionrelated to the write-down of property, plant and equipment in 2005 within ourPerformance Additives segment.

 

(2)     Restructuring and other severance costs includecertain expenses primarily related to severance and facility closure costs incurredin connection with consolidations and cessations of certain of ouroperations.  See Note 18, “Restructuring And Other Severance Costs,” forfurther details.

 

(3)     In connection with the initial public offering, werecorded an expense of $10.0 million in the third quarter of 2005 to terminatethe management services agreement with affiliates of KKR and DLJ MerchantBanking Partners III, L.P. (“DLJMB”).

 

(4)     We recorded net losses (gains) of $0.5 million, $(2.4)million, $(4.7) million, $(0.3) million and $(4.4) million for the years ended December 31,2009, 2008, 2007, 2006 and 2005, respectively, related to asset sales. The gainrecorded for the year ended December 31, 2008 primarily relates to thesale of land that was acquired as part of the acquisition of Dynamit Nobel in2004, partially offset by the liquidation of a joint venture in the TitaniumDioxide Pigments segment. The gain recorded for the year ended December 31,2007 primarily relates to the sale of the U.S. wafer reclaim business that waspart of the former Electronics segment.

 

(5)     For the years ended December 31, 2009, 2008,2007, 2006 and 2005, respectively, interest expense included gains (losses) of$3.9 million, $(51.5) million, $(32.2) million, $7.2 million, and $22.4million, respectively, representing the movement in the mark-to-marketvaluation of our interest rate and cross-currency swaps for the periods. In addition,for the years ended December 31, 2009, 2008, 2007, 2006, and 2005,interest expense, net includes $7.9 million, $9.6 million, $9.2 million, $9.5million, and $10.6 million, respectively, of amortization expense related todeferred financing costs.

 

(6)     For the year ended December 31,2009, we recorded a loss on early extinguishment of debt, net of $26.6 millionrelated to the write-off of deferred financing costs of $20.9 million andlender fees related to the early extinguishment of debt of $12.0 million,partially offset by a discount of $6.3 million related to the repurchase of$153.2 million in aggregate principal amount of the 2014 Notes.  For the year ended December 31, 2008, weredeemed €11.0 million of our 2014 Notes at a discount and recorded a gain of$4.0 million. For the year ended December 31, 2007, we paid a redemptionpremium of $14.5 million and wrote off $4.1 million of deferred financing costsassociated with the redemption of the 2011 Notes on May 15, 2007.  For the year ended December 31, 2005, wepaid a redemption premium of $13.2 million to redeem long-term debt and wroteoff $13.0 million of deferred financing costs associated with the debt repaidin connection with the IPO.

 

(7)     In March 2007, we expensed $0.9 million relatedto the fourth amendment of the senior secured credit agreement to refinance all

 

36

----

 

outstanding borrowingsunder the tranche F term loans with new tranche G term loans. In December 2005,we expensed $1.0 million in connection with the third amendment under thesenior secured credit facilities.

 

(8)     Foreign exchange gain (loss) primarily represents thetranslation impact on non-operating euro denominated transactions andintercompany financing arrangements.

 

(9)     The Company recorded $1.8 million of income in 2006primarily related to the correction of an error related to a previouslyunrecorded asset in the Titanium Dioxide Pigments segment. The effect of thisadjustment to our consolidated financial statements for the year ended December 31,2005 was not material. In 2005, we recorded $2.6 million of income primarilyrelated to the reversal of a bad debt reserve of $2.9 million related to a notereceivable from the buyer in connection with the sale of a business by DynamitNobel prior to the acquisition of Dynamit Nobel for which the cash wascollected from the buyer in 2005.

 

(10)   As noted above, we sold our Groupe Novasep subsidiary inJanuary 2007, our Electronics business, excluding our European waferreclaim business, in December 2007 and our pool and spa chemicals businessin October 2008.  The results of these businesses have been accountedfor as discontinued operations in the accompanying Consolidated Statements ofOperations for all periods presented (see Note 2, “Discontinued Operations,”for further details).

 

Income from discontinuedoperations, net of tax was $2.8 million for the year ended December 31,2009 and was primarily due to the favorable resolution of a claim against theCompany’s former Groupe Novasep business and the reversal of certain reservesno longer deemed necessary in connection with the sale of the Electronicsbusiness in December 2007. Income from discontinued operations, net of taxwas $3.3 million for the year ended December 31, 2008 from operating thepool and spa chemicals business that was sold in October 2008.  Income from discontinued operations, net oftax was $25.3 million for the year ended December 31, 2007 and was primarilycomprised of income from operating the pool and spa chemicals business and theElectronics business.

 

An impairment charge of$44.7 million was recorded in 2005 primarily related to the write-down ofproperty, plant and equipment in conjunction with the downsizing of the Rohnerfacility within our former Groupe Novasep segment. In addition, in March 2006,we sold Rohner AG and recorded a pre-tax loss of $11.5 million.

 

(11)   Primarily related to a gain of $40.5 million (net of tax)in 2008 on the sale of the pool and spa chemicals business and gains in 2007 of$115.6 million (net of tax) on the sale of Groupe Novasep and $94.8 million(net of tax) on the sale of the Electronics business.

 

(12)   Noncontrolling interest represents the total of thenoncontrolling party’s interest in certain investments.  For 2009, 2008 and 2007, noncontrollinginterest primarily relates to the Viance LLC joint venture and the TitaniumDioxide Pigments venture.  In 2008,noncontrolling interest was primarily related to the goodwill impairment chargerecorded in the Titanium Dioxide Pigments venture. Noncontrolling interest in2006 and 2005 relates to the Groupe Novasep subsidiary that was sold in January 2007.

 

(13)   Represents the net income (loss) attributable toRockwood Holdings, Inc. applicable to common shareholders.  In 2005, net income was reduced by the amountof accumulated and unpaid redeemable convertible preferred stock dividends. SeeNote 16, “Earnings Per Share.”

 

(14)   Net earnings (loss) per share attributable to RockwoodHoldings, Inc. is calculated by dividing net income (loss) applicable tocommon shareholders by the weighted average shares outstanding.

 

(15)   EBITDA is defined as net income (loss) attributable toRockwood Holdings, Inc. plus interest expense, net, income tax provision(benefit) and depreciation and amortization. EBITDA is not a recognized termunder U.S. GAAP and does not purport to be an alternative to net income (loss)as an indicator of operating performance or to cash flows from operatingactivities as a measure of liquidity. Additionally, EBITDA is not intended tobe a measure of free cash flow for management’s discretionary use, as it doesnot consider certain cash requirements such as interest payments, tax paymentsand debt service requirements.

 

The amounts shown forEBITDA differ from the amounts calculated under the definition of consolidatedEBITDA used in our debt agreements. The definition of EBITDA used in our debtagreements permits further adjustments for certain cash and non-cash chargesand gains; the indenture governing the 2014 Notes and the facility agreementgoverning the Titanium Dioxide Pigments venture exclude certain adjustmentspermitted under the senior secured credit agreement. Consolidated EBITDA asadjusted (“Adjusted EBITDA”) is used in our debt agreements to determinecompliance with financial covenants and our ability to engage in certainactivities, such as incurring additional debt and making certain payments. Inaddition to covenant compliance, our management also uses Adjusted EBITDA toassess our operating performance and to calculate performance-based cashbonuses and determine whether certain performance-based stock options vest, asboth such bonuses and options are tied to Adjusted EBITDA targets. For adiscussion of the adjustments, uses and the limitations on the use of AdjustedEBITDA, 

 

37

----

 

see Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—FactorsWhich Affect Our Results of Operations—Special Note Regarding Non-GAAPFinancial Measures.”

 

Thefollowing table sets forth a reconciliation of net income (loss) to EBITDA forthe periods indicated:

 
| ** **                                                      | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------|------------|
| **($ in millions)**                                        | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net  income (loss) attributable to Rockwood Holdings, Inc. |       | $                                | 21.1       |   | $ | (588.4 | ) | $ | 317.1 |   | $ | 103.0 |   | $ | 95.8 |   |
| Net  (loss) income attributable to noncontrolling interest (a)  |       | (3.8                             | )          | (83.6 | ) | 8.0 |   | 5.2 |   | (3.0 | ) |
| Net  income (loss)                                              |       | 17.3                             |       | (672.0 | ) | 325.1 |   | 108.2 |   | 92.8 |   |
| (Income)  loss from discontinued operations, net of tax         |       | (2.8                             | )          | (3.3 | ) | (25.3 | ) | (48.1 | ) | 23.0 |   |
| Gain  on sale of discontinued operations, net of tax            |       | —                           |       | (42.9 | ) | (210.4 | ) | — |   | — |   |
| Income  (loss) from continuing operations                       |       | 14.5                             |       | (718.2 | ) | 89.4 |   | 60.1 |   | 115.8 |   |
| Income  tax provision (benefit)                                 |       | 17.2                             |       | (23.9 | ) | 62.3 |   | 61.3 |   | 55.6 |   |
| Interest  expense                                               |       | 180.2                            |       | 231.1 |   | 219.3 |   | 199.9 |   | 221.5 |   |
| Interest  income                                                |       | (2.1                             | )          | (6.0 | ) | (11.5 | ) | (2.4 | ) | (9.9 | ) |
| Depreciation  and amortization                                  |       | 283.0                            |       | 258.9 |   | 211.7 |   | 174.4 |   | 156.7 |   |
| EBITDA                                                          |       | $                                | 492.8      |   | $ | (258.1 | ) | $ | 571.2 |   | $ | 493.3 |   | $ | 539.7 |   |

 

----

(a)     Net (loss) income attributable to noncontrollinginterest represents the total of the noncontrolling party’s interest in certaininvestments (principally the Viance, LLC joint venture and the Titanium DioxidePigments venture).

 

(16)   EBITDA, as defined above, contains the followingnon-cash charges and gains for which we believe adjustment is permitted underour senior secured credit agreement, each of which is described under Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Factors Which Affect Our Results of Operations—Special Charges andCredits and special NoteRegarding Non-GAAP Financial measures”:

 
| ** **                                     | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|
| **($ in millions)**                       | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Impairment  charges                            |       | $                                | —     |   | $ | 809.5 |   | $ | — |   | $ | 2.2 |   | $ | 0.4 |   |
| Write-off  of deferred debt issuance costs (a) |       | 20.9                             |       | — |   | 4.1 |   |   |   | 13.0 |   |
| Foreign  exchange (gain) loss                  |       | (16.0                            | )          | 32.3 |   | (7.8 | ) | (8.6 | ) | (112.2 | ) |
|                                           |       | $                                | 4.9        |   | $ | 841.8 |   | $ | (3.7 | ) | $ | (6.4 | ) | $ | (98.8 | ) |

 

----

(a)     Represents pre-tax charges of $20.9 millionrelated to the write-off of deferred financing costs in 2009 in connection withthe amendment of our senior secured credit facility and the redemption of aportion of the 2014 Notes, $4.1 million related to the write-off of deferreddebt issuance costs associated with the redemption of the 2011 Notes in May 2007and $13.0 million related to the write-off of deferred debt issuance costsassociated with debt repaid with IPO proceeds in 2005.  These amounts arereported in “(Loss) gain on early extinguishment of debt” in the ConsolidatedStatements of Operations.

 

(17)   In addition to non-cash charges and gains,our EBITDA contains the following other special charges and gains for which webelieve adjustment is permitted under our senior secured credit agreement, eachof which is described under Item 7, “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Factors Which Affect Our Resultsof Operations—Special Charges and Credits and Special Note Regarding Non-GAAPFinancial Measures”:

 

38

----

 
| ** **                                     | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|
| **($ in millions)**                       | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Restructuring  and other severance costs (a)   |       | $                                | 20.8       |   | $ | 35.3 |   | $ | 12.0 |   | $ | 5.3 |   | $ | 15.7 |   |
| Systems/organization  establishment expenses   |       | 6.3                              |       | 12.9 |   | 4.2 |   | 10.7 |   | 3.9 |   |
| Acquisition  and disposal costs                |       | 3.0                              |       | 1.7 |   | 2.3 |   | 1.9 |   | 1.1 |   |
| Inventory  write-up charges                    |       | —                           |       | 6.9 |   | 5.7 |   | 1.1 |   | — |   |
| Long-term  debt redemption premium (discount)  |       | 5.7                              |       | (4.0 | ) | 14.5 |   | — |   | 13.2 |   |
| Refinancing  expenses                          |       | —                           |       | — |   | 0.9 |   | — |   | 1.0 |   |
| Management  services agreement termination fee |       | —                           |       | — |   | — |   | — |   | 10.0 |   |
| Loss  (gain) on sale of assets and other       |       | 0.5                              |       | (2.4 | ) | (4.7 | ) | (0.3 | ) | (4.4 | ) |
| Acquired  in-process research and development  |       | —                           |       | 2.9 |   | — |   | — |   | — |   |
| Other  (b)                                     |       | 6.5                              |       | 1.9 |   | — |   | 0.3 |   | (2.2 | ) |
|                                           |       | $                                | 42.8       |   | $ | 55.2 |   | $ | 34.9 |   | $ | 19.0 |   | $ | 38.3 |   |

 

----

(a)                Includes inventory write-downs of $0.7 million, $0.4million and $0.5 million recorded in cost of products sold for the years ended December 31,2009, 2006 and 2005, respectively.

 

(b)               In 2009, the Company recorded expenses of $6.5 millionprimarily related to an increase in reserves covering legacy obligationsassumed in connection with the KKR acquisition in 2000 and the acquisition ofthe Dynamit Nobel businesses in 2004.  In2008, the company recorded expenses of $1.9 million which includes feesincurred in connection with the secondary offering of the Company’s commonstock in June 2008.  In 2005, theCompany recorded income of $2.2 million primarily related to the reversal of abad debt reserve related to a note receivable from the buyer in connection withthe sale of a business by Dynamit Nobel prior to the acquisition of DynamitNobel, which was collected from the buyer in 2005.

 

(18)          Working capital is defined as current assets lesscurrent liabilities.

 

**Item7. Management’s Discussion and Analysis of Financial Condition and Results ofOperations.**

 

*In2008, we completed the sale of our pool and spa chemicals business and in 2007,we completed the sale of our Groupe Novasep and Electronics segments, excludingour European wafer reclaim business. As a result, our consolidated financialstatements have been reclassified to reflect these segments as discontinuedoperations for all periods presented. See Note 2, “Discontinued Operations,”for further details.*

 

*Thefollowing discussion contains forward-looking statements that involve numerousrisks and uncertainties. Our actual results could differ materially from thosediscussed in the forward-looking statements as a result of these risks anduncertainties, including those set forth under Item 1, “Business—Forward-LookingStatements” and Item 1A, “Risk Factors.” You should read the followingdiscussion and analysis together with Item 6, “Selected Financial Data,” ourconsolidated financial statements and the notes to those statements that appearelsewhere in this Annual Report. Amounts may not recalculate due to roundingdifferences.*

 

*Unlessotherwise noted, all balance sheet items as of December 31, 2009 which aredenominated in Euros are converted at the December 31, 2009 exchange rateof €1.00 = $1.4321.*

 

**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 

 

39

----

 

costs, inspection costsand certain energy costs.

 

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

 

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

 

·                  In the first half of 2009, we repurchased a portion ofour Euro-denominated senior subordinated notes due in 2014, voluntarily prepaida portion of our senior secured term loans and amended our senior securedcredit agreement. See discussion below in “Liquidity and Capital Resources”for further details.

 

·                  In the fourth quarter of 2008, we reduced overheadand eliminated duplicative positions throughout the Company as part of ourglobal cost control initiatives. To cope with the downturn in the economy,we have continued this activity in 2009, and we remain focused on reducingcosts, improving productivity, and conserving cash by controlling workingcapital and capital spending;

 

·                  We acquired Holliday Pigments in August 2008,which is included 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; and

 

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

 

**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 conditionsin our segments and regions in which we operate that impacted our results ofoperations during the periods presented include the following:

 

***Specialty Chemicals***

 

·                  Demand for Surface Treatment products in our SpecialtyChemicals segment generally follows the activity levels of metal processingmanufacturers, including the automotive supply, steel and aerospace industries.Sales growth in the Surface Treatment business occurred in 2008 in most marketsand regions served, primarily aerospace, general industrial and Europeanautomotive industries. This growth was driven by price increases and theimpact of bolt-on acquisitions that offset raw material cost increases andlower volumes from a slowdown in the automotive markets. In 2009, resultsdeclined on lower volumes in most businesses, partially offset by increasedselling prices. Sales growth is expected in 2010 primarily from higher volumesacross most markets.

 

·                  Demand for our lithium carbonate products in the FineChemicals business line of our Specialty Chemicals segment is generally drivenby demand in industrial applications, the aluminum business, glass ceramics,cement and the general demand in China. Sales of lithium products specificallyused in life science applications depend on the trends in drug development andgrowth in pharmaceuticals markets as well as generic competition. Growthin the Fine Chemicals business occurred in 2008 in most market segments, drivenby price increases and higher volumes of lithium applications.  In 2009,lower volumes in most applications, particularly in lithium and metal sulfideapplications, had a negative impact on results. Results in 2010 are expected tobe negatively impacted by the highly competitive business environment,partially offset by higher volumes in lithium applications.

 

***Performance Additives***

 

·                  Generally, a trend towards the increased use ofcolored concrete products in the construction market has historically had apositive effect on our Color Pigments and Services business line. However,a general slowdown in the construction market has negatively impactedconstruction sales. North American and European volumes were lower in 2008and continued to decline in 2009.  Acontinued slowdown in the construction industry could have a negative impact onour results in 2010.

 

40

----

 

·                  Demand for our wood protection products, in particularalkaline copper quaternary, or ACQ, is generally driven by both repair andremodeling, as well as new construction. The market position of ACQ wasnegatively impacted in 2008 and 2009 by a general slowdown in the constructionmarket, some customer shifts to substitute products and the use of woodsubstitutes. A continued slowdown in the construction industry could have anegative impact on our results in 2010.

 

·                  In the Clay-based Additives business, net salesincreased in 2008 as increased selling prices and volumes for oilfieldapplications and increased selling prices of coatings and inks were partiallyoffset by lower volumes of coatings and carbonless applications. In 2009,net sales decreased as lower volumes in most applications were partially offsetby increased selling prices. We expect modest sales growth in 2010 primarilyfrom higher volumes in most market segments.

 

***Titanium Dioxide Pigments***

 

·                  Demand for our titanium dioxide products in anatasegrade is driven mainly by demand in the synthetic fiber industry, while demandfor titanium dioxide products in rutile grade and our functional additives isdriven by demand in the coatings, printing inks, construction, cosmetics,pharmaceutical, food, paper and plastics industries. Market conditions,including pricing pressure and current industry overcapacity, have continued tonegatively impact this segment. Volumes and selling prices in fiberanatase applications decreased in 2008. In 2009, net sales decreased aslower volumes 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 2009, sales of rutile applications were up due to highervolumes as a result of the venture with Kemira that was completed on September 1,2008, and higher selling prices. We expect sales of rutile and anataseapplications to be higher in 2010.  Ourfunctional additives sales were down in 2008 on lower volumes, partially offsetby increased selling prices. In 2009, functional additives sales were down aslower volumes were partially offset by higher selling prices. We expect salesof functional additives to be higher in 2010.

 

***Advanced Ceramics***

 

·                  Demand for our ceramic medical devices is mainly tiedto the aging population in Europe and the United States.  Sales of our medical device applicationsincreased in 2008 on higher volumes and continued to increase in 2009.  We expect this growth to continue in 2010.

 

·                  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. Sales of these applicationswere lower in 2009, but are expected to be slightly higher in 2010.  Sales of mechanical systems and applications,electronic applications and multi-functional applications were down in 2009from lower volumes, particularly related to the economic downturn in theautomotive industry.  However, sales ofthese applications are expected to be slightly higher in 2010.

 

***Specialty Compounds***

 

·                  Our largest product line in the Specialty Compoundssegment is wire and cable compounds. Sales within this product line aredependent upon the telecommunications market and related sectors, specificallydemand for high-end voice and data communication wire and cable, for which ourSpecialty Compounds segment is a significant provider of sheathing materials.Newly developed non-halogen products for wire and cable data communication,military and other applications have expanded business in North America forthose applications and created opportunities in Europe. However, as aresult of a general downturn in the wire and cable market, volumes of wire andcable products were down in 2008 and 2009. In 2010, we expect sales of wire and cable products to be up slightly.

 

·                  Most of the other end-use markets for which SpecialtyCompounds’ products are used generally track growth of gross domestic product,but many are also application specific, such as automotive. We are focusingmore of our efforts towards increasing high margin specialty products, inparticular, thermoplastic elastomers, and less of our efforts in automotive andfootwear. Our net sales in consumer/industrial thermoplastic elastomers wereflat in 2008, but were lower in 2009. Net sales of regulated packagingwere lower in 2008 and 2009.  In 2010, weexpect sales of these applications to be up slightly.

 

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

 

**GlobalExposure**

 

We operate ageographically diverse business. Of our 2009 net sales, 52% were shipments toEurope, 27% to North America 

 

41

----

 

(predominantly the UnitedStates) and 21% to the rest of the world. For a geographic description of theorigin of our net sales and location of our long-lived assets, see Note 3, “SegmentInformation.”

 

We have sold to customersin more than 60 countries during this period. Currently, we serve our diverseand extensive customer base with 87 manufacturing facilities in 24 countries.Consequently, we are exposed to global economic and political changes,particularly currency fluctuations that could impact our profitability anddemand for our products.

 

Our sales and productioncosts are mainly denominated in U.S. dollars or Euros. Our results ofoperations and financial condition have been historically impacted by thefluctuation of the euro against our reporting currency, the U.S. dollar. Forthe year ended December 31, 2009, the average exchange rate of the euroagainst the U.S. dollar was lower compared to 2008. As a result, our net sales,gross profit and operating income were negatively impacted. Historically,however, our operating margins have not been significantly impacted by currencyfluctuations because, in general, sales and costs of products sold aregenerated or incurred in the same currency, subject to certain exceptions.

 

**RawMaterials**

 

Raw materials constitutedapproximately 47% of our 2009 cost of products sold. We have a broad rawmaterial base, with the cost of no single raw material representing more than3% of our cost of products sold in 2009. In 2009, lower raw material costs in a number of our businesses had afavorable impact on our results of operations. However, the significant price fluctuations our raw materials haveexperienced in the past during periods of high demand have had an adverseimpact on our results of operations. For example, higher prices for iron-oxideused in the Color Pigments business of our Performance Additives segment had a negativeimpact on results in 2007 and 2008. We cannot accurately predict theimpact of any future price increases for raw materials or any raw materialshortages on our business as a whole or in specific geographic regions. Inaddition, we may not be able to pass on raw material price increases to ourcustomers. See details of our ten most significant raw materials (in termsof dollars) in Item 1, “Business — Raw Materials.”

 

**EnergyCosts**

 

In 2009, energy purchasesrepresented approximately 8% of our cost of products sold. However, withincertain business lines, such as our Titanium Dioxide Pigments segment and theColor Pigments and Services and Clay-based Additives businesses of ourPerformance Additives segment, energy costs are more significant. The cost ofproducts sold for certain of our businesses, including Color Pigments andServices and Clay-based Additives, increases when the price of natural gas inNorth America rises. However, energy costs in 2009 were lower in a number ofour businesses, particularly in North America. Natural gas prices in NorthAmerica were relatively stable in 2007, increased during 2008, but declined in2009.  Natural gas prices in Europe, where our Titanium Dioxide Pigmentssegment is located, were higher in 2007 and 2008, but declined in 2009.

 

**IncomeTaxes**

 

As of December 31,2009, the Company has U.S. federal and foreign corporate tax loss carryforwards(excluding state and local amounts) of approximately $496.0 million, of which$202.1 million expire in 2029, $67.2 million expire between 2010 and 2026 and$226.7 million which have no current expiration date. The Company also hasstate and local tax loss carryforwards of approximately $300.7 million expiringin years 2010 through 2029.

 

The worldwide valuationallowance increased by $48.2 million to $132.9 million at December 31,2009. Of this amount, $34.4 million was a charge to income tax expense relatingprimarily to net operating losses and $13.8 million primarily represents anincrease to other comprehensive income.

 

**Acquisitions**

 

We did not complete anyacquisitions in 2009.  However, during2008 and 2007, we made certain selective acquisitions and strategictransactions pursuant to our business strategy of achieving profitable growth.See Note 4, “Acquisitions,” for further details.

 

**SpecialCharges and Credits**

 

During the periodspresented, we incurred certain special charges that included goodwillimpairment charges, systems/organization establishment expenses, restructuringand other severance costs, foreign exchange gains and losses and inventorywrite-up charges. See “Items excluded from Adjusted EBITDA” section in Note 3, “SegmentInformation,” for a discussion of special charges and credits recorded in theyears ended December 31, 2009, 2008 and 2007.

 

42

----

 

**SpecialNote Regarding Non-GAAP Financial Measures**

 

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

 

**Definitionof Adjusted EBITDA**

 

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

 

·                  interest expense;

·                  depreciation expense;

·                  amortization expense, including amortization ofdeferred financing fees;

·                  extraordinary losses and non-recurring charges;

·                  non-cash charges;

·                  losses on asset sales;

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

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

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

·                  any fees and expenses related to permittedacquisitions;

·                  any deduction for noncontrolling interest expense; and

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

 

less:

 

·                  extraordinary gains and non-recurring gains;

·                  non-cash gains; and

·                  gains on asset sales,

 

in all cases, subject tocertain exclusions.

 

For presentation purposeswithin this report, we use the computation set forth in our senior securedcredit agreement as a basis which reflects management’s interpretationsthereof. Management has determined that stock-based compensation costs, whichare non-cash charges, will not be an adjustment in calculating Adjusted EBITDAas these costs will be an ongoing recurring cost to the Company. These costsare recorded in selling, general and administrative expenses in theConsolidated Statements of Operations. Specifically, the calculation of AdjustedEBITDA according to the indenture underlying our 2014 Notes and the facilityagreement governing our Titanium Dioxide Pigments venture excludes certainadjustments prescribed within the senior secured credit agreement. Given thatborrowings under the senior secured credit agreement are secured by most of ourassets and given that the calculation does not materially differ from thecalculation of Adjusted EBITDA for performance measurement purposes, we believethis is the most appropriate computation of Adjusted EBITDA to present.

 

**Management’sUses**

 

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

 

We also use AdjustedEBITDA on a consolidated basis as a liquidity measure. We believe thisfinancial measure on a consolidated 

 

43

----

 

basis is important inanalyzing our liquidity because our senior secured credit agreement andindenture governing the 2014 Notes contain financial covenants that aredetermined based on Adjusted EBITDA. These covenants are material terms ofthese agreements, because they govern substantially all of our long-term debt,which in turn represents a substantial portion of our capitalization.Non-compliance with these financial covenants under our senior secured creditfacilities—our maximum total leverage ratio and our minimum interest coverageratio, in particular—could result in the lenders requiring us to immediatelyrepay all amounts borrowed. Any such acceleration could also lead to the noteholdersaccelerating the maturity of the 2014 Notes. In addition, if we cannot satisfythese financial covenants in the indenture governing the 2014 Notes, we cannotengage in certain activities, such as incurring additional indebtedness ormaking certain payments. Consequently, Adjusted EBITDA is critical to ourassessment of our liquidity.

 

We also use AdjustedEBITDA on a segment basis as the primary measure used by our chief operatingdecision maker, our Chief Executive Officer, to evaluate the ongoingperformance of our business segments and reporting units. On a segment basis,we define Adjusted EBITDA as operating income excluding depreciation andamortization, certain non-cash gains and charges, certain other special gainsand charges determined by our senior management to be non-recurring gains andcharges and certain items deemed by our senior management to have little or nobearing on the day-to-day operating performance of our business segments 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 has limitationsas an analytical tool, and should not be viewed in isolation and is not asubstitute for U.S. GAAP measures of earnings and cash flows. Materiallimitations associated with making the adjustments to our earnings and cashflows to calculate Adjusted EBITDA, and using this non-GAAP financial measureas compared to the most directly comparable U.S. GAAP financial measures,include:

 

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

 

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

 

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

 

An investor or potentialinvestor may find any one or all of these items important in evaluating ourperformance, results of operations, financial position and liquidity.Management compensates for the limitations of using non-GAAP financial measuresby using them only to supplement our U.S. GAAP results to provide a morecomplete understanding of the factors and trends affecting our business. AdjustedEBITDA is not an alternative to net income (loss) or income (loss) fromcontinuing operations before taxes or operating income or cash flows from operatingactivities as calculated and presented in accordance with U.S. GAAP. You shouldnot rely on Adjusted EBITDA as a substitute for any such U.S. GAAP financialmeasures. We strongly urge you to review the reconciliations of Adjusted EBITDAto U.S. GAAP financial measures and other financial information, in each caseincluded elsewhere in this Annual Report. We also strongly urge you not to relyon any single financial measure to evaluate our business. Our measure ofAdjusted EBITDA may 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 Holdings, Inc. to AdjustedEBITDA for the years ended December 31, 2009, 2008 and 2007), including asa percentage of net sales, for the periods presented. See Note 3, “SegmentInformation,” for segment information and a reconciliation to income (loss)from continuing operations before taxes to Adjusted EBITDA on a segment basis.

 

44

----

 
| ** **                                                      | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------|------------|
| **($ in millions)**                                        | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Statement of operations data:**                               |       |                             |       |   |   |   |   |
| **Net sales:**                                                  |       |                             |       |   |   |   |   |
| Specialty  Chemicals                                            |       | $                                | 996.6      |   | $ | 1,232.6 |   | $ | 1,082.9 |   |
| Performance  Additives                                          |       | 671.5                            |       | 835.6 |   | 798.5 |   |
| Titanium  Dioxide Pigments                                      |       | 666.3                            |       | 534.8 |   | 442.9 |   |
| Advanced  Ceramics                                              |       | 412.2                            |       | 505.9 |   | 452.5 |   |
| Specialty  Compounds                                            |       | 210.7                            |       | 261.5 |   | 276.6 |   |
| Corporate  and other                                            |       | 5.6                              |       | 9.7 |   | 11.8 |   |
| Total  net sales                                                |       | 2,962.9                          |       | 3,380.1 |   | 3,065.2 |   |
|                                                            |       |                             |       |   |   |   |   |
| Gross  profit                                                   |       | 855.2                            |       | 1,014.3 |   | 976.1 |   |
|                                                            |       | 28.9                             | %          | 30.0 | % | 31.8 | % |
| Selling,  general and administrative expenses                   |       | 614.1                            |       | 661.3 |   | 597.6 |   |
|                                                            |       | 20.7                             | %          | 19.6 | % | 19.5 | % |
| Impairment  charges                                             |       | —                           |       | 809.5 |   | — |   |
| Restructuring  and other severance costs                        |       | 20.8                             |       | 35.3 |   | 12.0 |   |
| Loss  (gain) on sale of assets and other                        |       | 0.5                              |       | (2.4 | ) | (4.7 | ) |
| **Operating income (loss):**                                    |       |                             |       |   |   |   |   |
| Specialty  Chemicals                                            |       | 161.8                            |       | 223.7 |   | 206.9 |   |
|                                                            |       | 16.2                             | %          | 18.1 | % | 19.1 | % |
| Performance  Additives                                          |       | 19.3                             |       | (438.5 | ) | 81.5 |   |
|                                                            |       | 2.9                              | %          | (52.5 | )% | 10.2 | % |
| Titanium  Dioxide Pigments                                      |       | 16.4                             |       | (229.0 | ) | 38.4 |   |
|                                                            |       | 2.5                              | %          | (42.8 | )% | 8.7 | % |
| Advanced  Ceramics                                              |       | 48.0                             |       | 96.6 |   | 83.8 |   |
|                                                            |       | 11.6                             | %          | 19.1 | % | 18.5 | % |
| Specialty  Compounds                                            |       | 23.1                             |       | (83.9 | ) | 22.0 |   |
|                                                            |       | 11.0                             | %          | (32.1 | )% | 8.0 | % |
| Corporate  and other                                            |       | (48.8                            | )          | (58.3 | ) | (61.4 | ) |
| Total  operating income (loss)                                  |       | 219.8                            |       | (489.4 | ) | 371.2 |   |
| **Other expenses, net:**                                        |       |                             |       |   |   |   |   |
| Interest  expense                                               |       | (180.2                           | )          | (231.1 | ) | (219.3 | ) |
| Interest  income                                                |       | 2.1                              |       | 6.0 |   | 11.5 |   |
| (Loss)  gain on early extinguishment of debt                    |       | (26.6                            | )          | 4.0 |   | (18.6 | ) |
| Refinancing  expenses                                           |       | —                           |       | — |   | (0.9 | ) |
| Foreign  exchange gain (loss), net                              |       | 16.0                             |       | (32.3 | ) | 7.8 |   |
| Other,  net                                                     |       | 0.6                              |       | 0.7 |   | — |   |
| Other  expenses, net                                            |       | (188.1                           | )          | (252.7 | ) | (219.5 | ) |
| Income  (loss) from continuing operations before taxes          |       | 31.7                             |       | (742.1 | ) | 151.7 |   |
| Income  tax provision (benefit)                                 |       | 17.2                             |       | (23.9 | ) | 62.3 |   |
| Income  (loss) from continuing operations                       |       | 14.5                             |       | (718.2 | ) | 89.4 |   |
| Income  from discontinued operations, net of tax                |       | 2.8                              |       | 3.3 |   | 25.3 |   |
| Gain  on sale of discontinued operations, net of tax            |       | —                           |       | 42.9 |   | 210.4 |   |
| Net  income (loss)                                              |       | 17.3                             |       | (672.0 | ) | 325.1 |   |
| Net  loss (income) attributable to noncontrolling interest      |       | 3.8                              |       | 83.6 |   | (8.0 | ) |
| Net  income (loss) attributable to Rockwood Holdings, Inc. |       | $                                | 21.1       |   | $ | (588.4 | ) | $ | 317.1 |   |
| **Adjusted EBITDA:**                                            |       |                             |       |   |   |   |   |
| Specialty  Chemicals                                            |       | $                                | 245.7      |   | $ | 313.0 |   | $ | 262.2 |   |
|                                                            |       | 24.7                             | %          | 25.4 | % | 24.2 | % |
| Performance  Additives                                          |       | 95.1                             |       | 107.1 |   | 150.7 |   |
|                                                            |       | 14.2                             | %          | 12.8 | % | 18.9 | % |
| Titanium  Dioxide Pigments                                      |       | 97.3                             |       | 83.1 |   | 82.7 |   |
|                                                            |       | 14.6                             | %          | 15.5 | % | 18.7 | % |
| Advanced  Ceramics                                              |       | 107.7                            |       | 150.2 |   | 128.1 |   |
|                                                            |       | 26.1                             | %          | 29.7 | % | 28.3 | % |
| Specialty  Compounds                                            |       | 34.0                             |       | 34.0 |   | 34.3 |   |
|                                                            |       | 16.1                             | %          | 13.0 | % | 12.4 | % |
| Corporate  and other                                            |       | (39.3                            | )          | (48.5 | ) | (55.6 | ) |
| Total  Adjusted EBITDA                                          |       | $                                | 540.5      |   | $ | 638.9 |   | $ | 602.4 |   |

 

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

 

45

----

 
| ** **                                                 | ** ** | **Change: 2009 versus 2008** | ** ** | **Change: 2008 versus 2007** | ** ** |
|------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                 | ** ** | ** **                   | ** ** | ** **                   | ** ** | **Constant** | ** ** | **Constant** | ** ** | ** ** | ** ** | ** ** | ** ** | **Constant** | ** ** | **Constant** | ** ** |
| ** **                                                 | ** ** | ** **                   | ** ** | **%**                        | ** ** | **Currency** | ** ** | **Currency** | ** ** | ** ** | ** ** | **%** | ** ** | **Currency** | ** ** | **Currency** | ** ** |
| **($ in millions)**                                   | ** ** | **Total**                    | ** ** | **Change**                   | ** ** | **Effect (a)** | ** ** | **Basis** | ** ** | **Total** | ** ** | **Change** | ** ** | **Effect (a)** | ** ** | **Basis** | ** ** |
| **Statement of operations data:**                          |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net sales:**                                             |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                                       |       | $                            | (236.0     | )                            | (19.1      | )% | $ | (44.9 | ) | $ | (191.1 | ) | $ | 149.7 |   | 13.8 | % | $ | 53.0 |   | $ | 96.7 |   |
| Performance  Additives                                     |       | (164.1                       | )          | (19.6                        | )          | (31.2 | ) | (132.9 | ) | 37.1 |   | 4.6 |   | 3.8 |   | 33.3 |   |
| Titanium  Dioxide Pigments                                 |       | 131.5                        |       | 24.6                         |       | (9.0 | ) | 140.5 |   | 91.9 |   | 20.7 |   | 32.9 |   | 59.0 |   |
| Advanced  Ceramics                                         |       | (93.7                        | )          | (18.5                        | )          | (17.3 | ) | (76.4 | ) | 53.4 |   | 11.8 |   | 35.7 |   | 17.7 |   |
| Specialty  Compounds                                       |       | (50.8                        | )          | (19.4                        | )          | (12.2 | ) | (38.6 | ) | (15.1 | ) | (5.5 | ) | (3.1 | ) | (12.0 | ) |
| Corporate  and other                                       |       | (4.1                         | )          | (42.3                        | )          | (0.3 | ) | (3.8 | ) | (2.1 | ) | (17.8 | ) | 0.7 |   | (2.8 | ) |
| Total  net sales                                           |       | (417.2                       | )          | (12.3                        | )          | (114.9 | ) | (302.3 | ) | 314.9 |   | 10.3 |   | 123.0 |   | 191.9 |   |
|                                                       |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross  profit                                              |       | (159.1                       | )          | (15.7                        | )          | (31.4 | ) | (127.7 | ) | 38.2 |   | 3.9 |   | 45.9 |   | (7.7 | ) |
|                                                       |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling,  general and administrative expenses              |       | (47.2                        | )          | (7.1                         | )          | (26.0 | ) | (21.2 | ) | 63.7 |   | 10.7 |   | 25.5 |   | 38.2 |   |
| Impairment  charges                                        |       | (809.5                       | )          |                         |       |   |   | (809.5 | ) | 809.5 |   |   |   |   |   | 809.5 |   |
| Restructuring  and other severance costs                   |       | (14.5                        | )          |                         |       |   |   | (14.5 | ) | 23.3 |   |   |   |   |   | 23.3 |   |
| Loss  (gain) on sale of assets and other                   |       | 2.9                          |       |                         |       |   |   | 2.9 |   | 2.3 |   |   |   |   |   | 2.3 |   |
| Total  operating expenses                                  |       | (868.3                       | )          | (57.7                        | )          | (26.0 | ) | (842.3 | ) | 898.8 |   | 148.6 |   | 25.5 |   | 873.3 |   |
| **Operating income (loss):**                               |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                                       |       | (61.9                        | )          | (27.7                        | )          | (3.0 | ) | (58.9 | ) | 16.8 |   | 8.1 |   | 9.1 |   | 7.7 |   |
| Performance  Additives                                     |       | 457.8                        |       | 104.4                        |       | (1.7 | ) | 459.5 |   | (520.0 | ) | (638.0 | ) | 1.1 |   | (521.1 | ) |
| Titanium  Dioxide Pigments                                 |       | 245.4                        |       | 107.2                        |       | 0.7 |   | 244.7 |   | (267.4 | ) | (696.4 | ) | 1.8 |   | (269.2 | ) |
| Advanced  Ceramics                                         |       | (48.6                        | )          | (50.3                        | )          | (2.0 | ) | (46.6 | ) | 12.8 |   | 15.3 |   | 8.8 |   | 4.0 |   |
| Specialty  Compounds                                       |       | 107.0                        |       | 127.5                        |       | (0.3 | ) | 107.3 |   | (105.9 | ) | (481.4 | ) | 0.3 |   | (106.2 | ) |
| Corporate  and other                                       |       | 9.5                          |       | 16.3                         |       | 0.9 |   | 8.6 |   | 3.1 |   | 5.0 |   | (0.7 | ) | 3.8 |   |
| Total                                                      |       | 709.2                        |       | 144.9                        |       | (5.4 | ) | 714.6 |   | (860.6 | ) | (231.8 | ) | 20.4 |   | (881.0 | ) |
| **Other expenses, net:**                                   |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  expense                                          |       | 50.9                         |       | (22.0                        | )          | 6.7 |   | 44.2 |   | (11.8 | ) | (5.4 | ) | 0.9 |   | (12.7 | ) |
| Interest  income                                           |       | (3.9                         | )          | (65.0                        | )          | (0.2 | ) | (3.7 | ) | (5.5 | ) | (47.8 | ) | (0.3 | ) | (5.2 | ) |
| Gain  (loss) on early extinguishment of debt               |       | (30.6                        | )          |                         |       |   |   |   |   | 22.6 |   |   |   |   |   |   |   |
| Refinancing  expenses                                      |       | —                       |       |                         |       |   |   |   |   | 0.9 |   |   |   |   |   |   |   |
| Foreign  exchange gain (loss), net                         |       | 48.3                         |       |                         |       |   |   |   |   | (40.1 | ) |   |   |   |   |   |   |
| Other,  net                                                |       | (0.1                         | )          |                         |       |   |   |   |   | 0.7 |   |   |   |   |   |   |   |
| Other  expenses, net                                       |       | 64.6                         |       |                         |       |   |   |   |   | (33.2 | ) |   |   |   |   |   |   |
| **Income (loss) from continuing operations before taxes**  |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                                       |       | (80.0                        | )          |                         |       |   |   |   |   | 1.1 |   |   |   |   |   |   |   |
| Performance  Additives                                     |       | 455.6                        |       |                         |       |   |   |   |   | (533.1 | ) |   |   |   |   |   |   |
| Titanium  Dioxide Pigments                                 |       | 258.0                        |       |                         |       |   |   |   |   | (272.3 | ) |   |   |   |   |   |   |
| Advanced  Ceramics                                         |       | (56.0                        | )          |                         |       |   |   |   |   | 10.4 |   |   |   |   |   |   |   |
| Specialty  Compounds                                       |       | 105.0                        |       |                         |       |   |   |   |   | (104.6 | ) |   |   |   |   |   |   |
| Corporate  and other                                       |       | 91.2                         |       |                         |       |   |   |   |   | 4.7 |   |   |   |   |   |   |   |
| Total                                                      |       | 773.8                        |       |                         |       |   |   |   |   | (893.8 | ) |   |   |   |   |   |   |
| Income  tax provision (benefit)                            |       | 41.1                         |       |                         |       |   |   |   |   | (86.2 | ) |   |   |   |   |   |   |
| Income  (loss) from continuing operations                  |       | 732.7                        |       |                         |       |   |   |   |   | (807.6 | ) |   |   |   |   |   |   |
| Income  from discontinued operations, net of tax           |       | (0.5                         | )          |                         |       |   |   |   |   | (22.0 | ) |   |   |   |   |   |   |
| Gain  on sale of discontinued operations, net of tax       |       | (42.9                        | )          |                         |       |   |   |   |   | (167.5 | ) |   |   |   |   |   |   |
| Net income  (loss)                                         |       | 689.3                        |       |                         |       |   |   |   |   | (997.1 | ) |   |   |   |   |   |   |
| Net  loss (income) attributable to noncontrolling interest |       | (79.8                        | )          |                         |       |   |   |   |   | 91.6 |   |   |   |   |   |   |   |
| Net  income (loss) attributable to Rockwood Holdings, Inc. |       | $                            | 609.5      |                         |       |   |   |   |   |   | $ | (905.5 | ) |   |   |   |   |   |   |
| **Adjusted EBITDA:**                                       |       |                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                                       |       | $                            | (67.3      | )                            | (21.5      | )% | $ | (6.2 | ) | $ | (61.1 | ) | $ | 50.8 |   | 19.4 | % | $ | 11.7 |   | $ | 39.1 |   |
| Performance  Additives                                     |       | (12.0                        | )          | (11.2                        | )          | (4.1 | ) | (7.9 | ) | (43.6 | ) | (28.9 | ) | 2.0 |   | (45.6 | ) |
| Titanium  Dioxide Pigments                                 |       | 14.2                         |       | 17.1                         |       | (1.0 | ) | 15.2 |   | 0.4 |   | 0.5 |   | 5.2 |   | (4.8 | ) |
| Advanced  Ceramics                                         |       | (42.5                        | )          | (28.3                        | )          | (4.5 | ) | (38.0 | ) | 22.1 |   | 17.3 |   | 12.0 |   | 10.1 |   |
| Specialty  Compounds                                       |       | —                       |       | —                       |       | (1.3 | ) | 1.3 |   | (0.3 | ) | (0.9 | ) | — |   | (0.3 | ) |
| Corporate  and other                                       |       | 9.2                          |       | 19.0                         |       | 0.7 |   | 8.5 |   | 7.1 |   | 12.8 |   | (0.8 | ) | 7.9 |   |
| Total  Adjusted EBITDA                                     |       | $                            | (98.4      | )                            | (15.4      | )% | $ | (16.4 | ) | $ | (82.0 | ) | $ | 36.5 |   | 6.1 | % | $ | 30.1 |   | $ | 6.4 |   |

 

----

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

 

46

----

 

***Year ended December 31, 2009 comparedto year ended December 31, 2008***

 

**Overview**

 

Net sales decreased$417.2 million for the year ended December 31, 2009 compared with the sameperiod in the prior year primarily due to lower volumes and the negative impactof currency changes of $114.9 million, partially offset by increased sellingprices of $59.2 million and bolt-on acquisitions, particularly the TitaniumDioxide Pigments venture with Kemira. See further discussion by segment below.

 

Operating incomeincreased $709.2 million for the year ended December 31, 2009 comparedwith the same period in the prior year primarily due to the goodwill impairmentcharge of $809.5 million recorded in the prior year, as well as higher sellingprices, lower raw material costs and other cost control measures throughout theCompany. This was partially offset by lower sales volumes and the negativeimpact of currency changes of $5.4 million.

 

Adjusted EBITDA decreased$98.4 million for the year ended December 31, 2009 compared with the sameperiod in the prior year primarily due to lower sales volumes and the negativeimpact of currency changes of $16.4 million. This was partially offset by higher selling prices, lower raw materialcosts, as well as other cost control measures throughout the Company.

 

Net income fromcontinuing operations increased $732.7 million for the year ended December 31,2009 compared with the same period in the prior year primarily from thegoodwill impairment charge recorded in the prior year, lower interest expenserecorded in the current year due to decreased mark-to-market losses on ourinterest rate hedging instruments and increased foreign exchange gains onfinancing activities recorded in the current year.  This was partially offset by lower salesvolumes and increased expenses due to the early extinguishment of debt, netprimarily related to the amendment of our senior secured credit facility in June 2009.

 

Income from discontinuedoperations, net of tax was $2.8 million for the year ended December 31,2009 and was primarily due to the favorable resolution of a claim against theCompany’s former Groupe Novasep business and the reversal of certain reservesno longer deemed necessary in connection with the sale of the Electronicsbusiness in December 2007. Income from discontinued operations, net of taxwas $3.3 million in the year ended December 31, 2008 from operating thepool and spa chemicals business that was sold in October 2008.

 

The gain on sale ofdiscontinued operations, net of tax for the year ended December 31, 2008of $42.9 million is primarily related to the sale of the pool and spa chemicalsbusiness in October 2008.

 

Net loss attributable tononcontrolling interest decreased $79.8 million for the year ended December 31,2009 compared with the same period in the prior year primarily due to thegoodwill impairment charge recorded in the Titanium Dioxide Pigment’s venturein the fourth quarter of 2008.

 

Net income attributableto Rockwood Holdings, Inc. increased $609.5 million for the year ended December 31,2009 compared with the same period in the prior year due to the reasons notedabove.

 

**Netsales**

 

*SpecialtyChemicals*.  Netsales decreased $236.0 million over the prior year primarily due to lowervolumes and the negative impact of currency changes of $44.9 million. Inthe Fine Chemicals business, lower volumes in most products, particularly inlithium and metal sulfide applications, were partially offset by higher sellingprices. Net sales in the Surface Treatment business were lower on decreasedvolumes, particularly in general industrial and automotive applications,partially offset by higher selling prices and the impact of a bolt-onacquisition in September 2008.

 

*PerformanceAdditives*.  Netsales decreased $164.1 million over the prior year primarily due to lowervolumes of construction-related products in our Color Pigments and Services andTimber Treatment Chemicals businesses, lower volumes in our Clay-basedAdditives business and the negative impact of currency changes of $31.2million. This decrease was partially offset by increased selling prices and theimpact of a bolt-on acquisition in August 2008.

 

*TitaniumDioxide Pigments*.  Netsales increased $131.5 million over the prior year due to the completion of theventure with Kemira on September 1, 2008, as well as increased sellingprices. This was partially offset by lower volumes of titanium dioxideproducts and functional additives, and the negative impact of currency changesof $9.0 million.

 

*AdvancedCeramics*.  Netsales decreased $93.7 million over the prior year primarily due to lowervolumes in most applications and the negative impact of currency changes of$17.3 million, partially offset by the impact of a bolt-on acquisition in October 2008and higher volumes of medical applications.

 

47

----

 

*SpecialtyCompounds*.  Netsales decreased $50.8 million over the prior year primarily due to lowervolumes and selling prices in most applications, particularly in wire andcable, and the negative impact of currency changes of $12.2 million.

 

*Corporateand other*.  Netsales decreased $4.1 million over the prior year primarily due to lower volumesin the wafer reclaim business.

 

**Grossprofit**

 

Gross profit decreased $159.1million over the prior year primarily due to the sales volume decreases notedabove and the negative impact of currency changes of $31.4 million. Inaddition, depreciation and amortization costs were higher in most businessesprimarily from the impact of acquisitions. The decrease in gross profitwas partially offset by lower raw material costs and cost control measuresundertaken throughout the Company. Gross profit as a percentage of netsales decreased to 28.9% for the year ended December 31, 2009 from 30.0%for the year ended December 31, 2008.

 

**Selling,general and administrative expenses**

 

Selling, general andadministrative expenses, or SG&A, decreased $47.2 million over the prioryear primarily from lower compensation-related costs and professional fees,other cost control measures undertaken throughout the Company, as well as theimpact of currency changes of $26.0 million. SG&A expenses as apercentage of net sales were 20.7% and 19.6% for the year ended December 31,2009 and 2008, respectively.

 

**Impairmentcharges**

 

We recorded a goodwillimpairment charge of $809.5 million in the fourth quarter of 2008 due to thesignificant drop in global stock valuations, the substantial reduction in themarket valuation of Rockwood and comparable companies, and the negative globaleconomic and market outlook. In particular, the downturn in the constructionindustry had a negative impact on a number of our businesses. As a result, werecorded a non-cash goodwill impairment charge in the following businesses: ColorPigments and Services ($293.2 million), Timber Treatment Chemicals ($88.3million) and Clay-based Additives ($75.1 million) within our PerformanceAdditives segment; Titanium Dioxide Pigments segment ($247.7 million); andSpecialty Compounds segment ($105.2 million). See further discussion in “CriticalAccounting Policies and Estimates,” in Item 7, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations,” and Note 9, “Goodwill.”

 

**Restructuringand other severance costs**

 

We recorded $20.8 millionand $35.3 million of restructuring and other severance costs for the year endedDecember 31, 2009 and 2008, respectively, throughout the Company. See Note 18, “Restructuring And Other Severance Costs,” for further details.

 

**Loss/Gainon sale of assets**

 

We recorded a loss of$0.5 million for the year ended December 31, 2009 primarily related to thesale of property, plant and equipment within the Specialty Chemicals andAdvanced Ceramics segments. We recorded a gain of $2.4 million for the yearended December 31, 2008 primarily related to the sale of land.

 

**Operatingincome**

 

*SpecialtyChemicals*.  Operating income decreased $61.9 million over the prior year primarily due tothe lower volumes discussed above, increased depreciation and amortizationcosts of $4.4 million, and the negative impact of currency changes of $3.0million. This decrease was partially offset by lower restructuring and otherseverance costs of $11.4 million, higher selling prices, cost control measuresand the impact of a bolt-on acquisition.

 

*PerformanceAdditives*.  Operating income increased $457.8 million over the prior year due to thegoodwill impairment charge of $456.6 million recorded in the prior year. Higherselling prices, lower raw material costs of $8.1 million, lower restructuringand other severance costs of $4.0 million, cost control measures and the impactof a bolt-on acquisition also had a favorable impact on results. This increasewas partially offset by the lower sales volumes discussed above.

 

*TitaniumDioxide Pigments*.  Operating income increased $245.4 million over the prior year primarily due tothe goodwill impairment charge of $247.7 million recorded in the prior year,lower raw material costs of $12.1 million, higher selling prices, as well ascost control measures.  This waspartially offset by the lower sales volumes noted above and increaseddepreciation and amortization costs of $21.4 million primarily related to theKemira venture completed in September 2008.

 

48

----

 

*AdvancedCeramics*.  Operating income decreased $48.6 million over the prior year primarily due tothe lower volumes noted above,  increaseddepreciation and amortization costs of $5.0 million, increased restructuringand other severance costs of $2.6 million and the negative impact of currencychanges of $2.0 million. This decrease was partially offset by cost controlmeasures, the impact of a bolt-on acquisition in October 2008 and highervolumes of medical applications.

 

*SpecialtyCompounds*.  Operating income increased $107.0 million over the prior year due to thegoodwill impairment charge of $105.2 million, lower raw material costs of $12.6million, particularly PVC resin and plasticizer costs, and lower operatingcosts. This was partially offset by the lower sales volumes and selling pricesdiscussed above.

 

*Corporateand other.*  Operating loss decreased $9.5 million primarily due to lowercompensation-related costs and professional fees, as well as other cost controlmeasures undertaken throughout the Company.

 

**Otherincome (expenses)**

 

*Interestexpense*.  Interestexpense decreased $50.9 million over the prior year. The years ended December 31,2009 and 2008 included gains of $3.9 million and losses of $51.5 million, respectively,representing the movement in the mark-to-market valuation of our interest ratehedging instruments. Excluding the impact of these gains and losses, interestexpense increased $4.5 million due to higher interest rates related to theamendment of our senior secured credit facility in June 2009 and debtincurred during the third quarter of 2008 related to the Titanium DioxidePigments venture with Kemira, partially offset by debt repayments.

 

*Interestincome*.  Interestincome decreased $3.9 million for the year ended December 31, 2009compared to the same period in the prior year due to lower short-term averageinterest rates.

 

*Gain/Losson early extinguishment of debt.*   For the year ended December 31,2009, we recorded a loss on early extinguishment of debt of $26.6 millionprimarily related to the write-off of deferred financing costs of $20.9 millionand lender fees related to the early extinguishment of debt of $12.0 million,partially offset by a discount of $6.3 million related to the repurchase of$153.2 million in aggregate principal amount of the 2014 Notes.  For the year ended December 31, 2008, weredeemed €11.0 million of our senior subordinated notes due in 2014 at adiscount and recorded a gain of $4.0 million.

 

*Foreignexchange, net*.  Forthe year ended December 31, 2009, foreign exchange gains of $16.0 millionwere reported primarily due to the impact of the stronger pound sterling, aswell as a stronger euro, as of December 31, 2009 versus December 31,2008, in connection with non-operating Euro and Pound Sterling denominatedtransactions.  For the year ended December 31,2008, we had foreign exchange losses of $32.3 million primarily due to theimpact of the weaker Pound Sterling as of December 31, 2008 versus December 31,2007 related to non-operating euro-denominated transactions.

 

**Provisionfor income taxes**

 

The effective income taxrate for the year ended December 31, 2009 was 54.3% and an income taxprovision of $17.2 million was recorded for the year ended December 31,2009. The effective income tax rate compared to the federal statutory rate wasnegatively impacted by domestic losses which are not tax effected as a resultof a full valuation allowance and was positively impacted by a non-recurringtax benefit related to foreign currency changes and geographic earnings mix.The effective income tax rate for the year ended December 31, 2008 was3.2% and an income tax benefit of $23.9 million was recorded for the year endedDecember 31, 2008. The effective income tax rate compared to the federalstatutory rate was negatively impacted primarily by non-deductible bookgoodwill impairments. It was also impacted negatively by domestic losses whichare not tax effected as a result of a full valuation allowance and positivelyimpacted by an allocation of tax benefits to continuing operations.

 

**Income(loss) from continuing operations**

 

Income from continuingoperations for the year ended December 31, 2009 was $14.5 million ascompared to a loss from continuing operations of $718.2 million for the yearended December 31, 2008 for the reasons described above.

 

**Incomefrom discontinued operations, net of tax**

 

Income from discontinuedoperations, net of tax was $2.8 million for the year ended December 31,2009 and was due to the favorable resolution of a claim against the Company’sformer Groupe Novasep business and the reversal of certain reserves no longerdeemed necessary in connection with the sale of the Electronics business in December 2007. Income from discontinued operations, net of tax was $3.3 million for the yearended December 31, 2008 from operating the pool and spa chemicals businessthat was sold in October 2008.

 

49

----

 

**Gain onsale of discontinued operations, net of tax**

 

The gain on sale ofdiscontinued operations, net of tax, of $42.9 million recorded for the yearended December 31, 2008 is primarily related to the sale of the pool andspa chemicals business in October 2008.

 

**Net lossattributable to noncontrolling interest**

 

Net loss attributable tononcontrolling interest of $3.8 million and $83.6 million for the year ended December 31,2009 and 2008, respectively, was recorded.  Noncontrolling interestprimarily represents the noncontrolling interest portion of the Viance, LLCjoint venture that was completed in January 2007 and the noncontrollinginterest portion of the Titanium Dioxide Pigments venture completed in September 2008.The change from the prior year primarily relates to the goodwill impairmentcharge recorded in the Titanium Dioxide Pigments venture in the fourth quarterof 2008.

 

**Netincome (loss) attributable to Rockwood Holdings, Inc.**

 

Net income attributableto Rockwood Holdings, Inc. for the year ended December 31, 2009 was$21.1 million (income of $18.3 million from continuing operations and incomefrom discontinued operations of $2.8 million) as compared to a net lossattributable to Rockwood Holdings, Inc. of $588.4 million (loss of $634.6million from continuing operations and income from discontinued operations of$46.2 million) for the same period in the prior year for the reasons describedabove.

 

**AdjustedEBITDA**

 

*SpecialtyChemicals*.  AdjustedEBITDA decreased $67.3 million over the prior year primarily due to the lowervolumes discussed above and the negative impact of currency changes of $6.2million. This decrease was partially offset by higher selling prices, costcontrol measures and the impact of a bolt-on acquisition.

 

*PerformanceAdditives*.  AdjustedEBITDA decreased $12.0 million over the prior year due to the lower volumes andthe negative impact of currency changes of $4.1 million. This decrease waspartially offset by higher selling prices, lower raw material costs of $8.1million, cost control measures and the impact of a bolt-on acquisition.

 

*TitaniumDioxide Pigments*.  AdjustedEBITDA increased $14.2 million over the prior year due to increased salesrelated to the completion of the venture with Kemira, lower raw material costsof $12.1 million, higher selling prices, as well as cost control measures.

 

*AdvancedCeramics*.  AdjustedEBITDA decreased $42.5 million over the prior year primarily due to the lowervolumes noted above and the negative impact of currency changes of $4.5 million.This decrease was partially offset by cost control measures, the impact of abolt-on acquisition in October 2008 and higher volumes of medicalapplications.

 

*SpecialtyCompounds*.  AdjustedEBITDA was flat versus the prior year as lower raw material costs of $12.6million were offset by lower sales volumes and selling prices, as well as thenegative impact of currency changes of $1.3 million.

 

*Corporateand other. *AdjustedEBITDA increased $9.2 million primarily due to lower compensation-related costsand professional fees, as well as other cost control measures undertakenthroughout the Company.

 

***Year ended December 31, 2008 comparedto year ended December 31, 2007***

 

**Overview**

 

Net sales increased$314.9 million for the year ended December 31, 2008 compared with theprior year primarily due to the impact of bolt-on acquisitions, the positiveimpact of currency changes of $123.0 million and increased selling prices of$115.6 million. See further discussion by segment below.

 

Operating incomedecreased $860.6 million for the year ended December 31, 2008 comparedwith the prior year due to a goodwill impairment charge of $809.5 million,lower sales volumes, higher raw material and energy costs in all businesses andrestructuring and other severance costs recorded in 2008 primarily related tocost control measures. The positive impact of currency changes of $20.4million, increased selling prices and lower corporate costs due to decreasedincentive compensation-related costs and professional fees had a favorable impacton operating income.

 

Adjusted EBITDA increased$36.5 million for the year ended December 31, 2008 primarily due to thepositive impact of currency changes of $30.1 million, the selling priceincreases noted above and decreased corporate costs.

 

50

----

 

Net income fromcontinuing operations decreased $807.6 million compared with the prior yearprimarily from the goodwill impairment charge, higher interest expense recordedin the year ended December 31, 2008 due to an increase in mark-to-marketlosses on our interest rate hedging instruments and increased foreign exchangelosses on financing activities recorded in 2008. This was partially offsetby the increases noted above and costs of $18.6 million incurred in 2007 toredeem our 2011 Notes.

 

Income from discontinuedoperations, net of tax was $3.3 million for the year ended December 31,2008 and was comprised of income from operating the pool and spa chemicalsbusiness that was sold in October 2008. In the year ended December 31,2007, income from discontinued operations, net of tax was $25.3 million and wasprimarily comprised of income from operating the pool and spa chemicalsbusiness and the Electronics business which was sold in December 2007.

 

The gain on sale ofdiscontinued operations, net of tax for the year ended December 31, 2008of $42.9 million is primarily related to the sale of the pool and spa chemicalsbusiness in October 2008. For the year ended December 31, 2007, thegain on sale of discontinued operations of $210.4 million is related to gain of$115.6 million (net of taxes) on the sale of Groupe Novasep and the gain of$94.8 million (net of taxes) on the sale of the Electronics business.

 

Net loss attributable tononcontrolling interest increased $91.6 million compared with the prior yearprimarily related to the goodwill impairment charge recorded in the TitaniumDioxide Pigments venture in the fourth quarter of 2008.

 

Net income attributableto Rockwood Holdings, Inc. decreased $905.5 million compared with the sameperiod in the prior year due to the reasons noted above.

 

**Netsales**

 

*SpecialtyChemicals*.  Netsales increased $149.7 million over the prior year, including the positiveimpact of currency changes of $53.0 million. In the Fine Chemicals business,higher selling prices of lithium products, as well as increased volumes, had afavorable impact on net sales. Net sales in the Surface Treatment business werefavorably impacted by higher selling prices and the impact of bolt-on acquisitionsin December 2007 and September 2008.

 

*PerformanceAdditives*.  Netsales increased $37.1 million over the prior year due to acquisitions in August 2007and 2008.  Also, increased selling prices in our Color Pigments andServices and Clay-based Additives businesses and the positive impact ofcurrency changes of $3.8 million had a favorable impact on net sales. This waspartially offset by lower volumes of construction-related products in our ColorPigments and Services and Timber Treatment Chemicals businesses.

 

*TitaniumDioxide Pigments*.  Netsales increased $91.9 million over the prior year due to the completion of theventure with Kemira on September 1, 2008 and the positive impact ofcurrency changes of $32.9 million.  This was partially offset by significantlylower net sales on lower volumes, as well as lower selling prices of titaniumdioxide products, primarily commodity grade, and lower volumes of functionaladditives.

 

*AdvancedCeramics*.  Netsales increased $53.4 million over the prior year primarily due to the positiveimpact of currency changes of $35.7 million, increased volumes of medicalapplications and the impact of bolt-on acquisitions made in April 2007 andOctober 2008. This was partially offset by lower selling prices andvolumes in most applications, particularly in mechanical systems andapplications and multifunctional ceramics.

 

*SpecialtyCompounds*.  Net sales decreased $15.1 million over the prior year due to lower volumes inmost businesses, particularly in wire and cable and regulated packagingapplications, and the negative impact of currency changes of $3.1million.  This was partially offset by increased selling prices.

 

*Corporateand other*.  Net sales decreased $2.1 million over the prior year due to lower volumes andselling prices in the European wafer reclaim business.

 

**Grossprofit**

 

Gross profit increased$38.2 million over the prior year due to the positive impact of currencychanges of $45.9 million and the sales increases noted above, in particularselling price increases. This was partially offset by raw material costincreases, particularly from the impact of higher phosphoric acid and tin costsin our Specialty Chemicals segment, higher iron-oxide costs in our ColorPigments and Services business, higher quat costs in our Clay-based additivesbusiness and higher ethylene vinyl acetate, plasticizer and PVC resin costs inour Specialty Compounds segment. We also experienced lower volumes in our ColorPigments and Services, Timber Treatment Chemicals and Titanium Dioxide Pigmentsbusinesses and higher depreciation and amortization costs in most businessesincluding the impact of acquisitions. Gross profit as a percentage of netsales decreased to 30.0% for the year ended December 31, 

 

51

----

 

2008 from 31.8% for theyear ended December 31, 2007.

 

**Selling,general and administrative expenses**

 

Selling, general andadministrative expenses, or SG&A, increased $63.7 million over the prioryear due in part to the impact of currency changes of $25.5 million. HigherSG&A costs were also recorded in a few segments, particularly in SpecialtyChemicals and Advanced Ceramics, related to increased sales volumes. SG&Aexpenses as a percentage of net sales was 19.6% in the year ended December 31,2008 compared to 19.5% for the year ended December 31, 2007.

 

**Impairmentcharges**

 

We recorded a goodwillimpairment charge of $809.5 million in the fourth quarter of 2008 due to thesignificant drop in global stock valuations, the substantial reduction in themarket valuation of Rockwood and comparable companies, and the continuingnegative global economic and market outlook. In particular, the downturn in theconstruction industry has had a negative impact on a number of our businesses.As a result, we recorded a non-cash goodwill impairment charge in the followingbusinesses: Color Pigments and Services ($293.2 million), Timber TreatmentChemicals ($88.3 million) and Clay-based Additives ($75.1 million) within ourPerformance Additives segment; Titanium Dioxide Pigments segment ($247.7million); and Specialty Compounds segment ($105.2 million). See furtherdiscussion in “Critical Accounting Policies and Estimates,” in Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” andNote 9, “Goodwill.”

 

**Restructuringand other severance costs**

 

We recorded $35.3 millionof restructuring and other severance costs for the year ended December 31,2008 throughout the Company.  These charges primarily related to headcountreductions as part of our global cost control initiatives.  We recorded$12.0 million of restructuring charges for the year ended December 31,2007 for miscellaneous restructuring actions in the Specialty Chemicals,Performance Additives, Advanced Ceramics and Corporate and other segments forheadcount reductions and facility closures. See Note 18, “Restructuring AndOther Severance Costs,” for further details.

 

**Gain onsale of assets**

 

We recorded a gain of$2.4 million for the year ended December 31, 2008 primarily related to thesale of land that was acquired as part of the acquisition of Dynamit Nobel in2004. For the year ended December, 2007, we recorded a gain of $4.7 millionprimarily related to the sale of our U.S. wafer reclaim business.

 

**Operatingincome**

 

*SpecialtyChemicals*.  Operating income increased $16.8 million over the prior year primarily due tothe positive impact of currency changes of $9.1 million and higher salesdiscussed above. This increase was partially offset by higher raw material costsof $25.5 million, primarily for phosphoric acid and tin, increased depreciationand amortization costs of $15.3 million, including the impact of bolt-onacquisitions made in December 2007 and September 2008, and increasedrestructuring and other severance costs of $14.6 million.

 

*PerformanceAdditives*.  Operating income decreased $520.0 million over the prior year due to thegoodwill impairment charge of $456.6 million, lower sales volumes discussedabove, and higher raw material costs of $46.7 million, particularly higheriron-oxide costs in the Color Pigments and Services business and higher quatcosts in our Clay-based Additives business. Higher depreciation andamortization costs of $9.6 million primarily due to the acquisitions made in August 2007and 2008 and increased restructuring and other severance costs of $8.1 millionalso had an unfavorable impact on operating income.

 

*TitaniumDioxide Pigments*.  Operating income decreased $267.4 million over the prior year primarily due tothe goodwill impairment charge of $247.7 million, lower sales volumes andselling prices discussed above, increased depreciation and amortization costsof $13.9 million and higher energy costs of $8.7 million. This was partiallyoffset by increased sales related to the completion of the venture with Kemiraon September 1, 2008.

 

*AdvancedCeramics*.  Operating income increased $12.8 million over the prior year primarily due tothe positive impact of currency changes of $8.8 million, the increased salesvolumes noted above and productivity improvements. The impact of bolt-onacquisitions made in April 2007 and October 2008 also had a favorableimpact on operating income. This increase was partially offset by lower sellingprices and increased depreciation and amortization costs of $6.5 millionprimarily related to the acquisitions discussed above.

 

*SpecialtyCompounds*.  Operating income decreased $105.9 million over the prior year due to thegoodwill impairment charge of $105.2 million, lower sales volumes discussedabove and higher raw material costs of $12.6 million, particularly ethylenevinyl 

 

52

----

 

acetate, plasticizer andPVC resin costs.  This was partially offset by lower operating costs andhigher selling prices.

 

*Corporateand other.*  Operating loss decreased $3.1 million primarily due to lower incentivecompensation related costs and lower professional fees, partially offset bylower gains on asset sales and higher depreciation and amortization costs.

 

**Otherincome (expenses)**

 

*Interestexpense*.  Interestexpense increased $11.8 million over the prior year. The years ended December 31,2008 and 2007 included losses of $51.5 million and $32.2 million, respectively,representing the movement in the mark-to-market valuation of our interest ratehedging instruments. The remaining interest expense decrease of $7.5 million isprimarily due to the redemption of the 2011 Notes in May 2007 in theaggregate amount of $273.4 million, partially offset by increased debt levelsrelated to the completion of the Titanium Dioxide Pigments venture.

 

*Interestincome*. Interestincome decreased $5.5 million for the year ended December 31, 2008compared to the same period in the prior year due to lower average cashbalances in 2008 compared to the prior year and lower short-term average rates.

 

*Gain/Losson early extinguishment of debt.*  In the fourth quarter of 2008, we redeemed€11.0 million of our senior subordinated notes due in 2014 at a discount andrecorded a gain of $4.0 million.  In thesecond quarter of 2007, we paid a redemption premium of $14.5 million and wroteoff $4.1 million of deferred financing costs associated with the redemption ofthe 2011 Notes in May 2007.

 

*Refinancingexpenses*. In March 2007, we expensed $0.9 million related to the fourth amendment ofthe senior secured credit agreement resulting in a 50 basis point reduction onour tranche G term loans.

 

*Foreignexchange, net*.  Forthe year ended December 31, 2008, we had foreign exchange losses of $32.3million primarily due to the impact of the weaker Pound Sterling as of December 31,2008 versus December 31, 2007 related to non-operating euro-denominatedtransactions. For the year ended December 31, 2007, we had foreignexchange gains of $7.8 million primarily related to euro-denominated debt, cashand inter-company loans.

 

**Provisionfor income taxes**

 

The effective income taxrate for the year ended December 31, 2008 was 3.2% and an income taxbenefit of $23.9 million was recorded for the year ended December 31,2008. The effective income tax rate compared to the federal statutory rate wasnegatively impacted primarily by non-deductible book goodwill impairments. Itwas also impacted negatively by domestic losses which are not tax effected as aresult of a full valuation allowance and positively impacted by an allocationof tax benefits to continuing operations. The effective income tax rate was41.1% for the year ended December 31, 2007 and was favorably impacted bycertain non-recurring items, primarily related to the impact of a statutoryrate change in certain European jurisdictions and the allocation of tax benefitsto continuing operations.

 

**(Loss)income from continuing operations**

 

Loss from continuingoperations for the year ended December 31, 2008 was $718.2 million ascompared to income from continuing operations of $89.4 million for the yearended December 31, 2007 for the reasons described above.

 

**Incomefrom discontinued operations, net of tax**

 

Income from discontinuedoperations, net of tax was $3.3 million for the year ended December 31,2008 from operating the pool and spa chemicals business that was sold in October 2008,compared to $25.3 million for the year ended December 31, 2007, due toincome from operating the Electronics business, that was sold in December 2007and the pool and spa chemicals business.

 

**Gain onsale of discontinued operations, net of tax**

 

The gain on sale ofdiscontinued operations, net of tax, of $42.9 million recorded for the yearended December 31, 2008 is primarily related to the sale of the pool andspa chemicals business in October 2008.  For the year ended December 31,2007, we recorded a gain on sale, net of tax, of $115.6 million as a result ofthe sale of the Groupe Novasep segment in January 2007 and a gain, net oftax, of $94.8 million as a result of the sale of the Electronics business in December 2007.

 

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

 

Net loss (income)attributable to noncontrolling interest of $83.6 million and $(8.0) million forthe year ended December 31, 2008 and 2007, respectively, wasrecorded.  Noncontrolling interest primarily represents the noncontrollinginterest portion of the Viance, LLC 

 

53

----

 

joint venture that wascompleted in January 2007 and the noncontrolling interest portion of theTitanium Dioxide Pigments venture completed in September 2008. The changefrom the prior year primarily relates to the goodwill impairment chargerecorded in the Titanium Dioxide Pigments venture in the fourth quarter of2008.

 

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

 

Net loss attributable toRockwood Holdings, Inc. for the year ended December 31, 2008 was$588.4 million (loss of $634.6 million from continuing operations and incomefrom discontinued operations of $46.2 million) as compared to net incomeattributable to Rockwood Holdings, Inc. of $317.1 million (income of $81.5million from continuing operations and income from discontinued operations of$235.6 million) for the same period in the prior year for the reasons describedabove.

 

**AdjustedEBITDA**

 

*SpecialtyChemicals*.  Adjusted EBITDA increased $50.8 million over the prior year primarily due tothe impact of higher sales discussed above and the positive impact of currencychanges of $11.7 million. This increase was partially offset by higher rawmaterial costs of $25.5 million as discussed above.

 

*PerformanceAdditives*.  Adjusted EBITDA decreased $43.6 million over the prior year due to lower salesvolumes and higher raw material costs of $46.7 million as discussed above.

 

*TitaniumDioxide Pigments*.  Adjusted EBITDA increased $0.4 million over the prior year primarily due to theimpact of currency changes of $5.2 million, as well as by increased salesrelated to the completion of the venture with Kemira on September 1, 2008.This was partially offset by the lower sales volumes and selling pricesdiscussed above and higher energy costs of $8.7 million.

 

*AdvancedCeramics*.  Adjusted EBITDA increased $22.1 million over the prior year primarily due tothe impact of the increased sales volumes noted above, productivityimprovements and the positive impact of currency changes of $12.0 million. Theimpact of bolt-on acquisitions made in April 2007 and October 2008also had a favorable impact on Adjusted EBITDA. This increase was partiallyoffset by lower selling prices.

 

*SpecialtyCompounds*.  Adjusted EBITDA decreased $0.3 million primarily due to the lower sales volumesdiscussed above and higher raw material costs of $12.6 million, particularlyethylene vinyl acetate, plasticizer and PVC resin costs.  This waspartially offset by lower operating costs and higher selling prices.

 

*Corporateand other.*  Adjusted EBITDA increased $7.1 million primarily due to lower incentivecompensation related costs and lower professional fees.

 

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

 

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

 

54

----

 
| ** **                                                      | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------|------------|
| **($ in millions)**                                        | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net  income (loss) attributable to Rockwood Holdings, Inc. |       | $                                | 21.1       |   | $ | (588.4 | ) | $ | 317.1 |   |
| Net  (loss) income attributable to noncontrolling interest      |       | (3.8                             | )          | (83.6 | ) | 8.0 |   |
| Net  income (loss)                                              |       | 17.3                             |       | (672.0 | ) | 325.1 |   |
| Income  tax provision (benefit)                                 |       | 17.2                             |       | (23.9 | ) | 62.3 |   |
| Income  from discontinued operations, net of tax                |       | (2.8                             | )          | (3.3 | ) | (25.3 | ) |
| Gain  on sale of discontinued operations, net of tax            |       | —                           |       | (42.9 | ) | (210.4 | ) |
| Income  (loss) from continuing operations before taxes          |       | 31.7                             |       | (742.1 | ) | 151.7 |   |
| Interest  expense (a)                                           |       | 180.2                            |       | 231.1 |   | 219.3 |   |
| Interest  income                                                |       | (2.1                             | )          | (6.0 | ) | (11.5 | ) |
| Depreciation  and amortization                                  |       | 283.0                            |       | 258.9 |   | 211.7 |   |
| Impairment  charges                                             |       | —                           |       | 809.5 |   | — |   |
| Restructuring  and other severance costs                        |       | 20.8                             |       | 35.3 |   | 12.0 |   |
| Systems/organization  establishment expenses                    |       | 6.3                              |       | 12.9 |   | 4.2 |   |
| Acquisition  and disposal costs                                 |       | 3.0                              |       | 1.7 |   | 2.3 |   |
| Inventory  write-up charges                                     |       | —                           |       | 6.9 |   | 5.7 |   |
| Loss  (gain) loss on early extinguishment of debt               |       | 26.6                             |       | (4.0 | ) | 18.6 |   |
| Refinancing  expenses                                           |       | —                           |       | — |   | 0.9 |   |
| Acquired  in-process research and development                   |       | —                           |       | 2.9 |   | — |   |
| Loss  (gain) on sale of assets and other                        |       | 0.5                              |       | (2.4 | ) | (4.7 | ) |
| Foreign  exchange (gain) loss, net                              |       | (16.0                            | )          | 32.3 |   | (7.8 | ) |
| Other                                                           |       | 6.5                              |       | 1.9 |   | — |   |
| Total  Adjusted EBITDA (b)                                      |       | $                                | 540.5      |   | $ | 638.9 |   | $ | 602.4 |   |

 

----

(a)                Includes gains (losses) of $3.9 million, $(51.5)million and $(32.2) million for the years ended December 31, 2009, 2008and 2007, respectively, representing the movement in the mark-to-marketvaluation of the Company’s interest rate and cross-currency hedginginstruments.

 

**Liquidityand Capital Resources**

 

**Cash Flows**

 

*OperatingActivities.*  Net cash provided by operating activities was $369.6 million, $296.6 millionand $368.5 million in 2009, 2008 and 2007, respectively.  Net cash from operating activities increasedin 2009 primarily from an outflow of operating cash from working capitalchanges in 2008, partially offset by $31.1 million related to the terminationof interest rate swaps in November 2009, higher cash interest expense andoperating cash inflows in 2008 related to operating the pool and spa businessthat was sold in October 2008.  Netcash from operating activities decreased in 2008 primarily from the higher useof operating cash from working capital changes and the reduction in operatingcash flows due to the divestiture of the Electronics business, partially offsetby lower cash interest expense.  Net cashfrom operating activities increased in 2007 primarily from higher operatingincome and lower cash interest expense, partially offset by higher use ofoperating cash from working capital changes and lower operating cash flows dueto the Groupe Novasep divestiture.

 

*InvestingActivities*.  Net cash (used in) provided by investing activities was $(204.3) million,$(295.5) million and $377.6 million in 2009, 2008 and 2007, respectively.  Net cash used in investing activities for theyear ended December 31, 2009 was primarily comprised of capitalexpenditures and $32.9 million related to the settlement of a cross-currencyswap in November 2009.  Net cashused in investing activities for the year ended December 31, 2008 includedthe acquisitions of Holliday Pigments, Nalco’s Finishing Technologies businessand other acquisitions in 2008 and capital expenditures. This waspartially offset by the sale proceeds from the sale of the pool and spachemicals business in the fourth quarter of 2008 and funds received related tothe claim settlement between the Company and GEA Group in the first quarter of2008.  Net cash provided by investing activities for the year ended December 31,2007 included proceeds received from the sale of the Electronics business, thesale of the Groupe Novasep segment and the formation of the Viance, LLC jointventure. This was partially offset by acquisitions made in 2007, including theacquisition of the global color pigments business of Elementis plc in August 2007,and capital expenditures.

 

*FinancingActivities.*  Net cash (used in) provided by financing activities was $(320.9) million,$104.7 million and $(411.8) million in 2009, 2008 and 2007, respectively. Net cash used in financing activities increased due to certain debtprepayments. We used $146.8 million of cash to prepay, at a discount,$153.2 million in aggregate principal amount of our Euro-denominated seniorsubordinated notes due in 2014, $102.3 million to prepay our senior securedterm loans in the first half of 2009, and $25.8 million related to theamendment of the senior secured credit facility in June 2009.  For the year ended December 31, 2008,net cash provided by financing  

 

55

----

 

activities included$362.5 million related to the financing of the Titanium Dioxide Pigmentsventure, partially offset by the payment of assumed debt to the noncontrollingshareholder of the Titanium Dioxide Pigments venture of $141.4 million.For the year ended December 31, 2007, net cash used in financingactivities included the redemption of our 10 5/8% Senior Subordinated Notesthat were due in 2011 in the aggregate principal amount of $273.4 million andrelated redemption premiums of $14.5 million.

 

**Liquidity**

 

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

 

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

 

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

 

Our primary liquidityrequirements are working capital, debt service, capital expenditures andacquisitions. Our debt service requirements in future years are significant andare substantially higher than historical amounts. We believe that based oncurrent conditions in our industry and markets, our cash reserves, cash flowsfrom operations and borrowings available under our revolving credit facilitywill be adequate sources of liquidity. However, a prolonged economicdownturn or recession may have a material adverse impact on our results ofoperations, cash flows from operations and our liquidity. See Item 1, “Business,”and Item 1A, “Risk Factors.”

 

In addition, ourliquidity may be negatively impacted due to funding obligations related tocertain pension plans. We have several pension plans located in Germany,Finland, the United Kingdom and the United States, which were adverselyimpacted by market conditions in late 2008 and early 2009. Although recentinvestment performance of assets in pension plans covering our employees inthese countries has reduced the amount of any immediate funding obligations andwe have entered into long-term funding arrangements for pension plans locatedin Germany and the U.K., we may have to make a significant payment via aone-time payment and/or long-term funding arrangement for the Finnish Plan.However, our funding obligations could change significantly based on theinvestment performance of the pension plan assets. Any deterioration of thecapital markets or returns available in such markets may materially andadversely impact our pension plan assets and increase our funding obligationsfor one or more of these plans and adversely impact our liquidity. We cannotpredict the impact of this or any further market disruption on our pensionfunding obligations.

 

In August 2009, theU.S. Department of Energy awarded $28.4 million in Recovery and ReinvestmentAct funds, subject to certain conditions, to our Fine Chemicals business withinour Specialty Chemicals segment. We expect to use the funds to expand andupgrade the production of lithium compounds used in lithium ion batteries forhybrid and electric vehicles at our Silver Peak, Nevada and Kings Mountain,North Carolina facilities. In addition to the funds from this grant, weare required to invest an additional $28.4 million in the project over the nextfew years. In addition, in September 2009, the German Federal Ministry forthe Environment, Nature Conservation and Nuclear Safety awarded €5.7 million toour Fine Chemicals business to set up a pilot plant for the recycling oflithium ion batteries, subject to customary terms and conditions. Including thefunds from this grant, we expect to invest an additional €8.8 million in theproject over the next three years.

 

As of December 31,2009, we had actual total indebtedness of $2,528.3 million. Our $250.0 millionrevolving credit facility under our senior secured credit facility provided foradditional borrowings of up to $223.6 million as of December 31, 2009.There were no outstanding borrowings under this revolving credit facility as ofDecember 31, 2009, although we had outstanding letters of credit of $26.4million that reduced our availability under the senior secured credit facility.In July 2010, the availability under the revolving credit facility will bereduced to $180.0 million.  The €30.0million ($43.0 million) revolving credit facility under the Titanium DioxidePigments venture facility provided for additional borrowings of up to €10.0million ($14.3 million) as of December 31, 2009. There was €10.0 million($14.3 million) of borrowings outstanding under this facility as of December 31,2009, as well as an outstanding bank guarantee of €10.0 million ($14.3 million)that further reduced availability under this facility. We repaid €10.0 millionof borrowings in January 2010 that were outstanding under this facility asof December 31, 2009.

 

As of December 31,2009, we had cash and cash equivalents of $300.5 million primarily from cashfrom operations. We may use available cash to reduce our term debt orrepurchase additional 2014 Notes at any time, subject to certain limitationscontained in our senior secured credit facility.

 

Ourlong-term debt at December 31, 2009 and 2008 is primarily comprised of oursenior secured credit facility, which we amended in June 2009, our 2014Notes and our Titanium Dioxide Pigments venture term loans.  See Note 11, “Long-Term Debt,” for a detaileddiscussion of these borrowings.

 

56

----

 

*Senior secured creditfacilities. *The borrowings of our indirect,wholly-owned subsidiaries, RSGI and Rockwood Specialties Limited under thesenior secured credit facilities are guaranteed and secured by assets andpledges of capital stock. The senior secured credit agreement also contains thefollowing financial covenants that are determined based on our Adjusted EBITDA(including certain adjustments for acquisitions and related synergies), whichreflects management’s interpretations thereof:

 

·                  a leverage ratio: for the twelve-month period ended December 31,2009, net senior secured debt (senior secured debt plus capital leaseobligations, minus cash up to a maximum of $100.0 million) to Adjusted EBITDAmust be less than 4.40 to 1; for such period, our ratio equaled 3.41 to 1; and

 

·                  an interest coverage ratio: for the twelve-monthperiod ended December 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 3.10  to 1.

 

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

 

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

 

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

 

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

 

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

 

*2014 Notes.*The 2014 Notes also 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 December 31, 2009, the fixed chargecoverage ratio equaled 3.10 to 1. This covenant is a material term of theindenture governing the 2014 Notes.

 

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

 

57

----

 

due and payable.

 

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

 

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

 

·                  A leverage coverage ratio: for the twelve-month periodended December 31, 2009, net debt to EBITDA, subject to certainadjustments (which is substantially similar to the definition of AdjustedEBITDA in our senior secured credit agreement) must be less than 4.00 to 1: forsuch period, our ratio equaled 3.32 to 1;

 

·                  An interest coverage ratio: for the twelve-monthperiod ended December 31, 2009, EBITDA, subject to certain adjustments,(which is substantially similar to the definition of Adjusted EBITDA in oursenior secured credit agreement) to cash interest expense (net of interestincome), must be greater than 3.00 to 1: for such period, our ratio equaled4.53 to 1; and

 

·                  Cash flow coverage ratio: for the twelve-month periodended December 31, 2009, cash generated for financing activities (EBITDA,subject to certain adjustments, less working capital changes, capitalexpenditures and interest) to debt service (interest expense and amortizationof debt) must be greater than 1.00: for such period, our ratio equaled 2.35 to1.

 

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

 

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

 
| ** **                                                                                                             | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| **($ in millions)**                                                                                               | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net  cash provided by operating activities from continuing operations                                                  |       | $                                | 369.6      |   | $ | 284.6 |   | $ | 330.2 |   |
| Changes  in assets and liabilities, net of the effect of foreign currency translation  and acquisitions                |       | (71.5                            | )          | 96.8 |   | 50.8 |   |
| Current  portion of income tax provision                                                                               |       | 31.7                             |       | 40.6 |   | 33.3 |   |
| Interest  expense, net, excluding amortization of deferred financing costs and  unrealized losses/gains on derivatives |       | 174.1                            |       | 164.0 |   | 166.4 |   |
| Restructuring  and other severance costs                                                                               |       | 20.8                             |       | 35.3 |   | 12.0 |   |
| Systems/organization  establishment expenses                                                                           |       | 6.3                              |       | 12.9 |   | 4.2 |   |
| Acquisition  and disposal costs                                                                                        |       | 3.0                              |       | 1.7 |   | 2.3 |   |
| Inventory  write-up charges                                                                                            |       | —                           |       | 6.9 |   | 5.7 |   |
| Refinancing  expenses                                                                                                  |       | —                           |       | — |   | 0.9 |   |
| Bad  debt provision                                                                                                    |       | (0.5                             | )          | (3.4 | ) | 1.3 |   |
| Loss  (gain) on sale of assets and other                                                                               |       | 0.5                              |       | (2.4 | ) | (4.7 |   |
| Other                                                                                                                  |       | 6.5                              |       | 1.9 |   | — |   |
| Total  Adjusted EBITDA                                                                                                 |       | $                                | 540.5      |   | $ | 638.9 |   | $ | 602.4 |   |

*** ***

***Contractual Obligations***

 

The following tabledetails Rockwood’s fixed contractual cash obligations as of December 31, 2009:

 

58

----

 
| ** **                           | ** ** | ** ** | ** ** | **Less than** | ** ** | **2-3**   | ** ** | **4-5**   | ** ** | **After**   | ** ** |
|--------------------------------------|------------|------------|------------|---------------|------------|-----------|------------|-----------|------------|-------------|------------|
| **($ in millions)**             | ** ** | **Total**  | ** ** | **1 year**    | ** ** | **Years** | ** ** | **Years** | ** ** | **5 years** | ** ** |
| Debt,  including current portion (a) |       | $          | 3,199.2    |          | $          | 263.6     |       | $         | 680.2      |        | $          | 2,221.3 |   | $ | 34.1 |   |
| Operating  leases                    |       | 58.7       |       | 16.8          |       | 21.1      |       | 11.1      |       | 9.7         |       |
| Purchase  obligations (b)            |       | 543.0      |       | 228.3         |       | 211.4     |       | 34.5      |       | 68.8        |       |
| Total  (c) (d)                  |       | $          | 3,800.9    |          | $          | 508.7     |       | $         | 912.7      |        | $          | 2,266.9 |   | $ | 112.6 |   |

 

----

(a)                Amounts represent the expected principal payments ofour long-term debt, including capital leases, and do not include any fair valueadjustments or bond premiums or discounts. This amount also includes estimatedscheduled cash interest payments totaling $670.9 million. A portion of the debtbalance outstanding as of December 31, 2009 contained a variable interestrate component. Therefore, interest was calculated on this portion based uponthe average of the rates in effect as of December 31, 2009. SeeNote 11, “Long-Term Debt.”

 

(b)               Purchase obligations consist of agreements to purchasegoods or services that are enforceable and legally binding and that specify allsignificant terms, including: fixed or minimum quantities to be purchased;fixed, minimum or variable price provisions; and the approximate timing of thetransaction. Purchase obligations exclude agreements that are cancelablewithout penalty.

 

(c)                Statutory minimum funding requirements for 2009 fordefined benefit pension plans are not included as such amounts have not beendetermined. For 2010, the Company expects to make contributions of approximately$6.6 million to pension trusts and $18.8 million directly to plan participantsas benefit payments. Future contributions, including additional payments thatmay be required as a result of investment performance of pension assets, arenot included, as they are not fixed either as to timing or amount. See Note 15,“Employee Benefit Plans,” for further details.

 

(d)               Obligations relating to eventual settlement ofderivative contracts are not included as the timing and amounts are not fixed.These contracts are marked to market with the related liabilities or assetsdepending on the mark to market position. At December 31, 2009, the markto market position of obligations relating to derivative contracts was aliability and were recorded in “accrued expenses and other current liabilities”and “Other Liabilities” in the Consolidated Balance Sheet.

 

Liabilities forunrecognized tax benefits in the amount of $19.8 million (excluding interestand penalties) as of December 31, 2009 are excluded from the ContractualObligations table as we are 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.

 

***Capital Expenditures***

 

Rockwood’s capitalexpenditures in 2009 consisted primarily of replacements of worn, obsolete ordamaged equipment as well as investments in new equipment.  For the yearended December 31, 2009, capital expenditures, excluding capital leases,were $154.1 million. Capital expenditures for 2010 are expected to be above2009 levels. For the years ended December 31, 2008 and 2007, our capitalexpenditures, excluding capital leases, amounted to $224.0 million and $193.2million, respectively.

 

We may incur future costsfor capital improvements and general compliance under Safety, Health andEnvironmental (“SHE”) laws. For the year ended December 31, 2009, ourcapital expenditures for SHE matters totaled $17.9 million, excluding costs tomaintain and repair pollution control equipment. For 2010, 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 20, “Commitments and Contingencies,” “RegulatoryDevelopments” for a discussion of REACH.  We are applying our capitaldiscipline and stringent controls to reduce our future capital expenditures.

 

***Foreign currency related transactions***

 

As of December 31,2009, $1,237.0 million of the debt outstanding is denominated in Euros. SeeItem 7A, “Quantitative and Qualitative Disclosures about Market Risk.”

 

**Off-Balance Sheet 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 

 

59

----

 

credit and other bankguarantees. As of December 31, 2009, the Company had approximately $30.1million of letters of credit and other bank guarantees, of which $27.4 millionwill expire in 2009 through 2014. The remaining guarantees have no specifiedexpiration date. This amount includes outstanding letters of credit of $26.4million that reduced our availability under the senior secured credit facility.In the opinion of management, such obligations will not significantly affectthe Company’s financial position, results of operations or cash flows as theCompany anticipates fulfilling its performance obligations.

 

***Commitments and Contingencies***

 

See Note 20, “Commitmentsand Contingencies,” for a discussion of the Company’s Commitments and Contingencies.

 

**Critical Accounting Policies and Estimates**

 

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

 

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

 

·                  the use and recoverability of inventory;

 

·                  the valuation of deferred tax assets;

 

·                  the amount of unrecognized tax benefits;

 

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

 

·                  the useful lives of tangible and intangible assets.

 

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

 

See Note 1, “Descriptionof Business and Summary of Significant Accounting Policies,” for a summary ofour significant accounting policies. We believe the following to be the mostcritical accounting policies and estimates affecting preparation of ourconsolidated financial statements:

 

***RevenueRecognition****.*  We recognize revenue when the earnings process is complete. Product sales arerecognized when products are shipped to the customer in accordance with theterms of the contract of sale, title and risk of loss have been transferred andcollectibility is reasonably assured. We believe that we have adequate creditgranting procedures in place and operating effectively so that collectibilityis reasonably assured. We have a low incidence of uncollectible accounts.Additionally, credit insurance is purchased at times by certain of ourbusinesses, particularly in Europe, to protect against collection risk.Accruals are made for sales returns based on our experience and for otherallowances based on the terms of allowance programs put in place. Although webelieve that sufficient experience and history exists to make reasonableestimates as to such accruals and allowances, actual results can differdepending on market conditions.

 

***ImpairmentAccounting****.*  The recoverability of goodwill is reviewed on an annual basis during the fourthquarter. Additionally, the recoverability of goodwill, long-lived tangible, andother intangible assets is reviewed when events or changes in circumstancesoccur indicating that the carrying value of the assets may not berecoverable.  We have determined that our reporting units for our goodwillimpairment review are our operating segments or components of an operatingsegment that constitute a business for which discrete financial information isavailable and for which segment management regularly reviews the operatingresults. Based on this analysis, we have identified nine reporting unitswithin our reportable segments.

 

In accordance with theaccounting guidance on determining a goodwill impairment, there is a two-stepmethod.  In the first step, we determine the fair value of each reportingunit (as discussed in the following sentence) and compare that fair value tothe carrying value of such reporting unit.  This begins with ourestimating the fair value of each reporting unit, which we derive from peermultiples.  Specifically, we base our estimate of the fair value of suchreporting unit on an industry metric that is the ratio of enterprise value (“EV”which is commonly defined as market capitalization, plus long-term debt, lesscash) to Adjusted EBITDA of the relevant benchmark peer companies and groups;we refer to this as the peer multiple approach.  The peer companies aretypically based upon

 

60

----

 

the competitors disclosedin Item 1, “Business” for each of our reporting units.  We use EVmultiples to the last twelve months Adjusted EBITDA and to the next fiscal yearAdjusted EBITDA. We then multiply this ratio by the Adjusted EBITDA for therecently completed year and the budgeted Adjusted EBITDA for the upcoming yearof such reporting unit and compare it to the carrying value of such reportingunit. If the product of such peer multiple and reporting unit’s AdjustedEBITDA is less than such carrying value, it may be an indication of animpairment. If our initial review indicates there may be an impairment, weperform a review based on expected future cash flows; we refer to this as thediscounted cash flow approach.  For the discounted cash flow approach, theCompany makes certain assumptions about, among other things, estimates offuture cash flows, including growth rates, price increases, capitalexpenditures, the benefits of recent acquisitions and expected synergies, andan appropriate discount rate.  If the results of the peer multipleapproach and the discounted cash flow approach differ materially, we wouldreview the relevant facts and circumstances and make a qualitative assessmentto determine the proper weighting. If the results of the first stepindicate the carrying amount of a reporting unit is higher than its fair value,the second step must be performed.  Specifically, the Company determinesthe implied fair value of goodwill in the same manner as if the Company hadacquired those reporting units.  In the second step, the potentialimpairment is computed by comparing the implied fair value of the reportingunit’s goodwill with the carrying amount of goodwill.  If the carryingamount of the reporting unit’s goodwill is greater than the implied fair valueof its goodwill, an impairment loss must be recognized for the excess.  Ifnecessary, we may consult with valuation specialists to assist with ourgoodwill impairment review.

 

For the years ended December 31,2009 and 2007, we did not recognize a goodwill impairment loss as a result ofthe impairment analysis that was performed. In the fourth quarter of 2008, we tested the recoverability of goodwillas part of our annual review.  In connection with the determination offair value of the reporting units, we made significant estimates andassumptions with respect to those reporting units and engaged independentvaluation specialists to assist with this review. The first step of our reviewindicated that the fair values of our Color Pigments and Services, TimberTreatment Chemicals, Clay-based Additives, Titanium Dioxide Pigments, SpecialtyCompounds and Rubber Chemicals reporting units were less than their carryingvalues.  Accordingly, we were required to complete the second step of theimpairment review.  To compute the amount of the impairment, the Companydetermines the implied fair value of goodwill in the same manner as if theCompany had acquired those reporting units.  Specifically, the Companyallocated the fair value of the reporting units to all of the assets, includingany unrecognized intangible assets, and liabilities of that unit, including anyunrecognized intangible assets, in a hypothetical calculation that would yieldthe implied fair value of goodwill.  The impairment loss is measured asthe difference between the book value of the goodwill and the implied fairvalue of the goodwill computed in step two.  Based on the results of thesecond step of the impairment review, we determined and recorded goodwillimpairment charges in our Color Pigments and Services business ($293.2million), Timber Treatment Chemicals business ($88.3 million) and Clay-basedAdditives business ($75.1 million) within our Performance Additives segment;Titanium Dioxide Pigments segment ($247.7 million); and Specialty Compoundssegment, including our Rubber Chemicals business ($105.2 million).  Thegoodwill impairment charges were attributed to the significant drop in globalstock valuations, the substantial reduction in the market valuation of Rockwoodand comparable companies, and the continuing negative global economic andmarket outlook.  In particular, the downturn in the construction industryhas had a negative impact on a number of our businesses.

 

These calculations arebased on inherent assumptions and estimates about future cash flows andappropriate benchmark peer companies or groups. Subsequent changes in theseassumptions could result in future impairment. Although we consistently use thesame methods in developing the assumptions and estimates underlying the fairvalue calculations, such estimates are uncertain by nature and can vary fromactual results.  For example, if the Company had applied a 10% reductionin the peer multiples of its reporting units in 2009, no potential goodwillimpairment would exist at any of our reporting units. In 2008, if the Companyhad applied a 10% reduction in the peer multiples of the reporting units thatwere not impaired, there may have been an additional potential goodwillimpairment in two of our reporting units. In 2007, if the Company had applied a10% reduction in all peer multiples for all reporting units, no potentialgoodwill impairment would exist at any of our reporting units, except for onereporting unit for which there may have been a potential impairment. As notedabove, if we had discovered such a potential impairment, we might have expandedthe review to prepare more detailed estimates of future cash flows insubsequent years, which might have resulted in a different impairmentassessment.

 

Prior to completing theassessment of goodwill for impairment during the fourth quarter of 2008, weperformed a recoverability test of certain long-lived assets*.* As a result, we concluded that there wasno impairment of those assets in the fourth quarter of 2008.

 

***BusinessCombinations****.*  We account for business combinations using the purchase method of accounting*.* Under the purchase method of accounting,we are required to allocate the purchase price to the estimated fair value ofassets acquired and liabilities assumed. Examples of material estimates fromour previous acquisitions are:

 

·                  The fair values of work-in-process and finished goodsinventories are estimated based on selling price less selling profit. Thecalculation of selling profit requires a judgment on the relative marginsderived from manufacturing vs. marketing efforts.

 

·                  The fair value of property, plant and equipment can beestimated by a variety of methods taking into account market values,replacement cost, and remaining useful life. Although market value andreplacement cost is sometimes readily obtainable,  

 

61

----

 

often this requiresjudgment, as does determining the estimated remaining useful life. When webelieve that property, plant and equipment acquired will be material to ouroverall balance sheet, or that fair value might represent a significantdifference from the historical cost (net of accumulated depreciation) of suchassets, we have engaged an independent appraiser to assist us on suchestimates, as we have done in our recent acquisitions. However, it is notuncommon for appraisers to differ on the valuation of items (such asmanufacturing equipment) where a ready secondary market does not exist.

 

·                  The fair value of identifiable intangible assets suchas patents and other intellectual property, customer lists, and trademarks, canbe estimated by discounted cash flow and return on royalties. The processutilized to identify intangible assets is consistent with the requirements ofthe accounting guidance on business combinations. When considered material, wehave engaged an independent appraiser to assist us in the identification ofintangible assets acquired, valuation of such assets and determination of theestimated useful life. An independent appraiser, with management’s oversightand input, is required to make judgments and estimates that could cause suchappraisals to differ from those of other appraisal experts.

 

·                  In order to determine the fair value of intangibleassets and other long term assets, a discount rate and royalty rate aredetermined in conjunction with our independent appraiser. The royalty rate isbased on professional judgment taking into consideration the type of product,market and perceived strength. The discount rate and royalty rate have amaterial impact on the determination of the fair value.

 

·                  Purchase accounting often involves the same criticalestimates that are required in our ordinary course of business includingestimates of deferred tax assets or liabilities, pension liabilities,restructuring liabilities and legal and environmental reserves.

 

Goodwill is an intangibleasset that represents the excess of the purchase price over the fair value ofidentifiable assets acquired and liabilities assumed. While goodwill itselfdoes not represent an estimate, we must assign goodwill to one or morereporting units. Allocation of goodwill to reporting units requires judgmentsabout the relative fair values of reporting units including the fair value oftheir identifiable assets and estimates as to the present value of future cashflows expected from the reporting units as adjusted by weighted average and/orrisk-adjusted costs of capital. Goodwill is assessed for impairment at leastannually.

 

Some of our businesscombinations have complex terms that may result in conflicting claims betweenbuyers and sellers concerning the purchase price itself. Management is requiredto assess the probability and amount (or range of amounts) of such claims, and,where possible, determine the most likely amount due.

 

***Legal Matters****.*  We are involved in variouslegal proceedings, including commercial, product liability, intellectualproperty and environmental matters, of a nature that can be expected in ourbusiness. It is our policy to accrue for amounts related to these matters if itis probable that a liability has been incurred and an amount can be reasonablyestimated. The probability that a contingent liability has been incurred isregularly assessed by our legal staff, based on periodic reviews of availablefacts and circumstances for our legal matters, with senior operating andfinance management both at the business accountable for the potential liabilityand at our corporate offices. This is supplemented where applicable byconsultation with outside counsel. We do not believe it is informative toquantify past experience at assessing probability or estimating exposure sincematerial matters of this nature at Rockwood often represent unique situationswith little applicability to the assessment of probability or estimation ofpotential liability regarding other legal matters. It is our policy to disclosesuch matters when there is at least a reasonable possibility that a loss mayhave been incurred.

 

***EnvironmentalMatters****.*  Weaccrue costs of a non-capital nature related to environmental clean-up whenthose costs are believed to be probable and can be reasonably estimated.Expenditures that extend the life of the related property or mitigate orprevent future environmental contamination are capitalized, and expendituresrelated to existing conditions resulting from past or present operations andfrom which no current or future benefit is discernible are immediatelyexpensed. The quantification of environmental exposures requires an assessmentof many factors, including changing laws and regulations, advancements in environmentaltechnologies, the quality of information available related to specific sites,the assessment stage of each site investigation and the length of time involvedin remediation or settlement. As such, it can be extremely difficult toaccurately estimate such costs. We do not include anticipated recoveries frominsurance carriers or other third parties in our accruals for environmentalliabilities.

 

We have estimated andestablished financial reserves relating to anticipated environmental cleanup obligations,site reclamation and remediation and closure costs. On a consolidated basis, wehave accrued approximately $55.1 million for known environmental liabilities asof December 31, 2009. Given that these obligations may be paid/relievedover extended time periods (30 years in some cases), charges or credits tooperations may be required as information is gathered and estimates refined.

 

We have evaluated ourtotal environmental exposure based on currently available data and believe thatsuch environmental matters will not have a material adverse impact on ourfinancial position or results of operations. If matters previously identifiedby management are resolved in a manner different from original estimates, thereis the potential for a material adverse effect on operating results or cashflows in any one accounting period. See Note 20, “Commitments andContingencies.”

 

62

----

 

***Restructuring****.*  We record restructuringcharges from time to time that represent expenses incurred in connection withconsolidations and cessations of certain of our operations as well as headcountreduction programs. These charges consist primarily of write-offs of surplusassets and severance costs. These charges are based on various factorsincluding the employee’s length of service, contract provisions, salary levelsand local governmental legislation. At the time a related charge is recorded,we calculate our best estimate based upon detailed analysis. Althoughsignificant changes are not expected, actual costs may differ from theseestimates.

 

For example, we haveaccrued liabilities of $7.5 million as of December 31, 2009 to coverrestructuring liabilities for employee severance, facility closure andrelocation costs. The portion of this accrued liability that was recorded aspart of purchase accounting is not charged to operations, but was recorded aspart of goodwill. In the event that our estimates of such costs are too low, anadditional charge to operations would be required.

 

***Income Taxes.**** Valuation Allowance**-***We record valuation allowances to reduce our deferred tax assets to the amountthat is more likely than not to be realized based on available evidenceweighted toward evidence that is objectively verifiable. If we were todetermine that we would be able to realize deferred tax assets in the future inexcess of our net recorded amount, an adjustment to the net deferred tax assetwould increase income in the period such determination was made. Likewise,should we determine that we would not be able to realize all or part of ourrecorded net deferred tax assets in the future, an adjustment to the deferredtax asset would decrease income in the period such determination was made.

 

We have cumulative netoperating loss carry forwards in the U.S., Germany and China for which we havereserved. The valuation allowance also includes certain states in the U.S. aswe have concluded realizability of these net operating loss carryforwards isnot more likely than not. We have not recorded valuation allowances on asignificant portion of our German net operating loss carryforwards as we haveconsidered positive evidence such as forecasted future taxable income based onhistorical taxable income adjusted for charges which are not indicative offuture operations and as the carryforward period is indefinite.

 

We consider futuretaxable income and other available evidence when assessing the need for avaluation allowance. Various assumptions and strategies (including electionsfor tax purposes) are implicit in estimates of forecasted future taxableincome.

 

We believe that, insituations in which future realization of deferred tax assets is dependent ontaxable income from future operations, the relative significance of cumulativelosses be addressed. Accordingly, in assessing the realization of U.S.jurisdiction net operating loss carry forwards for the years ended December 31,2009, 2008 and 2007, and, considering future taxable income, we have identifiedthe key elements of both positive and negative evidence and evaluated suchevidence.

 

The worldwide valuationallowance increased by $48.2 million to $132.9 million at December 31,2009. Of this amount, $34.4 million was a charge to income tax expense relatingprimarily to net operating losses and $13.8 million primarily represents anincrease to other comprehensive income.

 

As of December 31,2009, we had three years of net cumulative losses in the U.K.  As such, weevaluated the realizability of the net deferred tax assets of$23.5 million related to our U.K. entities. For any specific jurisdictionwhere a history of three years of cumulative losses has occurred or where therehas been a substantial change in the business (e.g., a major acquisition ordivestiture), the Company’s policy is to determine its need for a valuationallowance on deferred tax assets, if any, by calculating an averagesteady-state normalized taxable income amount over the last three years,adjusted for acquisitions or divestitures if necessary. The steady-statecalculation includes management assumptions that relate to the appropriatenessof certain items, such as, including permanent cost savings which have been/arebeing implemented and excluding one-time items.

 

In accordance with thispolicy, we calculated the average annual income before taxes in the U.K. on asteady-state normalized basis.  We continue to be profitable on anormalized basis. We additionally considered the nature of the U.K. netdeferred tax assets which includes unused tax depreciation (“capital allowances”in the U.K.). Under U.K. law, this tax attribute can be utilized indefinitely.Accordingly, we concluded that given the level of profitability and given theirunlimited life, these assets should more likely than not be realizable as of December 31,2009 in the U.K. and therefore no valuation allowance was recorded as of suchdate.

 

We are committed tobuying and selling businesses within our portfolio of businesses asopportunities arise to enhance our overall results. We are committed to sellingassets which are non-core and which would generate a taxable gain in the eventof expiring U.S. Federal NOL’s.

 

During the first quarterof 2007, the Company adopted a standard that clarified the accounting foruncertainty in income taxes recognized in an entity’s financial statements andprescribes a recognition threshold and measurement attribute for financialstatement disclosure of tax positions taken or expected to be taken on a taxreturn.  The impact of an uncertain income tax position on the income taxreturn must be recognized as the largest amount that is more-likely-than-not tobe sustained upon audit by the relevant tax authority.  An uncertainincome tax position will not be recognized if it has less than a 50% likelihoodof being sustained.

 

63

----

 

The Company is subject totaxation in the U.S., various states, and foreign jurisdictions. As part of theadoption of this standard, we evaluated all tax positions taken including theexisting tax liabilities recorded in accordance with the accounting guidancefor contingencies*,* and evaluated whether such taxpositions would more-likely-than-not be sustained upon examination, based onthe technical merits of the position.  If the position met themore-likely-than-not threshold test, we estimated the amount of the benefitthat would be more than 50% likely to be sustained upon ultimatesettlement. The estimate includes management’s judgment of the  amounts and probabilities of outcomes thatcould be realized upon ultimate settlement, taking into account all facts,circumstances, and information available at the reporting date.

 

Although we have a fullvaluation allowance on the U.S. net deferred tax assets and certain U.S.states, we have evaluated the U.S. positions as well as foreign positions.Liabilities associated with positions taken as part of purchase accounting havebeen recorded as part of goodwill. Based on our year-end analysis, we haverecorded unrecognized tax benefits of $39.1 million (excluding interest andpenalties) on a gross basis.  The ultimate settlement of this liability issubject to tax audits or the expiration of the statute of limitations.  Assuch, actual results will differ from our estimates.

 

In accordance with ourpolicy, we have offset the gross liability in respect of our uncertain taxpositions against deferred taxes where settlement of such liability wouldreduce tax loss carry forwards. On a net basis, we have recorded unrecognizedtax benefits of $19.8 million (excluding interest and penalties) as of December 31,2009.

 

To the extent that theprovision for income taxes increases/decreases by 1% of income before taxes,consolidated net income would have declined/improved by $0.3 million in 2009.

 

***Stock-BasedCompensation****.*  Wehave a stock-based compensation plan which includes stock options, restrictedstock and other stock-based awards. See Note 1, “Description of Businessand Summary of Significant Accounting Policies,” and Note 14, “Stock-BasedCompensation,” for a complete discussion of our stock-based compensationprograms. In accordance with the accounting guidance on stockcompensation, we record stock-compensation expense associated with our equityawards. The accounting for stock compensation is a critical accountingestimate, which requires judgments and assumptions that have an impact on ourfinancial statements.

 

The fair value of ourstock options are estimated on the date of grant using the Black-Scholes optionpricing model, which includes assumptions of expected term, expected volatilityand risk-free rates. Changes in these assumptions can affect the fairvalue estimate. The fair value of our performance restricted stock units isestimated on the date of grant based on the closing market price of our stock. Theseperformance-based equity awards require management to make assumptionsregarding the likelihood of achieving company-performance goals, which in turnimpacts our compensation expense.  In addition, the recognition of expenseis only recorded for awards that will eventually vest. This requirespre-vesting forfeitures to be estimated at the time of grant and modified, ifnecessary, if actual forfeitures differ from estimated forfeitures.  Ourforfeiture rates are based upon historical share-based equity award cancellations.

 

We do not believe thereis a reasonable likelihood there will be a material change in the futureestimates or assumptions we use to determine stock-based compensationexpense.  However, if actual results are not consistent with our estimatesand assumptions, we may be exposed to changes in stock-based compensationexpense. A 10% change in our stock-based compensation expense for the yearended December 31, 2009, would have affected net income by approximately$0.4 million for the year ended December 31, 2009.

 

***Pensions,Postemployment and Postretirement Costs****.* In connection with prior year acquisitions,particularly the KKR and Dynamit Nobel acquisition, Rockwood assumedresponsibility for the pension and postretirement benefits for substantiallyall of the employees of the businesses acquired that were active as of the dateof the acquisition. For the KKR acquisition, obligations related to retired andterminated vested employees as of such date remained the responsibility of theseller, and accordingly, these obligations are not reflected in ourconsolidated financial statements. Defined benefit costs and liabilities andpostretirement benefit costs and liabilities have been determined in accordancewith the accounting guidance for retirement benefits*.*  Postemploymentbenefit costs and liabilities have been determined in accordance with theaccounting guidance for nonretirement postemployment benefits*.*

 

The measurement of ourpension obligations, costs and liabilities is dependent on a variety ofassumptions used by our actuaries. These assumptions include estimates of thepresent value of projected future pension payments to all plan participants,with consideration to the likelihood of potential future events such as salaryincreases (due to marketplace conditions and/or inflation) and demographicexperience (such as retirement and mortality rates). These assumptions may havean effect on the amount and timing of future contributions or benefit payments.For funded plans, the plan trustee obtains an independent valuation of the fairvalue of pension plan assets and prepares estimates of expected returns basedon target asset allocations multiplied by current marketplace rates of returnfor comparable assets. We base the discount rate assumption on investmentyields available at year-end on AA-rated corporate long-term bonds. The effectsof actual results differing from our assumptions are accumulated and amortizedover future periods and therefore are likely to affect our recognized expensein those periods. We cannot predict these bond yields or investment 

 

64

----

 

returns and thereforecannot reasonably estimate whether adjustments to our stockholders’ equity forminimum pension liability in subsequent years will be significant.

 

Estimated sensitivity ofour pension funded status and stockholders’ equity and annual pension expenseto a 0.25% increase/decrease in the discount rate assumption is shown below asof and for the year ended December 31, 2009. The estimates were based oninquiries of all plan actuaries. The December 31, 2009 funded status andstockholders’ equity are affected by assumptions as of December 31, 2009while 2009 annual pension expense is affected by December 31, 2008assumptions:

 
| ** **                              | ** ** | **As of  December 31, 2009** | ** ** |
|-----------------------------------------|------------|-----------------------------------|------------|
| **($ in millions)**                | ** ** | **U.S. Plans**                    | ** ** | **Non-U.S. Plans** | ** ** | ** ** | ** ** | **2009 Pension** | ** ** |
| **Impact of a Change in Discount Rate** | ** ** | **Funded Status**                 | ** ** | **Funded Status** | ** ** | **Equity** | ** ** | **Expense** | ** ** |
| +25  basis points                       |       | $                                 | 1.0        |   | $ | 21.5 |   | $ | (22.5 | ) | $ | (1.2 | ) |
| -25  basis points                       |       | (1.0                              | )          | (22.6 | ) | 23.6 |   | 1.0 |   |
|                                         |            |                                   |            |  |  |  |  |  |  |  |  |  |  |

 

As shown above, changesin the discount rate can have a significant effect on the funded status of ourpension plans and stockholders’ equity. As noted above, the funded status andstockholders’ equity of our funded plans might also be significantly affectedby assumptions concerning expected return of plan assets. However, given thatmost of our pension obligations do not require funding, such sensitivity wouldbe significantly less.

 

*Usefullives of Plant and Equipment*. We determine the estimated useful lives and relateddepreciation charges for our plant and equipment. Depreciation is determinedusing the straight-line method over the various asset classes. Estimated livesgenerally range from 20-30 years for buildings and improvements (including landimprovements), 7-12 years for machinery and equipment, 3-5 years for furnitureand fixtures and 14-50 years for mining rights. To the extent actual lives areless than previously estimated lives, we will increase our depreciation chargeor will write-off or write-down obsolete assets.

 

To the extent that ourplant and equipment actual useful lives differ from management’s estimates by10%, consolidated net income would be an estimated $20.2 million higher/lowerbased upon 2009 results, depending upon whether the actual lives werelonger/shorter, respectively, than the estimates.

 

*Usefullives of Other Intangible Assets.* We determine the estimated useful lives and relatedamortization charges for our other intangible assets. Other intangible assetsprimarily consist of patents and other intellectual property, trade names andtrademarks, and customer relationships. Patents and other intellectual propertyare recorded at their estimated fair values at the time of acquisition and arebeing amortized over their estimated remaining useful lives, ranging from 4-20years. Trade names and trademarks are being amortized from 18-25 years,customer relationships are amortized from 7-15 years and supply agreements arebeing amortized from 10-15 years. To the extent actual lives are less thanpreviously estimated lives, we will increase our amortization charge or willwrite-off or write-down obsolete other intangible assets.

 

To the extent that theactual useful lives of our other intangible assets differ from management’sestimates by 10%, consolidated net income would be an estimated $8.1 millionhigher/lower based upon 2009 results, depending upon whether the actual liveswere longer/shorter, respectively, than the estimates.

 

**RecentAccounting Pronouncements**

 

See “Recent AccountingPronouncements” section in Note 1, “Description of Business and Summary ofSignificant Accounting Policies,” for discussion of recent accountingpronouncements.

 

65

----

 

**QuarterlyFinancial Information (Unaudited)**

 
| **($ in millions, except per share amounts)**                               | ** ** | **First****Quarter (a)** | ** ** | **Second****Quarter (b)** | ** ** | **Third****Quarter (c)** | ** ** | **Fourth****Quarter** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------|------------|---------------------------|------------|--------------------------|------------|-----------------------|------------|
| **2009**                                                                         |       |                     |       |                      |       |                     |       |                  |       |
| Net  sales                                                                       |       | $                        | 660.0      |                      | $          | 730.4                    |       | $                     | 786.2      |   | $ | 786.3 |   |
| Gross  profit                                                                    |       | 182.1                    |       | 203.2                     |       | 231.2                    |       | 238.7                 |       |
|                                                                             |       |                     |       |                      |       |                     |       |                  |       |
| Amounts  attributable to Rockwood Holdings, Inc.:                           |       |                     |       |                      |       |                     |       |                  |       |
| (Loss)  income from continuing operations                                        |       | $                        | (3.8       | )                         | $          | 0.6                      |       | $                     | 10.2       |   | $ | 11.3 |   |
| Income  (loss) from discontinued operations                                      |       | 2.3                      |       | 1.1                       |       | (0.1                     | )          | (0.5                  | )          |
| Net  (loss) income                                                               |       | $                        | (1.5       | )                         | $          | 1.7                      |       | $                     | 10.1       |   | $ | 10.8 |   |
|                                                                             |       |                     |       |                      |       |                     |       |                  |       |
| Basic  (loss) earnings per share attributable to Rockwood Holdings, Inc.:   |       |                     |       |                      |       |                     |       |                  |       |
| Basic  (loss) earnings from continuing operations                                |       | $                        | (0.05      | )                         | $          | 0.01                     |       | $                     | 0.14       |   | $ | 0.15 |   |
| Basic  earnings from discontinued operations                                     |       | 0.03                     |       | 0.01                      |       | —                   |       | —                |       |
| Basic  (loss) earnings per share                                                 |       | $                        | (0.02      | )                         | $          | 0.02                     |       | $                     | 0.14       |   | $ | 0.15 |   |
|                                                                             |       |                     |       |                      |       |                     |       |                  |       |
| Diluted  (loss) earnings per share attributable to Rockwood Holdings, Inc.: |       |                     |       |                      |       |                     |       |                  |       |
| Diluted  (loss) earnings from continuing operations                              |       | $                        | (0.05      | )                         | $          | 0.01                     |       | $                     | 0.14       |   | $ | 0.15 |   |
| Diluted  earnings (loss) from discontinued operations                            |       | 0.03                     |       | 0.01                      |       | (0.01                    | )          | (0.01                 | )          |
| Diluted  (loss) earnings per share                                               |       | $                        | (0.02      | )                         | $          | 0.02                     |       | $                     | 0.13       |   | $ | 0.14 |   |

 
| **($ in millions, except per share amounts)**                               | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter (d)** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|-------------------------|------------|
| **2008**                                                                         |       |               |       |                |       |               |       |                    |       |
| Net  sales                                                                       |       | $                  | 843.8      |                | $          | 923.2              |       | $                       | 880.8      |   | $ | 732.3 |   |
| Gross  profit                                                                    |       | 272.5              |       | 283.3               |       | 257.5              |       | 201.0                   |       |
|                                                                             |       |               |       |                |       |               |       |                    |       |
| Amounts  attributable to Rockwood Holdings, Inc.:                           |       |               |       |                |       |               |       |                    |       |
| Income  (loss) from continuing operations                                        |       | $                  | 28.7       |                | $          | 75.6               |       | $                       | (4.8       | ) | $ | (734.1 | ) |
| (Loss)  income from discontinued operations                                      |       | (1.0               | )          | 2.4                 |       | 1.5                |       | 0.4                     |       |
| Gain  on sale of discontinued operations, net of tax                             |       | —             |       | —              |       | —             |       | 42.9                    |       |
| Net  income (loss)                                                               |       | $                  | 27.7       |                | $          | 78.0               |       | $                       | (3.3       | ) | $ | (690.8 | ) |
|                                                                             |       |               |       |                |       |               |       |                    |       |
| Basic  earnings (loss) per share attributable to Rockwood Holdings, Inc.:   |       |               |       |                |       |               |       |                    |       |
| Basic  earnings (loss) from continuing operations                                |       | $                  | 0.39       |                | $          | 1.02               |       | $                       | (0.06      | ) | $ | (9.91 | ) |
| Basic  (loss) earnings from discontinued operations                              |       | (0.02              | )          | 0.04                |       | 0.02               |       | 0.58                    |       |
| Basic  earnings (loss) per share                                                 |       | $                  | 0.37       |                | $          | 1.06               |       | $                       | (0.04      | ) | $ | (9.33 | ) |
|                                                                             |       |               |       |                |       |               |       |                    |       |
| Diluted  earnings (loss) per share attributable to Rockwood Holdings, Inc.: |       |               |       |                |       |               |       |                    |       |
| Diluted  earnings (loss) from continuing operations                              |       | $                  | 0.37       |                | $          | 0.98               |       | $                       | (0.06      | ) | $ | (9.91 | ) |
| Diluted  (loss) earnings from discontinued operations                            |       | (0.01              | )          | 0.03                |       | 0.02               |       | 0.58                    |       |
| Diluted  earnings (loss) per share                                               |       | $                  | 0.36       |                | $          | 1.01               |       | $                       | (0.04      | ) | $ | (9.33 | ) |

 

----

(a)                In the first quarter of 2009, we recorded a net gainof $2.2 million on the early extinguishment of debt related to a discount of$3.6 million due to the repurchase of $15.5 million of our senior subordinatednotes due in 2014, partially offset by the write-off of $1.4 million ofdeferred financing costs.

 

(b)               In the second quarter of 2009, we recorded a loss onearly extinguishment of debt, net of $27.9 million primarily related to theamendment of our senior secured credit facility in June 2009.  This included the write-off of deferredfinancing costs of $19.5 million and $11.1 million of lender fees.  This was partially offset by a discount of $2.7million related to the repurchase of $137.7 million in aggregate principalamount of our Euro-denominated 2014 Notes.

 

66

----

 

(c)                In the third quarter of 2009, we recorded a loss onearly extinguishment of debt, net of $0.9 million primarily related to lenderfees to extend the maturity of our revolving credit facility.

 

(d)               Results in the fourth quarter of 2008 include agoodwill impairment charge of $809.5 million ($675.7 million net of tax andnoncontrolling interest) and a gain of $42.9 million (net of tax) primarilyrelated to the sale of the pool and spa chemicals business on October 10,2008.  In addition, we redeemed €11.0million of our 2014 Notes at a discount in the fourth quarter of 2008 and recordeda gain of $4.0 million.

 

The basic and dilutedearnings (loss) per common share amounts are calculated independently for eachof the quarters presented. The sum of the quarters may not equal the full yearamounts.

 

**Item7A. 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.

 

**InterestRate Risk**

 

We had $1,186.9 million(a portion of which is subject to a Libor or Euribor floor of 2.00%) and $699.5million of variable rate debt (after hedging) outstanding as of December 31,2009 and 2008, respectively, at the then applicable exchange rate. Anyborrowings under the senior secured revolving credit facility and the TitaniumDioxide Pigments venture revolving credit facility are at a variable rate (withthe senior secured revolving credit facility subject to a Libor or Euriborfloor of 2.00%). As of December 31, 2009, we had €10.0 million ($14.3million) outstanding under the Titanium Dioxide Pigments venture revolvingcredit facility. There were no outstanding borrowings under the senior securedrevolving credit facility as of December 31, 2009. Although we are notrequired under the terms of any of our long-term debt facilities to hedge, orotherwise protect against interest rate fluctuation in our variable rate debt,we have entered into interest rate swaps to manage our exposure to changes ininterest rates related to variable-rate debt. In November 2009, a contractcovering a notional amount of $200.0 million matured and contracts coveringnotional amounts of $410.0 million were terminated resulting in a payment of$31.1 million.  As of December 31,2009, the remaining contracts cover notional amounts of €482.2 million (atinterest rates ranging from 2.995% to 4.416%). As of December 31, 2008, the contracts covered notional amounts of$610.0 million (at interest rates ranging from 4.864% to 5.038%) and €499.9million (at interest rates ranging from 2.995% to 4.416%). The derivativecontracts as of December 31, 2009 effectively convert a portion of thesenior secured credit obligations and a portion of the obligations under theTitanium Dioxide Pigments term loan facility to fixed rate obligations. Thesehedges will mature between December 2010 and July 2012. The Companyhas not applied hedge accounting for these interest rate swaps and has recordedthe mark-to-market of these derivatives as a component of interest expense inthe Consolidated Statements of Operations. We may in the future consideradjusting the amounts covered by these derivative contracts to better suit ourcapital structure. Each 0.125% increase or decrease in the assumed weightedaverage interest rate would change the annual interest expense by $1.5 millionand $0.9 million in 2009 and 2008, respectively.

 

**ForeignCurrency Risk**

 

We conduct operations inmany countries around the world. Our results of operations are subject to bothcurrency transaction risk and currency translation risk. We operate ageographically diverse business, with 52% of our net sales in 2009 generatedfrom customers in Europe, 27% in North America (predominantly in the UnitedStates) and 21% from the rest of the world based upon customer ship tolocations. For a geographic description of the origin of our net sales andlocation of our long-lived assets, see Note 3, “Segment Information.” Althoughwe sell and manufacture our products in many countries, our sales andproduction costs are mainly denominated in U.S. dollars and Euros. Our resultsof operations and financial condition are therefore impacted by the fluctuationof the euro against our reporting currency, the U.S. dollar. Approximately 56%of our 2009 net sales were derived from subsidiaries whose local currency isthe euro. This increases the impact of the fluctuation of the euro against theU.S. dollar.

 

We incur currencytransaction risk whenever we enter into either a purchase or sale transactionusing a currency other than the local currency of the transacting entity. Gainsand losses on currency transactions are included in operating income and doimpact our operating margins. With respect to currency translation risk, ourfinancial condition and results of operations are measured and recorded in therelevant domestic currency and then translated into U.S. dollars for inclusionin our consolidated financial statements. Gains and losses on currencytranslations are recorded in our consolidated financial statements as acomponent of “other comprehensive income (loss)” and do not impact ouroperating margins. Exchange rates between these currencies and U.S. dollars inrecent years have fluctuated significantly and may do so in the future.

 

In December 2008, weentered into foreign currency forward contracts to manage our exposure tofluctuations in currency rates on 

 

67

----

 

third-party salesdenominated in a currency other than the functional currency of the legalentity. These foreign currency forward contracts hedged the exposure tomovements in foreign exchange rates for forecasted transactions for twelvemonths. We hedged such exposures with foreign currency forward contractsdenominated in the same currency and with similar terms as the underlyingexposure. Therefore, the instruments were designated as foreign exchange cashflow hedges and are effective at generating offsetting changes in the fairvalue or cash flows of the hedged item or transaction. As a result, any foreigncurrency gains or losses related to changes in the fair value of the derivativeis accounted for as a component of accumulated other comprehensive income foras long as the hedge remains effective.  See discussion of derivativecontracts under Note 5, “Derivatives” for further details.

 

Our financial results aresubject to the effect of currency fluctuations on the translation of oureuro-denominated debt. As of December 31, 2009 and 2008, our totaleuro-denominated debt equaled €863.8 million ($1,237.0 million) and €1,069.2million ($1,493.8 million), respectively. A weakening or strengthening of theeuro against the U.S. dollar by $0.01 would decrease or increase, respectively,by $8.6 million and $10.7 million in 2009 and 2008, respectively, the U.S.dollar equivalent of our total euro-denominated debt. Gains and losses on thetranslation of debt denominated in a currency other than the functionalcurrency of the borrower are included as a separate component of “other expenses,net” in our statement of operations and “accumulated other comprehensive income”in our balance sheet.

 

In connection with theoffering of the 2014 Notes, we entered into a cross-currency interest rate swapin November 2004 with a notional amount of €155.6 million that effectivelyconverted the U.S. dollar fixed rate debt in respect of the 2014dollar-denominated notes sold into euro fixed rate debt.  The Company paid $32.9 million in connectionwith the settlement of this cross-currency swap in November 2009. We designatedthis contract as a hedge of the foreign currency exposure of our net investmentin our euro-denominated operations.  Inaddition, we designated the remaining portion of our euro-denominated debt thatis recorded on our U.S. books as a net investment hedge of our euro-denominatedinvestments as of October 1, 2005 (euro debt of €103.1 million at December 31,2009; $147.6 million). As a result, any foreign currency gains and lossesresulting from the euro-denominated debt discussed above is accounted for as acomponent of accumulated other comprehensive income.

 

**CommodityPrice Risk**

 

We are subject tocommodity price risk for certain of our raw materials, such as copper and zinc.We have not materially hedged this commodity price exposure to date.  In March 2008,we entered into derivative contracts in our Titanium Dioxide Pigments segmentto protect a portion of our exposure to movements in certain raw materialsprices.  These contracts expired in November 2008.  We electednot to apply hedge accounting for these derivative contracts and recorded themark-to-market of these contracts in cost of products sold in our ConsolidatedStatements of Operations.

 

68

----

 

**Item8. Financial Statements and Supplementary Data.**

 

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directorsand Stockholders of

Rockwood Holdings, Inc.**Princeton, New Jersey

 

We have audited theaccompanying consolidated balance sheets of Rockwood Holdings, Inc.**and subsidiaries (the “Company”) as of December 31,2009 and 2008, and the related consolidated statements of operations, changesin stockholders’ equity, and cash flows for each of the three years in theperiod ended December 31, 2009.  Our audits also included thefinancial statement schedule listed in the Index at Item 15. These financialstatements and financial statement schedule are the responsibility of theCompany’s management.  Our responsibility is to express an opinion on thefinancial statements and financial statement schedule based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the financial statementsare free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includes assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, suchconsolidated financial statements present fairly, in all material respects, thefinancial position of Rockwood Holdings, Inc.**and subsidiaries at December 31, 2009 and 2008, andthe results of their operations and their cash flows for each of the threeyears in the period ended December 31, 2009, in conformity with accountingprinciples generally accepted in the United States of America.  Also, inour opinion, such financial statement schedule, when considered in relation tothe basic consolidated financial statements taken as a whole, presents fairly,in all material respects, the information set forth therein.

 

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the Company’s internal control over financial reporting as of December 31,2009, based on the criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated February 26,2010 expressed an unqualified opinion on the Company’s internal control overfinancial reporting.

 

 
| /s/ Deloitte &  Touche LLP |   |
|--------------------------------|--------|
| Parsippany, New Jersey         |   |
| February 26, 2010         |   |

 

69

----

 

**ROCKWOODHOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Dollarsin millions, except per share amounts; shares in thousands)**

** **
| ** **                                                                       | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                       | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net  sales                                                                       |       | $                                | 2,962.9    |   | $ | 3,380.1 |   | $ | 3,065.2 |   |
| Cost  of products sold                                                           |       | 2,107.7                          |       | 2,365.8 |   | 2,089.1 |   |
| Gross  profit                                                                    |       | 855.2                            |       | 1,014.3 |   | 976.1 |   |
| Selling,  general and administrative expenses                                    |       | 614.1                            |       | 661.3 |   | 597.6 |   |
| Impairment  charges                                                              |       | —                           |       | 809.5 |   | — |   |
| Restructuring  and other severance costs                                         |       | 20.8                             |       | 35.3 |   | 12.0 |   |
| Loss  (gain) on sale of assets and other                                         |       | 0.5                              |       | (2.4 | ) | (4.7 | ) |
| Operating  income (loss)                                                         |       | 219.8                            |       | (489.4 | ) | 371.2 |   |
| Other  expenses, net:                                                            |       |                             |       |   |   |   |   |
| Interest  expense (a)                                                            |       | (180.2                           | )          | (231.1 | ) | (219.3 | ) |
| Interest  income                                                                 |       | 2.1                              |       | 6.0 |   | 11.5 |   |
| (Loss)  gain on early extinguishment of debt                                     |       | (26.6                            | )          | 4.0 |   | (18.6 | ) |
| Refinancing  expenses                                                            |       | —                           |       | — |   | (0.9 | ) |
| Foreign  exchange gain (loss), net                                               |       | 16.0                             |       | (32.3 | ) | 7.8 |   |
| Other,  net                                                                      |       | 0.6                              |       | 0.7 |   | — |   |
| Other  expenses, net                                                             |       | (188.1                           | )          | (252.7 | ) | (219.5 | ) |
| Income  (loss) from continuing operations before taxes                           |       | 31.7                             |       | (742.1 | ) | 151.7 |   |
| Income  tax provision (benefit)                                                  |       | 17.2                             |       | (23.9 | ) | 62.3 |   |
| Income  (loss) from continuing operations                                        |       | 14.5                             |       | (718.2 | ) | 89.4 |   |
| Income  from discontinued operations, net of tax                                 |       | 2.8                              |       | 3.3 |   | 25.3 |   |
| Gain  on sale of discontinued operations, net of tax                             |       | —                           |       | 42.9 |   | 210.4 |   |
| Net  income (loss)                                                               |       | 17.3                             |       | (672.0 | ) | 325.1 |   |
| Net  loss (income) attributable to noncontrolling interest                       |       | 3.8                              |       | 83.6 |   | (8.0 | ) |
| Net  income (loss) attributable to Rockwood Holdings, Inc.                  |       | $                                | 21.1       |   | $ | (588.4 | ) | $ | 317.1 |   |
|                                                                             |       |                             |       |   |   |   |   |
| Amounts  attributable to Rockwood Holdings, Inc.:                           |       |                             |       |   |   |   |   |
| Income  (loss) from continuing operations                                        |       | $                                | 18.3       |   | $ | (634.6 | ) | $ | 81.5 |   |
| Income  from discontinued operations                                             |       | 2.8                              |       | 46.2 |   | 235.6 |   |
| Net  income (loss)                                                               |       | $                                | 21.1       |   | $ | (588.4 | ) | $ | 317.1 |   |
|                                                                             |       |                             |       |   |   |   |   |
| Basic  earnings (loss) per share attributable to Rockwood Holdings, Inc.:   |       |                             |       |   |   |   |   |
| Earnings  (loss) from continuing operations                                      |       | $                                | 0.25       |   | $ | (8.58 | ) | $ | 1.10 |   |
| Earnings  from discontinued operations                                           |       | 0.03                             |       | 0.63 |   | 3.20 |   |
| Basic  earnings (loss) per share                                                 |       | $                                | 0.28       |   | $ | (7.95 | ) | $ | 4.30 |   |
|                                                                             |       |                             |       |   |   |   |   |
| Diluted  earnings (loss) per share attributable to Rockwood Holdings, Inc.: |       |                             |       |   |   |   |   |
| Earnings  (loss) from continuing operations                                      |       | $                                | 0.24       |   | $ | (8.58 | ) | $ | 1.07 |   |
| Earnings  from discontinued operations                                           |       | 0.04                             |       | 0.63 |   | 3.09 |   |
| Diluted  earnings (loss) per share                                               |       | $                                | 0.28       |   | $ | (7.95 | ) | $ | 4.16 |   |
|                                                                             |       |                             |       |   |   |   |   |
| Weighted  average number of basic shares outstanding                             |       | 74,096                           |       | 73,983 |   | 73,817 |   |
| Weighted  average number of diluted shares outstanding                           |       | 74,851                           |       | 73,983 |   | 76,279 |   |
|                                                                             |       |                             |       |   |   |   |   |
| (a) Interest  expense includes:                                             |       |                             |       |   |   |   |   |
| Interest  expense on debt                                                        |       | $                                | (176.2     | ) | $ | (170.0 | ) | $ | (177.9 | ) |
| Mark-to-market  gains (losses) on interest rate swaps                            |       | 3.9                              |       | (51.5 | ) | (32.2 | ) |
| Deferred  financing costs                                                        |       | (7.9                             | )          | (9.6 | ) | (9.2 | ) |
| Total                                                                            |       | $                                | (180.2     | ) | $ | (231.1 | ) | $ | (219.3 | ) |

 

See accompanyingnotes to consolidated financial statements.

 

70

----

 

**ROCKWOODHOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(Dollarsin millions, except per share amounts; shares in thousands)**

 
| ** **                                                                                                                                                                                                                                           | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                           | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **ASSETS**                                                                                                                                                                                                                                           |       |                  |       |   |   |
| Current  assets:                                                                                                                                                                                                                                     |       |                  |       |   |   |
| Cash  and cash equivalents                                                                                                                                                                                                                           |       | $                     | 300.5      |   | $ | 468.7 |   |
| Accounts  receivable, net                                                                                                                                                                                                                            |       | 450.4                 |       | 464.6 |   |
| Inventories                                                                                                                                                                                                                                          |       | 517.0                 |       | 641.0 |   |
| Deferred  income taxes                                                                                                                                                                                                                               |       | 12.5                  |       | 22.1 |   |
| Prepaid  expenses and other current assets                                                                                                                                                                                                           |       | 66.5                  |       | 65.9 |   |
| Total  current assets                                                                                                                                                                                                                                |       | 1,346.9               |       | 1,662.3 |   |
| Property,  plant and equipment, net                                                                                                                                                                                                                  |       | 1,702.5               |       | 1,752.2 |   |
| Goodwill                                                                                                                                                                                                                                             |       | 939.2                 |       | 917.8 |   |
| Other  intangible assets, net                                                                                                                                                                                                                        |       | 704.7                 |       | 754.8 |   |
| Deferred  debt issuance costs, net of accumulated amortization of $10.8 and $39.2,  respectively                                                                                                                                                     |       | 26.0                  |       | 39.1 |   |
| Deferred  income taxes                                                                                                                                                                                                                               |       | 24.9                  |       | 11.6 |   |
| Other  assets                                                                                                                                                                                                                                        |       | 37.5                  |       | 39.5 |   |
| Total  assets                                                                                                                                                                                                                                        |       | $                     | 4,781.7    |   | $ | 5,177.3 |   |
| **LIABILITIES**                                                                                                                                                                                                                                      |       |                  |       |   |   |
| Current  liabilities:                                                                                                                                                                                                                                |       |                  |       |   |   |
| Accounts  payable                                                                                                                                                                                                                                    |       | $                     | 237.3      |   | $ | 260.8 |   |
| Income  taxes payable                                                                                                                                                                                                                                |       | 11.5                  |       | 4.1 |   |
| Accrued  compensation                                                                                                                                                                                                                                |       | 77.7                  |       | 92.6 |   |
| Restructuring  liability                                                                                                                                                                                                                             |       | 7.5                   |       | 18.9 |   |
| Accrued  expenses and other current liabilities                                                                                                                                                                                                      |       | 149.4                 |       | 198.5 |   |
| Deferred  income taxes                                                                                                                                                                                                                               |       | 2.6                   |       | 9.0 |   |
| Long-term  debt, current portion                                                                                                                                                                                                                     |       | 94.2                  |       | 90.9 |   |
| Total  current liabilities                                                                                                                                                                                                                           |       | 580.2                 |       | 674.8 |   |
| Long-term  debt                                                                                                                                                                                                                                      |       | 2,434.1               |       | 2,720.3 |   |
| Pension  and related liabilities                                                                                                                                                                                                                     |       | 410.1                 |       | 352.0 |   |
| Deferred  income taxes                                                                                                                                                                                                                               |       | 69.1                  |       | 97.6 |   |
| Other  liabilities                                                                                                                                                                                                                                   |       | 145.9                 |       | 191.6 |   |
| Total  liabilities                                                                                                                                                                                                                                   |       | 3,639.4               |       | 4,036.3 |   |
| Restricted  stock units                                                                                                                                                                                                                              |       | 1.5                   |       | 2.1 |   |
| **EQUITY**                                                                                                                                                                                                                                           |       |                  |       |   |   |
| Rockwood  Holdings, Inc. stockholders’ equity:                                                                                                                                                                                             |       |                  |       |   |   |
| Common  stock ($0.01 par value, 400,000 shares authorized, 74,259 shares issued and  74,165 shares outstanding at December 31, 2009; 400,000 shares  authorized, 74,155 shares issued and 74,061 shares outstanding at  December 31, 2008) |       | 0.7                   |       | 0.7 |   |
| Paid-in  capital                                                                                                                                                                                                                                     |       | 1,169.2               |       | 1,163.5 |   |
| Accumulated  other comprehensive income                                                                                                                                                                                                              |       | 204.5                 |       | 204.0 |   |
| Accumulated  deficit                                                                                                                                                                                                                                 |       | (522.2                | )          | (543.3 | ) |
| Treasury  stock, at cost                                                                                                                                                                                                                             |       | (1.4                  | )          | (1.4 | ) |
| Total  Rockwood Holdings, Inc. stockholders’ equity                                                                                                                                                                                        |       | 850.8                 |       | 823.5 |   |
| Noncontrolling  interest                                                                                                                                                                                                                             |       | 290.0                 |       | 315.4 |   |
| Total  equity                                                                                                                                                                                                                                        |       | 1,140.8               |       | 1,138.9 |   |
| Total  liabilities and equity                                                                                                                                                                                                                        |       | $                     | 4,781.7    |   | $ | 5,177.3 |   |

 

See accompanyingnotes to consolidated financial statements.

 

71

----

 

**ROCKWOODHOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Dollarsin millions)**

** **
| ** **                                                                                                                                                                                                                                         | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                                                                                                                         | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                                                                                                                                                                          |       |                             |       |   |   |   |   |
| Net  income (loss)                                                                                                                                                                                                                                 |       | $                                | 17.3       |   | $ | (672.0 | ) | $ | 325.1 |   |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities:                                                                                                                                                          |       |                             |       |   |   |   |   |
| Income  from discontinued operations, net of tax                                                                                                                                                                                                   |       | (2.8                             | )          | (3.3 | ) | (25.3 | ) |
| Gain  on sale of discontinued operations, net of tax                                                                                                                                                                                               |       | —                           |       | (42.9 | ) | (210.4 | ) |
| Depreciation  and amortization                                                                                                                                                                                                                     |       | 283.0                            |       | 258.9 |   | 211.7 |   |
| Deferred  financing costs amortization                                                                                                                                                                                                             |       | 7.9                              |       | 9.6 |   | 9.2 |   |
| Loss  (gain) on early extinguishment of debt (a)                                                                                                                                                                                                   |       | 26.6                             |       | (4.0 | ) | 18.6 |   |
| Foreign  exchange (gain) loss, net                                                                                                                                                                                                                 |       | (16.0                            | )          | 32.3 |   | (7.8 | ) |
| Fair  value adjustment of derivatives                                                                                                                                                                                                              |       | (3.9                             | )          | 51.5 |   | 32.2 |   |
| Bad  debt provision                                                                                                                                                                                                                                |       | 0.5                              |       | 3.4 |   | (1.3 | ) |
| Acquired  in-process research and development                                                                                                                                                                                                      |       | —                           |       | 2.9 |   | — |   |
| Stock-based  compensation                                                                                                                                                                                                                          |       | 4.7                              |       | 4.1 |   | 3.9 |   |
| Deferred  income taxes                                                                                                                                                                                                                             |       | (14.5                            | )          | (64.5 | ) | 29.0 |   |
| Impairment  charges                                                                                                                                                                                                                                |       | —                           |       | 809.5 |   | — |   |
| Loss  (gain) on sale of assets and other                                                                                                                                                                                                           |       | 1.0                              |       | 0.7 |   | (4.7 | ) |
| Changes  in assets and liabilities, net of the effect of foreign currency translation  and acquisitions:                                                                                                                                           |       |                             |       |   |   |   |   |
| Accounts  receivable                                                                                                                                                                                                                               |       | 26.1                             |       | 36.8 |   | 7.1 |   |
| Inventories                                                                                                                                                                                                                                        |       | 133.5                            |       | (66.8 | ) | (34.5 | ) |
| Prepaid  expenses and other assets                                                                                                                                                                                                                 |       | 0.3                              |       | 10.5 |   | (18.5 | ) |
| Accounts  payable                                                                                                                                                                                                                                  |       | (21.9                            | )          | (52.1 | ) | 1.6 |   |
| Income  taxes payable                                                                                                                                                                                                                              |       | 5.4                              |       | (1.4 | ) | (6.4 | ) |
| Accrued  expenses and other liabilities                                                                                                                                                                                                            |       | (77.6                            | )          | (28.6 | ) | 0.7 |   |
| Net  cash provided by operating activities of continuing operations                                                                                                                                                                                |       | 369.6                            |       | 284.6 |   | 330.2 |   |
| Net  cash provided by operating activities of discontinued operations                                                                                                                                                                              |       | —                           |       | 12.0 |   | 38.3 |   |
| **Net cash provided by operating activities**                                                                                                                                                                                                      |       | 369.6                            |       | 296.6 |   | 368.5 |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                                                                                                                                                                          |       |                             |       |   |   |   |   |
| Acquisitions,  including transaction fees and payments for prior acquisitions, net of cash  aquired                                                                                                                                                |       | (6.4                             | )          | (226.7 | ) | (240.1 | ) |
| Post  closing purchase price consideration                                                                                                                                                                                                         |       | —                           |       | 29.8 |   | — |   |
| Capital  expenditures, excluding capital leases                                                                                                                                                                                                    |       | (154.1                           | )          | (224.0 | ) | (193.2 | ) |
| Cross  currency swap settlement                                                                                                                                                                                                                    |       | (32.9                            | )          | — |   | — |   |
| Proceeds  from formation of Viance joint venture, net                                                                                                                                                                                              |       | —                           |       | — |   | 73.0 |   |
| Contractual  advance to Titanium Dioxide Pigments noncontrolling shareholder                                                                                                                                                                       |       | (16.0                            | )          | — |   | — |   |
| Proceeds  on sale of assets                                                                                                                                                                                                                        |       | 8.2                              |       | 9.1 |   | 14.2 |   |
| Net  cash used in investing activities of continuing operations                                                                                                                                                                                    |       | (201.2                           | )          | (411.8 | ) | (346.1 | ) |
| Net  cash (used in) provided by investing activities of discontinued operations,  including net sale proceeds of $122.0 and $731.7 in 2008 and 2007,  respectively                                                                                 |       | (3.1                             | )          | 116.3 |   | 723.7 |   |
| **Net cash (used in) provided by investing activities**                                                                                                                                                                                            |       | (204.3                           | )          | (295.5 | ) | 377.6 |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                                                                                                                                                                          |       |                             |       |   |   |   |   |
| Issuance  of common stock, net of fees                                                                                                                                                                                                             |       | 1.0                              |       | 2.3 |   | 1.5 |   |
| Repayment  of 2011 Notes                                                                                                                                                                                                                           |       | —                           |       | — |   | (273.4 | ) |
| Prepayment  of 2014 Notes                                                                                                                                                                                                                          |       | (146.8                           | )          | (10.2 | ) | — |   |
| Proceeds  from Titanium Dioxide Pigments revolving credit facility                                                                                                                                                                                 |       | 14.1                             |       | — |   |   |   |
| Prepayment  of senior secured debt                                                                                                                                                                                                                 |       | (102.3                           | )          | — |   | — |   |
| Repayment  of senior secured debt                                                                                                                                                                                                                  |       | (56.5                            | )          | (68.7 | ) | (57.1 | ) |
| Repayment  of senior secured debt revolver                                                                                                                                                                                                         |       | —                           |       | — |   | (37.0 | ) |
| Payments  on other long-term debt                                                                                                                                                                                                                  |       | (5.5                             | )          | (30.9 | ) | (24.1 | ) |
| Deferred  financing costs                                                                                                                                                                                                                          |       | (14.9                            | )          | (5.0 | ) | — |   |
| Fees  related to early extinguishment of debt                                                                                                                                                                                                      |       | (12.0                            | )          | — |   | (14.5 | ) |
| Loan  from Viance noncontrolling shareholder                                                                                                                                                                                                       |       | 2.0                              |       | — |   | — |   |
| Titanium  Dioxide Pigments venture financing                                                                                                                                                                                                       |       | —                           |       | 362.5 |   | — |   |
| Payment  of assumed debt to Titanium Dioxide Pigments noncontrolling shareholder                                                                                                                                                                   |       | —                           |       | (141.4 | ) | — |   |
| Distribution  to noncontrolling shareholder                                                                                                                                                                                                        |       | —                           |       | (3.9 | ) | (7.2 | ) |
| Net  cash (used in) provided by financing activities of continuing operations                                                                                                                                                                      |       | (320.9                           | )          | 104.7 |   | (411.8 | ) |
| Net  cash used in financing activities of discontinued operations                                                                                                                                                                                  |       | —                           |       | — |   | — |   |
| **Net cash (used in) provided by financing activities**                                                                                                                                                                                            |       | (320.9                           | )          | 104.7 |   | (411.8 | ) |
| Effect  of exchange rate changes on cash and cash equivalents                                                                                                                                                                                      |       | (12.6                            | )          | 12.8 |   | (10.3 | ) |
| Net  (decrease) increase in cash and cash equivalents                                                                                                                                                                                              |       | (168.2                           | )          | 118.6 |   | 324.0 |   |
| Less  increase in cash and cash equivalents from discontinued operations, net (b)                                                                                                                                                             |       | —                           |       | — |   | (1.6 | ) |
| (Decrease)  increase in cash and cash equivalents from continuing operations                                                                                                                                                                       |       | (168.2                           | )          | 118.6 |   | 322.4 |   |
| Cash  and cash equivalents of continuing operations, beginning of period                                                                                                                                                                           |       | 468.7                            |       | 350.1 |   | 27.7 |   |
| Cash  and cash equivalents of continuing operations, end of period                                                                                                                                                                                 |       | $                                | 300.5      |   | $ | 468.7 |   | $ | 350.1 |   |
|                                                                                                                                                                                                                                               |       |                             |       |   |   |   |   |
|                                                                                                                                                                                                                                                    |       |                             |       |   |   |   |   |
| (a) Includes  the write-off of deferred financing costs of $20.9 and lender fees related to  the early extinguishment of debt of $12.0, partially offset  by a discount on the prepayment of the 2014  Notes of $6.3.                    |
| (b) Excludes  net sale proceeds of $122.0 and intercompany transfers of $6.3 for the year  ended December 31, 2008. Excludes net sale proceeds of $731.7 and  intercompany transfers of $28.7 for the year ended December 31, 2007. |
|                                                                                                                                                                                                                                               |
| Supplemental  disclosures of cash flow information:                                                                                                                                                                                                |       |                             |       |   |   |   |   |
| Interest  paid                                                                                                                                                                                                                                     |       | $                                | 164.3      |   | $ | 167.3 |   | $ | 174.4 |   |
| Income  taxes paid, net of refunds                                                                                                                                                                                                                 |       | 26.0                             |       | 41.9 |   | 39.8 |   |
| Non-cash  investing activities:                                                                                                                                                                                                                    |       |                             |       |   |   |   |   |
| Titanium  Dioxide Pigments venture formation, net                                                                                                                                                                                                  |       | —                           |       | 246.0 |   | — |   |
| Acquisition  of capital equipment                                                                                                                                                                                                                  |       | 17.6                             |       | 22.7 |   | 24.7 |   |
| Fees  related to early extinguishment of debt                                                                                                                                                                                                      |       | 0.4                              |       | — |   | — |   |

 

See accompanyingnotes to consolidated financial statements.

 

72

----

 

**ROCKWOODHOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CHANGES INSTOCKHOLDERS’ EQUITY**

**(Dollarsin millions; shares in thousands)**

 
| ** **                                                                                        | ** ** | ** ** | ** ** | ** **         | ** ** | **Rockwood  Holdings, Inc. Stockholders’ Equity** | ** ** | ** **  | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------|------------|--------------------|------------|-------------------------------------------------------------|------------|-------------|------------|
| ** **                                                                                        | ** ** | ** ** | ** ** | ** **         | ** ** | ** **                                                  | ** ** | ** **  | ** ** | ** ** | ** ** | **Accumulated** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                        | ** ** | ** ** | ** ** | ** **         | ** ** | ** **                                                  | ** ** | ** **  | ** ** | ** ** | ** ** | **Other** | ** ** | **Retained** | ** ** | **Treasury** | ** ** | ** ** | ** ** |
| ** **                                                                                        | ** ** | ** ** | ** ** | **Comprehensive**  | ** ** | **Common  Stock**                                           | ** ** | **Paid-in** | ** ** | **Comprehensive** | ** ** | **Earnings** | ** ** | **Stock** | ** ** | **Noncontrolling** | ** ** |
| ** **                                                                                        | ** ** | **Total**  | ** ** | **Income  (Loss)** | ** ** | **Shares**                                                  | ** ** | **Amount**  | ** ** | **Capital** | ** ** | **Income  (Loss)** | ** ** | **(Deficit)** | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Interest** | ** ** |
| Balance,  January 1, 2007                                                                    |       | $          | 1,154.1    |               |       |                                                        | 73,785     |        | $          | 0.7 |   | $ | 1,151.8 |   | $ | 234.0 |   | $ | (264.6 | ) | 94 |   | $ | (1.4 | ) | $ | 33.6 |   |
| Issuance  of common stock                                                                         |       | 1.5        |       |               |       | 110                                                         |       | —      |       | 1.5 |   | — |   | — |   | — |   | — |   | — |   |
| Deferred  compensation                                                                            |       | 4.7        |       |               |       | —                                                      |       | —      |       | 4.7 |   | — |   | — |   | — |   | — |   | — |   |
| Acquisition  of noncontrolling interest in subsidiaries                                           |       | 173.2      |       |               |       | —                                                      |       | —      |       | — |   | — |   | — |   | — |   | — |   | 173.2 |   |
| Sale  of noncontrolling interest in subsidiaries                                                  |       | (33.4      | )          |               |       | —                                                      |       | —      |       | — |   | — |   | — |   | — |   | — |   | (33.4 | ) |
| Distribution  to noncontrolling shareholder                                                       |       | (7.2       | )          |               |       | —                                                      |       | —      |       | — |   | — |   | — |   | — |   | — |   | (7.2 | ) |
| Restricted  stock units                                                                           |       | (1.8       | )          |               |       | —                                                      |       | —      |       | (1.8 | ) | — |   | — |   | — |   | — |   | — |   |
| Pension  related adjustments, net of tax                                                          |       | 36.7       |       | 36.7               |       | —                                                      |       | —      |       | — |   | 36.7 |   | — |   | — |   | — |   | — |   |
| Effect  of adoption of FIN No. 48                                                            |       | (7.4       | )          | (7.4               | )          | —                                                      |       | —      |       | — |   | — |   | (7.4 | ) | — |   | — |   | — |   |
| Foreign  currency translation                                                                     |       | 178.7      |       | 178.7              |       | —                                                      |       | —      |       | — |   | 177.6 |   | — |   | — |   | — |   | 1.1 |   |
| Sales  of investments in foreign entities, primarily Electronics business                         |       | (35.8      | )          | (35.8              | )          | —                                                      |       | —      |       | — |   | (35.8 | ) | — |   | — |   | — |   | — |   |
| Intercompany  foreign currency loans                                                              |       | 66.8       |       | 66.8               |       | —                                                      |       | —      |       | — |   | 66.8 |   | — |   | — |   | — |   | — |   |
| Net  investment hedges, net of tax                                                                |       | (108.3     | )          | (108.3             | )          | —                                                      |       | —      |       | — |   | (108.3 | ) | — |   | — |   | — |   | — |   |
| Net  income                                                                                       |       | 325.1      |       | 325.1              |       | —                                                      |       | —      |       | — |   | — |   | 317.1 |   | — |   | — |   | 8.0 |   |
| Comprehensive  income                                                                             |       |       |       | $                  | 455.8      |                                                        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance,  December 31, 2007                                                                  |       | 1,746.9    |       |               |       | 73,895                                                      |       | 0.7         |       | 1,156.2 |   | 371.0 |   | 45.1 |   | 94 |   | (1.4 | ) | 175.3 |   |
| Issuance  of common stock                                                                         |       | 2.3        |       |               |       | 166                                                         |       | —      |       | 2.3 |   | — |   | — |   | — |   | — |   | — |   |
| Deferred  compensation                                                                            |       | 5.3        |       |               |       | —                                                      |       | —      |       | 5.3 |   | — |   | — |   | — |   | — |   | — |   |
| Acquisition  of noncontrolling interest in subsidiaries                                           |       | 239.9      |       |               |       | —                                                      |       | —      |       | — |   | — |   | — |   | — |   | — |   | 239.9 |   |
| Distribution  to noncontrolling shareholder                                                       |       | (3.9       | )          |               |       | —                                                      |       | —      |       | — |   | — |   | — |   | — |   | — |   | (3.9 | ) |
| Restricted  stock units                                                                           |       | (0.3       | )          |               |       | —                                                      |       | —      |       | (0.3 | ) | — |   | — |   | — |   | — |   | — |   |
| Pension  related adjustments, net of tax                                                          |       | (27.9      | )          | (27.9              | )          | —                                                      |       | —      |       | — |   | (27.9 | ) | — |   | — |   | — |   | — |   |
| Foreign  currency translation                                                                     |       | (158.3     | )          | (158.3             | )          | —                                                      |       | —      |       | — |   | (146.0 | ) | — |   | — |   | — |   | (12.3 | ) |
| Intercompany  foreign currency loans                                                              |       | (32.2      | )          | (32.2              | )          | —                                                      |       | —      |       | — |   | (32.2 | ) | — |   | — |   | — |   | — |   |
| Net  investment hedges, net of tax                                                                |       | 38.9       |       | 38.9               |       | —                                                      |       | —      |       | — |   | 38.9 |   | — |   | — |   | — |   | — |   |
| Cash  flow hedges, net of tax                                                                     |       | 0.2        |       | 0.2                |       | —                                                      |       | —      |       | — |   | 0.2 |   | — |   | — |   | — |   | — |   |
| Net  loss                                                                                         |       | (672.0     | )          | (672.0             | )          | —                                                      |       | —      |       | — |   | — |   | (588.4 | ) | — |   | — |   | (83.6 | ) |
| Comprehensive  loss                                                                               |       |       |       | $                  | (851.3     | )                                                           |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance,  December 31, 2008                                                                  |       | 1,138.9    |       |               |       | 74,061                                                      |       | 0.7         |       | 1,163.5 |   | 204.0 |   | (543.3 | ) | 94 |   | (1.4 | ) | 315.4 |   |
| Issuance  of common stock                                                                         |       | 1.0        |       |               |       | 104                                                         |       | —      |       | 1.0 |   | — |   | — |   | — |   | — |   | — |   |
| Deferred  compensation                                                                            |       | 4.1        |       |               |       | —                                                      |       | —      |       | 4.1 |   | — |   | — |   | — |   | — |   | — |   |
| Change  in estimate of fair value of assets contributed to the Titanium Dioxide  Pigments venture |       | (16.5      | )          |               |       | —                                                      |       | —      |       | — |   | — |   | — |   | — |   | — |   | (16.5 | ) |
| Restricted  stock units                                                                           |       | 0.6        |       |               |       | —                                                      |       | —      |       | 0.6 |   | — |   | — |   | — |   | — |   | — |   |
| Pension  related adjustments, net of tax                                                          |       | (31.4      | )          | (31.4              | )          | —                                                      |       | —      |       | — |   | (24.4 | ) | — |   | — |   | — |   | (7.0 | ) |
| Foreign  currency translation                                                                     |       | 49.5       |       | 49.5               |       | —                                                      |       | —      |       | — |   | 47.6 |   | — |   | — |   | — |   | 1.9 |   |
| Intercompany  foreign currency loans                                                              |       | 15.6       |       | 15.6               |       | —                                                      |       | —      |       | — |   | 15.6 |   | — |   | — |   | — |   | — |   |
| Net  investment hedges, net of tax                                                                |       | (37.9      | )          | (37.9              | )          | —                                                      |       | —      |       | — |   | (37.9 | ) | — |   | — |   | — |   | — |   |
| Cash  flow hedges, net of tax                                                                     |       | (0.4       | )          | (0.4               | )          | —                                                      |       | —      |       | — |   | (0.4 | ) | — |   | — |   | — |   | — |   |
| Net  income (loss)                                                                                |       | 17.3       |       | 17.3               |       | —                                                      |       | —      |       | — |   | — |   | 21.1 |   | — |   | — |   | (3.8 | ) |
| Comprehensive  income                                                                             |       |       |       | $                  | 12.7       |                                                        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance,  December 31, 2009                                                                  |       | $          | 1,140.8    |               |       |                                                        | 74,165     |        | $          | 0.7 |   | $ | 1,169.2 |   | $ | 204.5 |   | $ | (522.2 | ) | 94 |   | $ | (1.4 | ) | $ | 290.0 |   |

 

See accompanyingnotes to consolidated financial statements.

 

73

----

 

**ROCKWOODHOLDINGS, INC. AND SUBSIDIARIES**

**Notes To Consolidated FinancialStatements**

 

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

 

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

 

Rockwood was formed inconnection with an acquisition of certain assets, stock and businesses fromLaporte plc (“Laporte”) on November 20, 2000 (the “KKR Acquisition”) byaffiliates of Kohlberg Kravis Roberts & Co. L.P. (“KKR”). Thebusinesses acquired focus on specialty compounds, iron-oxide pigments, timbertreatment chemicals and clay-based additives. On July 31, 2004, theCompany completed the acquisition of certain businesses of Dynamit Nobel frommg technologies ag, now known as GEA Group Aktiengesellschaft (“GEA Group”). Theremaining businesses acquired are focused on highly specialized markets andconsist of surface treatment and lithium chemicals, advanced ceramics andtitanium dioxide pigments. Effective November 2007, affiliates of KKRcontrol less than a majority of the voting power of the Company’s outstandingcommon stock.

 

***Basis of Presentation***—The accompanying financial statements of Rockwood arepresented on a consolidated basis. All intercompany accounts and transactionshave been eliminated in consolidation. In the opinion of management, this information contains all adjustmentsnecessary for a fair presentation of the results for the periods presented.

 

The Company’snoncontrolling interest in continuing operations represents the total of thenoncontrolling party’s interest in certain investments (principally the Viance,LLC joint venture and the Titanium Dioxide Pigments venture) that areconsolidated but less than 100% owned. On January 2, 2007, ChemicalSpecialties, Inc. (“CSI”), a wholly-owned subsidiary of the Company withinthe Timber Treatment Chemicals business of the Performance Additives segment,and Rohm and Haas Company (a subsidiary of The Dow Chemical Company) completedthe formation of Viance, LLC, a joint venture company that provides anextensive range of advanced wood treatment technologies and services to theglobal wood treatment industry.  The Company has concluded that Rockwoodis the primary beneficiary of the joint venture and as such has consolidatedthe joint venture.  At December 31, 2009 and 2008, the Viance, LLCjoint venture had no third party debt outstanding, no consolidated assets ofthe Company were pledged as collateral for any joint venture obligations andthe general creditors of the joint venture had no recourse to the generalcredit of the Company.  The net assets of the Viance, LLC joint ventureincluded in the Consolidated Balance Sheets of the Company were $85.4 millionand $87.5 million at December 31, 2009 and 2008, respectively, and wereprimarily related to identifiable intangible assets. All intercompany accounts,balances and transactions have been eliminated.

 

The Company completed aTitanium Dioxide Pigments venture with Kemira in September 2008.  TheCompany has consolidated this venture and has reported Kemira’s interest asnoncontrolling interest in the consolidated financial statements. This entitydid not meet the definition of a variable interest entity, and therefore wasconsolidated.  See Note 4, “Acquisitions,”for further details.

 

Unless otherwise noted,all balance sheet items as of December 31, 2009 which are denominated inEuros are converted at the December 31, 2009 exchange rate of €1.00 =$1.4321.

 

***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. See Note 3, “Segment Information,” for furtherdetails.

 

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 

 

74

----

 

liabilities, thedisclosure of contingent assets and liabilities at the date of the financialstatements, and revenue and expenses during the periods reported. Theseestimates include, among other things, assessing the collectability of accountsreceivable, the use and recoverability of inventory, the valuation of deferredtax assets, the measurement of the accrual for uncertain tax benefits,impairment of goodwill as well as property, plant and equipment and otherintangible assets, the accrual of environmental and legal reserves and theuseful lives of tangible and intangible assets, among others. Actual resultscould differ from those estimates. Such estimates also include the fairvalue of assets acquired and liabilities assumed allocated to the purchaseprice of business combinations consummated.

 

***Major Customers and Concentration of Credit***—The Company has a number of majorend-user, retail and OEM customers, with the largest concentration in Europeand the United States. No single customer accounted for more than 2% of netsales during any of the periods presented. The Company does not believe amaterial part of its business is dependent upon any single customer, the lossof which would have a material long-term impact on the business of the Company.However, the loss of one or more of the Company’s largest customers would mostlikely have a negative short-term impact on the Company’s results ofoperations. Financial instruments which potentially subject the Company toconcentrations of credit risk consist primarily of accounts receivable andderivative contracts.

 

***Accounts Receivable***—The allowance for doubtful accounts is estimated ateach reporting date based on factors such as receivable age, customer liquiditystatus and previous write-off history. The Company performs ongoing creditevaluations of customers and generally does not require collateral. Creditinsurance is maintained by certain of the Company’s businesses. An allowance ismaintained for aggregate expected credit losses. Write-offs are charged to theallowance when taken, net of recoveries. Allowance for doubtful accountactivity is as follows:

 
| ** **                     | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------|------------|----------------------------------|------------|
| **($ in millions)**       | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Balance,  January 1       |       | $                                | 10.8       |   | $ | 8.6 |   | $ | 8.6 |   |
| Additions  charged to expense  |       | 2.8                              |       | 4.5 |   | 0.5 |   |
| Write-offs,  net of recoveries |       | (2.3                             | )          | (1.1 | ) | (1.8 | ) |
| Other                          |       | 1.5                              |       | (1.2 | ) | 1.3 |   |
| Balance,  December 31     |       | $                                | 12.8       |   | $ | 10.8 |   | $ | 8.6 |   |

 

***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 with potentiallyadverse effects. A majority of the Company’s sales and expenses are denominatedin currencies other than U.S. dollars. Changes in exchange rates may have amaterial effect on the Company’s reported results of operations and financialposition. In addition, a significant portion of the Company’s indebtedness isdenominated in Euros.

 

***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 2009, 2008 and 2007, isrealized when the service is performed. Liabilities for product warranties areless than 1% of consolidated net sales as of December 31, 2009 and 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 December 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 €581.0 million ($832.1 million) of intercompany loans.

 

75

----

 

***Advertising***—The Company expenses advertising costs as incurred.

 

***Research and Development***—Research and development costs are charged toexpense, as incurred. Such costs were $46.4 million, $51.7 million and $44.0million for the years ended December 31, 2009, 2008 and 2007,respectively.

 

***Accounting for Shipping and Handling Costs***—The Company records shipping andhandling costs in cost of products sold and records shipping and handling costsbilled to customers in net sales.

 

***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.

 

***Inventories***—Inventories are stated at the lower of cost ormarket. Cost is determined primarily on average cost or the first-in, first-outmethod. Inventory quantities on hand are regularly reviewed, and wherenecessary, provisions for excess and obsolete inventory are recorded basedprimarily on either the Company’s estimated forecast of product demand andproduction requirements or historical usage. See Note 7, “Inventories.”

 

***Property, Plant and Equipment***—Property, plant and equipment are statedat cost less accumulated depreciation. Depreciation is determined using thestraight-line method over the various asset classes. Estimated lives generallyrange from 20-30 years for buildings and improvements (including land improvements),7-12 years for machinery and equipment, 3-5 years for furniture and fixturesand 14-50 years for mining rights. See Note 8, “Property, Plant and Equipment.”

 

The estimated usefullives of leasehold improvements are the lesser of the estimated life of theimprovement or the term of the lease.

 

Major renewals andimprovements are capitalized and minor replacements, maintenance and repairsare charged to current operations as incurred. Upon retirement or disposal ofassets, the cost and related accumulated depreciation are removed from thebalance sheet and any gain or loss is reflected in the statement of operations.

 

The Company classifiesdepreciation and amortization in its Consolidated Statements of Operationsconsistent with the utilization of the underlying assets as follows:

 
| ** **                                        | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|
| **($ in millions)**                          | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Cost  of products sold                            |       | $                                | 185.9      |   | $ | 161.9 |   | $ | 129.5 |   |
| Selling,  general and administrative expenses (a) |       | 97.1                             |       | 97.0 |   | 82.2 |   |
| Total  depreciation and amortization              |       | $                                | 283.0      |   | $ | 258.9 |   | $ | 211.7 |   |

 

----

(a)                Primarily consists of amortization costs.

 

***Gain/Loss on Early Extinguishment of Debt***— In 2009, the Company recorded a loss onearly extinguishment of debt of $26.6 million related to the write-off ofdeferred financing costs of $20.9 million and lender fees related to the earlyextinguishment of debt of $12.0 million, partially offset by a discount of $6.3million related to the repurchase of $153.2 million in aggregate principalamount of the 2014 Notes.  In 2008, theCompany redeemed €11.0 million of its 2014 Notes at a discount and recorded again of $4.0 million. In 2007, the Company paid a redemption premium of $14.5million and wrote off $4.1 million of deferred financing costs associated withthe redemption of the 2011 Notes.

 

***Goodwill***—Goodwill represents the cost in excess of fair valueof net assets acquired for transactions accounted for using the purchase methodof accounting. See Note 9, “Goodwill,” for details of goodwill activity bysegment.

 

***Other Intangible Assets***—Other intangible assets primarily consists of patentsand other intellectual property, trade names and trademarks, and customerrelationships. Patents and other intellectual property are recorded at theirestimated fair values at the time of acquisition and are being amortized overtheir estimated remaining useful lives, ranging from 4-20 years. Trade namesand trademarks are being amortized from 18-25 years, customer relationships arebeing amortized over periods ranging from 7-15 years and supply agreements arebeing amortized over periods ranging from 10-15 years. See Note 10, “OtherIntangible Assets.”

 

***Impairment Accounting***— The recoverability of goodwill is reviewed on anannual basis during the fourth quarter. Additionally, the recoverability of goodwill,long-lived tangible, and other intangible assets is reviewed when events orchanges in circumstances occur indicating that the carrying value of the assetsmay not be recoverable.  The Company determined that its reporting unitsfor its 

 

76

----

 

goodwill impairmentreview are its operating segments or components of an operating segment thatconstitute a business for which discrete financial information is available andfor which segment management regularly reviews the operating results. Based on this analysis, the Company has identified nine reporting units withinits reportable segments.

 

In accordance with theaccounting guidance for determining a goodwill impairment*,*there is a two-step method.  In the first step, the Company determines thefair value of each reporting unit (as discussed in the following sentence) andcompares that fair value to the carrying value of such reporting unit. This begins with estimating the fair value of each reporting unit, which isderived from peer multiples.  Specifically, the estimate of the fair valueof such reporting unit is based on an industry metric that is the ratio ofenterprise value (“EV” which is commonly defined as market capitalization, pluslong-term debt, less cash) to Adjusted EBITDA of the relevant benchmark peercompanies and groups; this is the peer multiple approach.  The Companyuses EV multiples to the last twelve months Adjusted EBITDA and to the nextfiscal year Adjusted EBITDA.  The peer companies are typically based uponthe competitors disclosed in Item 1, “Business” for each of the reportingunits.  The Company then multiplies this ratio by the Adjusted EBITDA forthe recently completed year and the budgeted Adjusted EBITDA for the upcomingyear of such reporting unit and compares it to the carrying value of suchreporting unit.  If the product of such peer multiple and reporting unit’sAdjusted EBITDA is less than such carrying value, it may be an indication of animpairment. If the initial review indicates there may be an impairment, areview based on expected future cash flows is performed; this is the discountedcash flow approach.  For the discounted cash flow approach, the Companymakes certain assumptions about, among other things, estimates of future cashflows, including growth rates, price increases, capital expenditures, thebenefits of recent acquisitions and expected synergies, and an appropriatediscount rate.  If the results of the peer multiple approach and thediscounted cash flow approach differ materially, the relevant facts andcircumstances are reviewed and a qualitative assessment is made to determinethe proper weighting.  If the results of the first step indicate thecarrying amount of a reporting unit is higher than its fair value, the secondstep must be performed. Specifically, the Company determines the implied fairvalue of goodwill in the same manner as if the Company had acquired thosereporting units.  In the second step, the potential impairment is computedby comparing the implied fair value of the reporting unit’s goodwill with thecarrying amount of goodwill.  If the carrying amount of the reporting unit’sgoodwill is greater than the implied fair value of its goodwill, an impairmentloss must be recognized for the excess.  If necessary, the Company mayconsult with valuation specialists to assist with its goodwill impairmentreview.

 

These calculations arebased on inherent assumptions and estimates about future cash flows andappropriate benchmark peer companies or groups. Subsequent changes in theseassumptions could result in future impairment. Although the Companyconsistently uses the same methods in developing the assumptions and estimatesunderlying the fair value calculations, such estimates are uncertain by natureand can vary from actual results.

 

In the fourth quarter of2008, the Company recorded a non-cash goodwill impairment charge of $809.5million. See Note 9, “Goodwill,” for further details.

 

***Financial Instruments***—Management believes the carrying amount of financialinstruments, including accounts receivable, accounts payable and debt,approximates fair value, except as described in Note 5, “Derivatives,” and Note6, “Fair Value Measurements.”

 

***Derivatives***— All derivatives are recognized as either assets orliabilities at fair value. Changes in the fair value of derivatives notdesignated as hedging instruments are recognized currently in earnings whilechanges in the fair value of derivatives that are designated as hedginginstruments are recognized as a component of comprehensive income. The Companyuses derivative instruments to manage its exposure to market risks associatedwith fluctuations in interest rates and foreign currency exchange rates. See “ComprehensiveIncome” section of Note 1 and Note 19, “Accumulated Other Comprehensive Income,”for the impact of the Company’s net investment and cash flow hedges. TheCompany does not enter into derivative contracts for trading purposes nor doesit use leveraged or complex instruments.

 

***Pension, Postemployment and Postretirement Costs***— Defined benefit costs and liabilitiesand Postretirement benefit costs and liabilities have been determined inaccordance with accounting standards for retirement benefits*.* Postemployment benefit costs and liabilities have been determined inaccordance with accounting standards for nonretirement postemployment benefits*. *See Note 15, “Employee Benefit Plans,” forfurther details.

 

***Related Party Transactions***—In the ordinary course of business,Rockwood has engaged in transactions with certain related parties including KKRand DLJ Merchant Banking Partners III, L.P. (“DLJMB”) and affiliates of each.

 

Credit Suisse Securities(USA) LLC (“Credit Suisse”), an affiliate of DLJMB, served as an underwriter inthe secondary offering of the Company’s common stock by certain sellingstockholders in November 2007 and June 2008. The Company did notreceive any proceeds in these offerings or pay any commissions.  Also,from time to time, Credit Suisse provides the Company with services inconnection with certain transactions. For example, the Company paid fees of$15.5 million in 2009 related to the amendment of its senior secured creditagreement, $0.5 million in 2008 primarily in connection with the TitaniumDioxide Pigments venture completed 

 

77

----

 

in September 2008and $3.2 million in 2007 for advice primarily related to the sale of theElectronics business.

 

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 $31.2million and $13.4 million, respectively, of energy from Kemira during 2009 and2008. As of December 31, 2009 and 2008, $2.8 million and $9.4 million,respectively, was due to Kemira, for energy purchases. In 2009, the venturealso made a contractual advance of $16.0 million in connection with thisagreement. Minimum annual payments under the energy agreement are approximately$17.2 million per year. In connection with this arrangement, the venture hasapproximately $30.7 million of non-interest bearing notes receivable fromKemira that are due in August 2028. The carrying value of the notes receivablewere $5.4 million at December 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 consisted of sales toKemira of $2.8 million and $0.5 million in 2009 and 2008, respectively, andamounts due from Kemira of $0.2 million and $0.2 million at December 31,2009 and 2008, respectively. In addition, there were sales from the TitaniumDioxide Pigments venture to companies owned by Kemira of $11.1 million and $5.8million during 2009 and 2008, respectively, of which $0.1 million and $1.7million was due to the venture at December 31, 2009 and 2008,respectively.

 

As part of the Viance,LLC joint venture, the Company’s CSI subsidiary within the Timber TreatmentChemicals business and The Dow Chemical Company (“Dow”) entered into certainrelated party transactions.  Viance, LLC does not own manufacturingfacilities, and as a result, relies on the members of the joint venture toprovide substantially all product and distribution requirements. In addition, themembers sell products to Viance, LLC.  Transactions between Viance, LLCand Dow amounted to: purchases from Dow of $5.0 million, $9.2 million and $8.2million in 2009, 2008 and 2007, respectively, and sales to Dow of $0.3 million,$0.5 million and $2.7 million in 2009, 2008 and 2007, respectively. Amounts due to Dow totaled $0.6 million and $3.0 million at December 31,2009 and 2008, respectively.

 

***Income Taxes***— 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.

 

The accounting foruncertainty in income taxes recognized in an entity’s financial statements andthe recognition threshold and measurement attributes for financial statementdisclosure of tax positions taken or expected to be taken on a tax return wereclarified in an accounting standard adopted in January 2007. The impact ofan uncertain income tax position on the income tax return must be recognized atthe largest amount that is more-likely-than-not to not be sustained upon auditby the relevant authority. An uncertain income tax position will not berecognized if it has less than a 50% likelihood of being sustained. 

 

The Company recordsliabilities for uncertain tax benefits net of deferred tax assets associatedwith tax loss carryforwards for liabilities arising in the same year as theasset and for liabilities arising in different years from the asset, providedthat the related tax loss can be carried back or forward to offset the liability.

 

The Company has allocateda tax benefit to its U.S. loss from continuing operations, offset by a taxprovision charged to discontinued operations and separately to othercomprehensive 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 temporary differences.

 

·                  Future taxable income exclusive of reversing temporary differences andcarryforwards.

 

·                  Taxable income in prior carry back year (s) if carry back ispermitted under the tax law.

 

78

----

 

·                  Tax planning strategies that would, if necessary, be implemented 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 will produce more thanenough taxable income to realize the deferred tax asset based on existing salesprices and cost structures.

 

·                  An excess of appreciated asset value over the tax basis of the entity’snet assets in an amount sufficient to realize the deferred 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 stockholders’ equity in thebalance sheets and net investment and 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. See Note 19, “Accumulated Other Comprehensive Income.”

 

***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.

 

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

 

The Company grantedadditional stock options and restricted stock units in 2009, 2008 and 2007 tocertain employees of Rockwood Corporate Headquarters and its business units.The restricted stock units contain a provision in which the units shallimmediately vest and become converted into the right to receive a cash paymentupon a change in control as defined in the equity agreement. As theprovisions for redemption are outside the control of the Company, the fairvalue of these units as of December 31, 2009 and 2008 have been recordedas mezzanine equity (outside of permanent equity) in the Consolidated BalanceSheets.

 

79

----

 

***Recent Accounting Pronouncements***—The Company adopted the followingaccounting pronouncements:

 

In December 2007,the FASB issued a statement that establishes principles and requirements forhow the acquirer recognizes and measures in its financial statements theidentifiable assets acquired, the liabilities assumed, any noncontrollinginterest in the acquiree and the goodwill acquired. This statement alsoestablishes disclosure requirements to enable users of financial statements toevaluate the nature and financial effects of the business combination. Thisstatement was adopted as of January 1, 2009 and is effective foracquisitions completed on or after January 1, 2009.

 

In December 2007,the FASB issued a statement that pertains to the accounting and reporting forminority interests. Minority Interests were recharacterized as noncontrollinginterests and classified as a component of equity (but separate from parent’sequity). This statement also establishes reporting requirements that providesufficient disclosures that clearly identify and distinguish between theinterests of the parent and the interests of the noncontrollingowners. This statement was adopted as of January 1, 2009 andprimarily relates to the Company’s Viance, LLC joint venture and TitaniumDioxide Pigments venture.

 

In February 2008,the FASB issued a statement that delayed the effective date of a previousstatement on fair value measurements for all nonfinancial assets andnonfinancial liabilities, except those that are recognized or disclosed at fairvalue in the financial statements on a recurring basis (at leastannually). The Company applied the provisions of this statement on January 1,2009, and this statement did not have a material impact on its financialstatements.

 

In March 2008, theFASB issued a statement that changed the disclosure requirements for derivativeinstruments and hedging activities, including enhanced disclosures about (a) howand why an entity uses derivative instruments, (b) how derivativeinstruments and related hedged items are accounted for, and (c) howderivative instruments and related hedged items affect an entity’s financialposition, financial performance, and cash flows. The Company adopted thisstatement on January 1, 2009. See Note 5, “Derivatives,” for thedisclosure requirements of this new statement.

 

In April 2008, theFASB issued a statement that amends the factors that should be considered indeveloping renewal or extension assumptions used to determine the useful lifeof a recognized intangible asset. The intent of this statement is to improvethe consistency between the useful life of a recognized intangible asset andthe period of expected cash flows used to measure the fair value of the asset.This statement 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 a statement that provides guidance on an employer’s disclosuresabout plan assets of a defined benefit pension or other postretirementplan. This includes disclosing objectives about how investment allocationdecisions are made, the major categories of plan assets, the inputs andvaluation techniques used to measure the fair value of plan assets, the effectof fair value measurements using significant unobservable inputs (Level 3) onchanges in plan assets, and significant concentrations of risk within planassets. The disclosures about plan assets required by this statement areeffective beginning with the Company’s 2009 Form 10-K.  See Note 15, “Employee Benefit Plans,” forthe disclosure requirements of this new statement.

 

In April 2009, theFASB issued a statement that addressed application issues raised by preparers,auditors, and members of the legal profession on initial recognition andmeasurement, subsequent measurement and accounting, and disclosure of assetsand liabilities arising from contingencies in a business combination. Thisstatement was adopted as of January 1, 2009 and is effective foracquisitions completed on or after January 1, 2009.

 

In April 2009, theFASB issued a statement that provides additional guidance for estimating fairvalue when the volume and level of activity for the asset or liability havesignificantly decreased. This statement also includes guidance onidentifying circumstances that indicate a transaction is not orderly. Thisstatement was effective for the Company beginning with its Form 10-Q forthe period ended June 30, 2009 and did not have a material impact on itsfinancial statements.

 

In June 2009, theFASB issued a statement that requires more information about transfers offinancial assets, including securitization transactions, and where entitieshave continuing exposure to the risks related to transferred financialassets. It also eliminates the concept of a “qualifying special purposeentity,” changes the requirements for derecognizing financial assets and willrequire additional disclosures. This Statement is effective for financialasset transfers occurring after January 1, 2010 for the Company. TheCompany does not expect this statement to have a material impact on itsfinancial statements.

 

In June 2009, theFASB issued a statement that requires an enterprise to perform an analysis todetermine whether the enterprise’s variable interest entity or interests giveit a controlling financial interest in a variable interest entity. It also willrequire additional disclosures about involvement with variable interestentities and any significant changes in risk exposure due to thatinvolvement. This

 

80

----

 

Statement is effectivefor the Company as of January 1, 2010.  The Company does not expectthis statement to have a material impact on its financial statements.

 

In June 2009, theFASB issued a statement that establishes the FASB Accounting Standards Codification(“Codification”) as the source of authoritative accounting principlesrecognized by the FASB to be applied to nongovernmental entities in thepreparation of financial statements in conformity with GAAP. Rules andinterpretative releases of the SEC under authority of federal securities lawsare also sources of authoritative GAAP. The Codification does not changecurrent GAAP. Instead, it introduces a new structure that reorganizes thethousands of U.S. GAAP pronouncements into roughly 90 accounting Topics. TheCodification supersedes all accounting standards in existing FASB, EmergingIssues Task Force (“EITF”), American Institute of Certified Public Accountants(“AICPA”), and related standards. This Codification was effective for theCompany’s financial statements beginning with its Form 10-Q for the periodended September 30, 2009.

 

In August 2009, theFASB issued an accounting update that provides clarification for the fair valuemeasurement of liabilities and provides clarification in circumstances in whicha quoted price in an active market for the identical liability is notavailable. This update was effective for the Company in its fourth quarterbeginning October 1, 2009. The adoption of this update did not have amaterial impact on the financial statements.

 

In September 2009,the FASB issued an accounting update that addressed the need for additionalimplementation guidance on accounting for uncertainty in income taxes. Thisupdate was effective for the Company’s financial statements beginning with its Form 10-Qfor the period ended September 30, 2009. The adoption of this update didnot have a material impact on the financial statements.

 

In October 2009, theFASB issued an accounting update that addressed the accounting formultiple-deliverable arrangements to enable vendors to account for products orservices separately rather than as a combined unit. In addition, the amendmentsin this update significantly expand the disclosures related to a vendor’smultiple-deliverable arrangements. This update is effective for the Company inits first quarter beginning January 1, 2011. The Company does not expectthis update to have a material impact on its financial statements.

 

**2.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. On January 9, 2007, theCompany completed the sale of its Groupe Novasep segment. The transaction wasvalued at approximately €425.0 million, which included the repayment of thirdparty and intercompany indebtedness. On December 31, 2007, the Companycompleted the sale of its Electronics business, excluding its European waferreclaim business, for $315.6 million. The Company’s financial statements havebeen reclassified to reflect the pool and spa chemicals business, the GroupeNovasep segment and the Electronics business sold as discontinued operationsfor all periods presented.

 

For the year ended December 31,2009, income from discontinued operations, net of tax, was $2.8 million and wasprimarily related to the favorable resolution of a claim against the Company’sformer Groupe Novasep business and the reversal of certain reserves no longerdeemed necessary in connection with the sale of the Electronics business.

 

Operating results of thediscontinued operations of the pool and spa chemicals business for the yearended December 31, 2008 are as follows:

 
| **($ in millions)**                      | ** ** | **Total** | ** ** |
|-----------------------------------------------|------------|-----------|------------|
| Net  sales                                    |       | $         | 54.9       |   |
| Cost  of products sold                        |       | 39.4      |       |
| Gross  profit                                 |       | 15.5      |       |
| Selling,  general and administrative expenses |       | 10.9      |       |
| Gain  on sale of business/assets              |       | (66.3     | )          |
| Operating  income                             |       | 70.9      |       |
| Other  expenses:                              |       |      |       |
| Interest  expense                             |       | (0.2      | )          |
| Other  expenses                               |       | (0.2      | )          |
| Income  before taxes                          |       | 70.7      |       |
| Income  tax provision                         |       | 26.9      |       |
| Net  income                                   |       | $         | 43.8       |   |

 

81

----

 

The Company also recordeda tax gain of $2.4 million related to the sale of Groupe Novasep for the yearended December 31, 2008.

 

Operating results of thediscontinued operations for the year ended December 31, 2007 are asfollows:

 
| ** **                                          | ** ** | **Pool and Spa** | ** ** | ** **      | ** ** | ** **  | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|------------------|------------|-----------------|------------|-------------|------------|------------|------------|
| ** **                                          | ** ** | **Chemicals**    | ** ** | **Electronics** | ** ** | **Groupe**  | ** ** | ** ** | ** ** |
| **($ in millions)**                            | ** ** | **Business**     | ** ** | **Business**    | ** ** | **Novasep** | ** ** | **Total**  | ** ** |
| Net  sales                                          |       | $                | 71.2       |            | $          | 201.9       |       | $          | 8.9        |   | $ | 282.0 |   |
| Cost  of products sold                              |       | 46.1             |       | 149.4           |       | 7.0         |       | 202.5      |       |
| Gross  profit                                       |       | 25.1             |       | 52.5            |       | 1.9         |       | 79.5       |       |
| Selling,  general and administrative expenses       |       | 14.1             |       | 28.8            |       | 1.1         |       | 44.0       |       |
| Gain  on sale of business/assets                    |       | —           |       | (106.8          | )          | (117.7      | )          | (224.5     | )          |
| Operating  income                                   |       | 11.0             |       | 130.5           |       | 118.5       |       | 260.0      |       |
| Other  expenses, net:                               |       |             |       |            |       |        |       |       |       |
| Interest  expense                                   |       | —           |       | —          |       | (0.3        | )          | (0.3       | )          |
| Interest  income                                    |       | (0.3             | )          | 0.8             |       | —      |       | 0.5        |       |
| Loss  on early extinguishment of debt               |       | (0.5             | )          | (0.3            | )          | —      |       | (0.8       | )          |
| Foreign  exchange loss, net                         |       | —           |       | (0.5            | )          | —      |       | (0.5       | )          |
| Other  expenses, net                                |       | (0.8             | )          | —          |       | (0.3        | )          | (1.1       | )          |
| Income  before taxes                                |       | 10.2             |       | 130.5           |       | 118.2       |       | 258.9      |       |
| Income  tax provision                               |       | 4.0              |       | 17.1            |       | 2.1         |       | 23.2       |       |
| Net  income                                         |       | 6.2              |       | 113.4           |       | 116.1       |       | 235.7      |       |
| Net  income attributable to noncontrolling interest |       | —           |       | —          |       | (0.1        | )          | (0.1       | )          |
| Net  income attributable to Rockwood Holdings, Inc. |       | $                | 6.2        |            | $          | 113.4       |       | $          | 116.0      |   | $ | 235.6 |   |

 

The Company received netcash proceeds of $122.0 million in 2008 from the sale of the pool and spachemicals business. These proceeds were reported as net cash provided byinvesting activities of discontinued operations for the year ended December 31,2008 in the Company’s Consolidated Statements of Cash Flows. The net gain onthe pool and spa chemicals business sale recorded in the fourth quarter of 2008was $40.5 million (net of $25.7 million of taxes).

 

The Company received netcash proceeds of $420.7 million and $311.0 million in 2007 from the sale ofGroupe Novasep and the Electronics business, excluding the European waferreclaim business, respectively. These proceeds were reported as net cashprovided by investing activities of discontinued operations for the year ended December 31,2007 in the Company’s Consolidated Statements of Cash Flows. The net gain onthe Groupe Novasep sale recorded in the first quarter of 2007 was $115.6million (net of $2.1 million of German taxes) and the net gain on the saleof the Electronics business, excluding the European wafer reclaim business,recorded in the fourth quarter of 2007 was $94.8 million (net of $12.0 millionof taxes).

 

**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 wafer reclaimbusiness works with semiconductor manufacturers to refurbish used test wafersand return them to the manufacturer for reuse in test and process monitorapplications.

 

82

----

 

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:

 
| **($ in millions)**              | ** ** | **Specialty  Chemicals** | ** ** | **Performance  Additives** | ** ** | **Titanium  Dioxide  Pigments** | ** ** | **Advanced  Ceramics** | ** ** | **Specialty  Compounds** | ** ** | **Corporate  and other** | ** ** | **Consolidated** | ** ** |
|---------------------------------------|------------|--------------------------|------------|----------------------------|------------|---------------------------------|------------|------------------------|------------|--------------------------|------------|--------------------------|------------|------------------|------------|
| ** **                            | ** ** | ** **               | ** ** | ** **                 | ** ** | ** **                      | ** ** | ** **             | ** ** | ** **               | ** ** | ** **               | ** ** | ** **       | ** ** |
| **Year ended December 31, 2009** |       |                     |       |                       |       |                            |       |                   |       |                     |       |                     |       |             |       |
| Net  sales                            |       | $                        | 996.6      |                       | $          | 671.5                           |       | $                      | 666.3      |                     | $          | 412.2                    |       | $                | 210.7      |   | $ | 5.6 |   | $ | 2,962.9 |   |
| Total  Adjusted EBITDA                |       | 245.7                    |       | 95.1                       |       | 97.3                            |       | 107.7                  |       | 34.0                     |       | (39.3                    | )          | 540.5            |       |
| Capital  expenditures                 |       | 46.2                     |       | 26.2                       |       | 40.6                            |       | 32.8                   |       | 5.6                      |       | 2.7                      |       | 154.1            |       |
| **Year ended December 31, 2008** |       |                     |       |                       |       |                            |       |                   |       |                     |       |                     |       |             |       |
| Net  sales                            |       | $                        | 1,232.6    |                       | $          | 835.6                           |       | $                      | 534.8      |                     | $          | 505.9                    |       | $                | 261.5      |   | $ | 9.7 |   | $ | 3,380.1 |   |
| Total  Adjusted EBITDA                |       | 313.0                    |       | 107.1                      |       | 83.1                            |       | 150.2                  |       | 34.0                     |       | (48.5                    | )          | 638.9            |       |
| Capital  expenditures                 |       | 74.5                     |       | 45.6                       |       | 42.5                            |       | 46.1                   |       | 9.6                      |       | 5.7                      |       | 224.0            |       |
| **Year ended December 31, 2007** |       |                     |       |                       |       |                            |       |                   |       |                     |       |                     |       |             |       |
| Net  sales                            |       | $                        | 1,082.9    |                       | $          | 798.5                           |       | $                      | 442.9      |                     | $          | 452.5                    |       | $                | 276.6      |   | $ | 11.8 |   | $ | 3,065.2 |   |
| Total  Adjusted EBITDA                |       | 262.2                    |       | 150.7                      |       | 82.7                            |       | 128.1                  |       | 34.3                     |       | (55.6                    | )          | 602.4            |       |
| Capital  expenditures                 |       | 63.5                     |       | 37.0                       |       | 39.2                            |       | 31.2                   |       | 17.6                     |       | 4.7                      |       | 193.2            |       |

 
| ** **                  | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **    | ** ** | ** **           | ** ** | ** **       | ** ** |
|-----------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|---------------|------------|----------------------|------------|------------------|------------|
| ** **                  | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | **Corporate** | ** ** | ** **           | ** ** | ** **       | ** ** |
| ** **                  | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **and other** | ** ** | **Eliminations (a)** | ** ** | **Consolidated** | ** ** |
| Identifiable  assets as of: |       |          |       |            |       |         |       |         |       |          |       |          |       |                 |       |             |       |
| December 31,  2009     |       | $             | 2,088.9    |            | $          | 762.7        |       | $            | 945.1      |          | $          | 866.3         |       | $                    | 124.9      |             | $          | 323.6 |   | $ | (329.8 | ) | $ | 4,781.7 |   |
| December 31,  2008     |       | 2,030.9       |       | 829.8           |       | 990.0        |       | 879.9        |       | 130.2         |       | 541.4         |       | (224.9               | )          | 5,177.3          |       |
|                             |            |               |            |                 |            |              |            |              |            |               |            |               |            |                      |            |                  |            |  |  |  |  |  |  |  |  |

 

----

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

 

The following tablerepresents summarized geographic information with net sales based on seller’slocation:

 
| ** **               | ** ** | **Year ended December 31,** | ** ** |
|--------------------------|------------|----------------------------------|------------|
| **($ in millions)** | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Net sales:**           |       |                             |       |   |   |   |   |
| Germany                  |       | $                                | 1,176.0    |   | $ | 1,371.0 |   | $ | 1,298.6 |   |
| Rest  of Europe          |       | 751.5                            |       | 799.3 |   | 655.1 |   |
| United  States           |       | 733.5                            |       | 890.2 |   | 852.5 |   |
| Rest  of World           |       | 301.9                            |       | 319.6 |   | 259.0 |   |
|                     |       | $                                | 2,962.9    |   | $ | 3,380.1 |   | $ | 3,065.2 |   |

 

83

----

 

The following tablepresents the Company’s long-lived assets located in the regions indicated:

 
| ** **               | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-----------------------|------------|
| **($ in millions)** | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **Long-lived assets:**   |       |                  |       |   |   |
| Germany                  |       | $                     | 782.2      |   | $ | 791.5 |   |
| Rest  of Europe          |       | 427.7                 |       | 456.9 |   |
| United  States           |       | 275.9                 |       | 293.4 |   |
| Rest  of World           |       | 216.7                 |       | 210.4 |   |
|                     |       | $                     | 1,702.5    |   | $ | 1,752.2 |   |

 

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

 

84

----

 
| ** **                                             | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **    | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|---------------|------------|------------------|------------|
| ** **                                             | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | **Corporate** | ** ** | ** **       | ** ** |
| **($ in millions)**                               | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **and other** | ** ** | **Consolidated** | ** ** |
| **Year ended December 31, 2009**                  |       |          |       |            |       |         |       |         |       |          |       |          |       |             |       |
| Income  (loss) from continuing operations before taxes |       | $             | 86.5       |            | $          | (15.0        | )          | $            | (8.3       | )             | $          | 5.3           |       | $                | 12.2       |   | $ | (49.0 | ) | $ | 31.7 |   |
| Interest  expense (a)                                  |       | 69.2          |       | 31.4            |       | 26.3         |       | 36.3         |       | 10.2          |       | 6.8           |       | 180.2            |       |
| Interest  income                                       |       | (0.9          | )          | 0.4             |       | (1.7         | )          | (0.2         | )          | —        |       | 0.3           |       | (2.1             | )          |
| Depreciation  and amortization                         |       | 74.1          |       | 62.7            |       | 77.7         |       | 52.0         |       | 10.7          |       | 5.8           |       | 283.0            |       |
| Restructuring  and other severance costs               |       | 5.8           |       | 6.3             |       | 0.1          |       | 7.1          |       | 0.2           |       | 1.3           |       | 20.8             |       |
| Systems/organization  establishment expenses           |       | 0.7           |       | 2.1             |       | 3.1          |       | 0.3          |       | —        |       | 0.1           |       | 6.3              |       |
| Acquisition  and disposal costs                        |       | 0.1           |       | 2.7             |       | 0.1          |       | —       |       | —        |       | 0.1           |       | 3.0              |       |
| Loss  on early extinguishment of debt                  |       | 11.6          |       | 2.4             |       | —       |       | 7.2          |       | 0.8           |       | 4.6           |       | 26.6             |       |
| Loss  on sale of assets and other                      |       | 0.3           |       | —          |       | —       |       | 0.2          |       | —        |       | —        |       | 0.5              |       |
| Foreign  exchange (gain) loss, net                     |       | (4.2          | )          | 0.1             |       | —       |       | (0.6         | )          | —        |       | (11.3         | )          | (16.0            | )          |
| Other                                                  |       | 2.5           |       | 2.0             |       | —       |       | 0.1          |       | (0.1          | )          | 2.0           |       | 6.5              |       |
| Total  Adjusted EBITDA                                 |       | $             | 245.7      |            | $          | 95.1         |       | $            | 97.3       |          | $          | 107.7         |       | $                | 34.0       |   | $ | (39.3 | ) | $ | 540.5 |   |
| **Year ended December 31, 2008**                  |       |          |       |            |       |         |       |         |       |          |       |          |       |             |       |
| Income  (loss) from continuing operations before taxes |       | $             | 166.5      |            | $          | (470.6       | )          | $            | (266.3     | )             | $          | 61.3          |       | $                | (92.8      | ) | $ | (140.2 | ) | $ | (742.1 | ) |
| Interest  expense (a)                                  |       | 56.2          |       | 30.4            |       | 37.9         |       | 34.2         |       | 9.3           |       | 63.1          |       | 231.1            |       |
| Interest  income                                       |       | (1.2          | )          | 1.3             |       | (0.2         | )          | (0.2         | )          | (0.5          | )          | (5.2          | )          | (6.0             | )          |
| Depreciation  and amortization                         |       | 69.7          |       | 67.2            |       | 56.3         |       | 47.0         |       | 11.3          |       | 7.4           |       | 258.9            |       |
| Impairment  charges                                    |       | —        |       | 456.6           |       | 247.7        |       | —       |       | 105.2         |       | —        |       | 809.5            |       |
| Restructuring  and other severance costs               |       | 17.2          |       | 10.3            |       | 0.2          |       | 4.5          |       | 0.7           |       | 2.4           |       | 35.3             |       |
| Systems/organization  establishment expenses           |       | 2.7           |       | 5.1             |       | 3.4          |       | 0.3          |       | 0.4           |       | 1.0           |       | 12.9             |       |
| Acquisition  and disposal costs                        |       | —        |       | 0.9             |       | —       |       | —       |       | 0.4           |       | 0.4           |       | 1.7              |       |
| Inventory  write-up charges                            |       | 0.8           |       | 1.5             |       | 3.3          |       | 1.3          |       | —        |       | —        |       | 6.9              |       |
| Gain  on early extinguishment of debt                  |       | —        |       | —          |       | —       |       | —       |       | —        |       | (4.0          | )          | (4.0             | )          |
| (Gain)  loss on sale of assets and other               |       | (1.3          | )          | —          |       | 1.1          |       | 0.1          |       | —        |       | (2.3          | )          | (2.4             | )          |
| Acquired  in-process research and development          |       | —        |       | 2.6             |       | —       |       | 0.3          |       | —        |       | —        |       | 2.9              |       |
| Foreign  exchange loss (gain), net                     |       | 2.9           |       | 0.3             |       | (0.3         | )          | 1.4          |       | —        |       | 28.0          |       | 32.3             |       |
| Other                                                  |       | (0.5          | )          | 1.5             |       | —       |       | —       |       | —        |       | 0.9           |       | 1.9              |       |
| Total  Adjusted EBITDA                                 |       | $             | 313.0      |            | $          | 107.1        |       | $            | 83.1       |          | $          | 150.2         |       | $                | 34.0       |   | $ | (48.5 | ) | $ | 638.9 |   |
| **Year ended December 31, 2007**                  |       |          |       |            |       |         |       |         |       |          |       |          |       |             |       |
| Income  (loss) from continuing operations before taxes |       | $             | 165.4      |            | $          | 62.5         |       | $            | 6.0        |          | $          | 50.9          |       | $                | 11.8       |   | $ | (144.9 | ) | $ | 151.7 |   |
| Interest  expense (a)                                  |       | 42.0          |       | 19.5            |       | 32.4         |       | 33.8         |       | 9.4           |       | 82.2          |       | 219.3            |       |
| Interest  income                                       |       | —        |       | (1.6            | )          | (0.2         | )          | 0.3          |       | (0.3          | )          | (9.7          | )          | (11.5            | )          |
| Depreciation  and amortization                         |       | 54.4          |       | 57.6            |       | 42.4         |       | 40.5         |       | 11.2          |       | 5.6           |       | 211.7            |       |
| Restructuring  and other severance costs               |       | 2.6           |       | 2.2             |       | —       |       | 2.5          |       | —        |       | 4.7           |       | 12.0             |       |
| Systems/organization  establishment expenses           |       | (0.4          | )          | 2.8             |       | —       |       | 1.1          |       | 0.6           |       | 0.1           |       | 4.2              |       |
| Acquisition  and disposal costs                        |       | 0.1           |       | 0.1             |       | 1.6          |       | —       |       | 0.5           |       | —        |       | 2.3              |       |
| Inventory  write-up charges                            |       | 0.1           |       | 5.5             |       | —       |       | 0.1          |       | —        |       | —        |       | 5.7              |       |
| Loss  on early extinguishment of debt                  |       | —        |       | 1.4             |       | —       |       | —       |       | 1.1           |       | 16.1          |       | 18.6             |       |
| Refinancing  expenses                                  |       | —        |       | —          |       | —       |       | —       |       | —        |       | 0.9           |       | 0.9              |       |
| (Gain)  loss on sale of assets and other               |       | (0.2          | )          | 0.2             |       | 0.5          |       | —       |       | —        |       | (5.2          | )          | (4.7             | )          |
| Foreign  exchange gain, net                            |       | (0.6          | )          | (0.2            | )          | —       |       | (1.2         | )          | —        |       | (5.8          | )          | (7.8             | )          |
| Other                                                  |       | (1.2          | )          | 0.7             |       | —       |       | 0.1          |       | —        |       | 0.4           |       | —           |       |
| Total  Adjusted EBITDA                                 |       | $             | 262.2      |            | $          | 150.7        |       | $            | 82.7       |          | $          | 128.1         |       | $                | 34.3       |   | $ | (55.6 | ) | $ | 602.4 |   |

 

----

(a)                Includes gains (losses) of $3.9 million, $(51.5)million, $(32.2) million for the years ended December 31, 2009, 2008 and2007, respectively, representing the movement in the mark-to-market valuationof the Company’s interest rate and cross-currency hedging instruments.

 

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

 

*Itemsexcluded from Adjusted EBITDA*

 

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

 
| · | * * | *Impairment  charges*:   In the fourth quarter of 2008, the Company recorded goodwill impairment  charges of $809.5 million in several businesses (see Note 9, “Goodwill,” for  further details).                                                     |
|--------|----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | * * | * *                                                                                                                                                                                                                                                             |
| · | * * | *Restructuring and other severance  costs*:   Charges of $20.8 million, $35.3 million and $12.0 million were recorded in  2009, 2008 and 2007, respectively, for miscellaneous restructuring  activities, including facility closures, headcount reductions and |

 

85

----

 

severance costs (see Note18, “Restructuring And Other Severance Costs,” for further details).

 

·                  *Systems/organization establishmentexpenses*: In 2009, expenses of $6.3 million were recorded related to the integration ofbusinesses acquired, primarily related to the completion of the TitaniumDioxide Pigments venture in September 2008 and the acquisition of theElementis plc business in the Performance Additives segment in August 2007. In2008, expenses of $12.9 million were recorded primarily related to theintegration of businesses acquired in the Specialty Chemicals, PerformanceAdditives and Titanium Dioxide Pigments segments. In 2007, expenses of $4.2million were recorded primarily related to the integration of businessesacquired in the Performance Additives and Advanced Ceramics segments.

 

·                  *Acquisition and disposal costs*:  Costs of $3.0 million, $1.7million and $2.3 million were recorded in 2009, 2008 and 2007, respectively, inconnection with potential and actual acquisitions and dispositions.

 

·                  *Inventory write-up charges*:  All inventories acquired in anacquisition must be revalued to “fair value.” This resulted in a consequentialreduction in gross profit of $6.9 million and $5.7 million for the years ended December 31,2008 and 2007, respectively, as the inventory was sold in the normal course ofbusiness. The reduction in 2008 and 2007 primarily related to the acquisitionof Holliday Pigments in August 2008 in the Performance Additives segmentand the completion of the Titanium Dioxide Pigments venture in September 2008.The reduction in gross profit in 2007 was primarily related to the acquisitionof the Elementis plc business.

 

·                  *(Gain) loss on early extinguishmentof debt*:  In2009, the Company recorded a loss on early extinguishment of debt of $26.6million related to the write-off of deferred financing costs of $20.9 millionand lender fees related to the early extinguishment of debt of $12.0 million,partially offset by a discount of $6.3 million related to the repurchase of$153.2 million in aggregate principal amount of the 2014 Notes.  In 2008, the Company redeemed €11.0 millionof the 2014 Notes at a discount and recorded a gain of $4.0 million. In 2007,the Company paid a redemption premium of $14.5 million to redeem long-term debtand wrote off $4.1 million of deferred financing costs associated with theredemption of the 2011 Notes.

 

·                  *Refinancing expenses*:  In March 2007, the Companyexpensed $0.9 million related to the fourth amendment of the senior securedcredit agreement to refinance all outstanding borrowings under the tranche Fterm loans with new tranche G term loans.

 

·                  *(Loss) gain on sale of assets andother*:  TheCompany recorded (losses) gains, net of $(0.5) million, $2.4 million and $4.7million in 2009, 2008 and 2007, respectively, related to asset sales. TheCompany recorded a loss of $0.5 million for the year ended December 31,2009 primarily related to the sale of property, plant and equipment within theSpecialty Chemicals and Advanced Ceramics segments. The gain recorded in 2008primarily relates to the sale of land that was acquired as part of theacquisition of Dynamit Nobel in 2004. The gain reported in 2007 primarilyrelates to the sale of the U.S. wafer reclaim business.

 

·                  *Acquired in-process research anddevelopment*: Acquired in-process research and development costs are charged to expense as ofthe acquisition date. For the year ended December 31, 2008, the Companyexpensed $2.9 million primarily related to the acquisition of Holliday Pigmentsin August 2008 in the Performance Additives segment. These acquiredin-process research and development costs are included in selling, general andadministrative expenses in the Consolidated Statements of Operations.

 

·                  *Foreign exchange loss (gain)*:  For 2009, the Company recordedforeign exchange gains of $16.0 million primarily due to the impact of thestronger pound sterling, as well as a stronger euro, as of December 31,2009 versus December 31, 2008 in connection with non-operatingEuro-denominated transactions. For 2008, foreign exchange losses of $32.3million were recorded primarily due to the impact of the weaker pound sterlingas of December 31, 2008 versus December 31, 2007 related tonon-operating euro-denominated transactions. For the year ended December 31,2007, foreign exchange gains of $7.8 million were recorded primarily related toeuro-denominated debt, cash and inter-company loans.

 

·                  *Other:*  In 2009, the Company recordedexpenses of $6.5 million primarily related to an increase in reserves coveringlegacy obligations assumed in connection with the KKR acquisition in 2000 andthe acquisition of the Dynamit Nobel businesses in 2004.  In 2008, the Company recorded expenses of$1.9 million which includes fees incurred in connection with the secondaryoffering of the Company’s common stock in June 2008.

 

**4.ACQUISITIONS:**

 

Pursuant to the Company’sbusiness strategy of achieving profitable growth through selectiveacquisitions, the Company has acquired several businesses in recent years.

 

86

----

 

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.

 

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 consolidated thisventure and has reported Kemira’s interest as noncontrolling interest in theconsolidated financial statements. The Company owns 61% of the venture withKemira owning the remaining portion. The venture’s acquisition of theshares of the Rockwood and Kemira entities was facilitated by the borrowingsunder a term loan of €250.0 million on September 3, 2008 ($362.5 millionusing a September 3, 2008 exchange rate of $1.4498). The venture madea payment of €97.5 million ($141.4 million using a September 3, 2008exchange rate) to the venture’s noncontrolling shareholder. In addition, theventure obtained a €30.0 million ($43.0 million) revolving credit facility tofinance its operations and the venture has other debt of €24.2 million ($34.7million) from Kemira, primarily due to a defined benefit pension plan. TheCompany estimates that the potential exposure range for assumed environmentalliabilities is from $11.9 million to $23.3 million. At December 31, 2009,$11.9 million of related reserves were recorded.

 

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

 

In addition to theacquisitions described above, the Company had completed other smaller acquisitionsin 2008. The purchase price allocation to the net assets acquired for allacquisitions in 2008 was complete as of December 31, 2009.

 

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

 

**5. DERIVATIVES:**

 

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

 

**InterestRate Risk**

 

The Company had $1,186.9 million(a portion of which is subject to a Libor or Euribor floor of 2.00%) and $699.5million of variable rate debt (after hedging) outstanding as of December 31,2009 and December 31, 2008, respectively. Any borrowings under the seniorsecured revolving credit facility and the Titanium Dioxide Pigments venturerevolving credit facility are at a variable rate (with the senior secured revolvingcredit facility subject to a Libor or Euribor floor of 2.00%). As of December 31,2009, the Company had €10.0 million ($14.3 million) outstanding under theTitanium Dioxide Pigments venture revolving credit facility. There were nooutstanding borrowings under the senior secured revolving credit facility as ofDecember 31, 2009. Historically, the Company has entered into interestrate swaps to manage its exposure to changes in interest rates related tovariable rate debt.  In November 2009,a contract covering a notional amount of $200.0 million matured and contractscovering notional amounts of $410.0 million were terminated resulting in apayment of $31.1 million. As of December 31, 2009, the remaining contractscover notional amounts of €482.2 million (at interest rates ranging from 2.995%to 4.416%). As of December 31, 2008, the Company had contracts coveringnotional amounts of $610.0 million (at interest rates ranging from 4.864% to5.038%) and €499.9 million (at interest rates ranging from 2.995% to 4.416%).The derivative contracts as of December 31, 2009 effectively convert aportion of the senior secured credit obligations and a portion of theobligations under the Titanium Dioxide Pigments term loan facility to fixedrate obligations. These hedges will mature between December 2010 and July 2012.The Company has not applied hedge accounting for these interest rate swaps andhas recorded the mark-to-market of these derivatives as a component of interestexpense in the Consolidated Statements of Operations. The Company may in thefuture consider adjusting the amounts covered by these derivative contracts tobetter suit its capital structure. The Company may allow all or a portion ofthese swaps to lapse, enter into replacement swaps or settle these swaps priorto expiration.

 

During 2003, theCompany entered into a cross-currency interest rate swap with a notional amountof $20.3 million that effectively converted $20.3 million U.S. dollarborrowings into euro-based obligations at an effective interest rate of Euriborplus 4.00%. As of December 31, 2009 and 2008, the notional amounts of thiscross-currency interest rate hedge were $19.1 million and €17.0 million and$19.3 million and €17.0 million, respectively. This contract has a finalmaturity date of July 2010. The Company has not 

 

87

----

 

applied hedge accountingfor this cross-currency interest rate swap and has recorded the mark-to-marketof this derivative as a component of interest expense in the ConsolidatedStatements of Operations.

 

**ForeignCurrency Risk**

 

In December 2008,the Company entered into foreign currency forward contracts to manage itsexposure to fluctuations in currency rates on certain forecasted salesdenominated in a currency other than the functional currency of the legalentity.  These foreign currency forwardcontracts hedged the exposure to movements in foreign exchange rates forforecasted transactions for twelve months, expiring in December 2009.  The instruments were designated as foreignexchange cash flow hedges and are effective at generating offsetting changes inthe fair value or cash flows of the hedged item or transaction. There was nogain or loss reclassified from accumulated other comprehensive income intoearnings as a result of the discontinuance of cash flow hedges due to theprobability of the original forecasted transaction not occurring.

 

In March 2009, theCompany entered into foreign currency forward contracts to manage its exposureto fluctuations in currency rates on forecasted sales denominated in a currencyother than the functional currency of the legal entity.  These foreigncurrency forward contracts hedged the exposure to movements in foreign exchangerates for forecasted transactions for nine months, expiring in December 2009.The Company has not applied hedge accounting for these foreign currency forwardcontracts.

 

In connection with theoffering of the 2014 Notes, the Company entered into a cross-currency interestrate swap with a five-year term which expired in November 2009 and anotional amount of €155.6 million that effectively converts the U.S. dollarfixed rate debt in respect of the 2014 dollar-denominated notes sold into eurofixed rate debt. The Company paid $32.9 million in connection with thesettlement of this cross-currency swap. The Company designated this contract asa hedge of the foreign currency exposure of its net investment in itsEuro-denominated operations. In addition, the Company has designated a portionof its Euro-denominated debt that is recorded on its U.S. books as a netinvestment hedge of its Euro-denominated investments (Euro debt of €103.1million at December 31, 2009; $147.6 million). In 2009, the Companydedesignated a portion of its euro-denominated debt (€411.0 million). Anyforeign currency gains and losses resulting from the designated portion ofEuro-denominated debt discussed above is accounted for as a component ofaccumulated other comprehensive income for as long as the hedge remainseffective. There was no ineffective portion of the net investment hedge as of December 31,2009.

 

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

 
| ** **                                                 | ** ** | ** **                                      | ** ** | **Asset Derivatives** | ** ** | **Liability Derivatives** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------|------------|---------------------------|------------|
| ** **                                                 | ** ** | ** **                                      | ** ** | **Fair Value as of**  | ** ** | **Fair Value as of**      | ** ** |
| ** **                                                 | ** ** | ** **                                      | ** ** | **December 31,** | ** ** | **December 31,**     | ** ** |
| **(in millions)**                                          | ** ** | **Balance Sheet Location**                      | ** ** | **2009**              | ** ** | **2008**                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Derivatives designated as hedging****instruments:**      |       |                                            |       |                  |       |                      |       |   |   |   |   |
| Foreign  exchange contracts                                |       | Prepaid  expenses and other current assets      |       | $                     | —     |                      | $          | 1.1 |   | $ | — |   | $ | — |   |
| Cross-currency  interest rate swaps - net investment hedge |       | Accrued  expenses and other current liabilities |       | —                |       | —                    |       | — |   | 16.4 |   |
| Total  derivatives designated as hedging instruments       |       |                                            |       | $                     | —     |                      | $          | 1.1 |   | $ | — |   | $ | 16.4 |   |
|                                                       |       |                                            |       |                  |       |                      |       |   |   |   |   |
| **Derivatives not designated as hedging****instruments:**  |       |                                            |       |                  |       |                      |       |   |   |   |   |
| Interest  rate swaps                                       |       | Accrued  expenses and other current liabilities |       | $                     | —     |                      | $          | — |   | $ | 8.8 |   | $ | 6.5 |   |
|                                                       |       | Other liabilities                               |       | —                |       | —                    |       | 23.5 |   | 58.9 |   |
| Cross-currency  interest rate swaps                        |       | Accrued  expenses and other current liabilities |       | —                |       | —                    |       | 5.2 |   | 0.1 |   |
|                                                       |       | Other liabilities                               |       | —                |       | —                    |       | — |   | 4.7 |   |
| Total  derivatives not designated as hedging instruments   |       |                                            |       | $                     | —     |                      | $          | — |   | $ | 37.5 |   | $ | 70.2 |   |
| **Total derivatives**                                      |       |                                            |       | $                     | —     |                      | $          | 1.1 |   | $ | 37.5 |   | $ | 86.6 |   |

 

88

----

 

The following tableprovides the gains and losses reported in “Other Comprehensive Income” (“OCI”)within Equity for the years ended December 31, 2009, 2008 and 2007:

 
| ** **                                                                                      | ** ** | **Amount of Gain or (Loss) Recognized in** | ** **  |
|-------------------------------------------------------------------------------------------------|------------|--------------------------------------------|-------------|
| ** **                                                                                      | ** ** | **OCI on Derivatives and Other Financial** | ** **  |
| ** **                                                                                      | ** ** | **Instruments (Effective Portion)**        | ** **  |
| ** **                                                                                      | ** ** | **Year ended December 31,**           | ** **  |
| **(in millions)**                                                                               | ** ** | **2009**                                   | ** **  | **2008** | ** ** | **2007** | ** ** |
| **Derivatives in****Cash Flow Hedging  Relationships:**                                         |       |                                       |        |   |   |   |   |
| Foreign  exchange contracts                                                                     |       | $                                          | (0.5        | ) | $ | 0.5 |   | $ | — |   |
|                                                                                            |       |                                       |        |   |   |   |   |
| **Derivatives and Other Financial Instruments****in****Net Investment Hedging  Relationships:** |       |                                       |        |   |   |   |   |
| Cross-currency  interest rate swaps - net investment hedge                                      |       | $                                          | (16.5       | ) | $ | 9.1 |   | $ | (14.9 | ) |
| Euro-denominated  debt                                                                          |       | (21.4                                      | )           | 41.6 |   | (93.7 | ) |
|                                                                                            |       | $                                          |  (37.9 | ) | $ | 50.7 |   | $ | (108.6 | ) |

 

In the year ended December 31,2009, gains of $0.5 million were reclassified from accumulated othercomprehensive income into income. In the years ended December 31, 2008 and2007, no gains or losses were reclassified from accumulated other comprehensiveincome into income.

 

The following tableprovides the gains and losses reported in the Consolidated Statements ofOperations for the years ended December 31, 2009, 2008 and 2007:

 
| ** **                                            | ** ** | **Amount of Gain or (Loss)**            | ** ** | ** **                     | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------|------------|--------------------------------|------------|
| ** **                                            | ** ** | **Recognized in Income on Derivatives** | ** ** | **Location of Gain or (Loss)** | ** ** |
| ** **                                            | ** ** | **Year ended December 31,**        | ** ** | **Recognized in Income on**    | ** ** |
| **(in millions)**                                     | ** ** | **2009**                                | ** ** | **2008**                       | ** ** | **2007** | ** ** | **Derivatives** | ** ** |
| **Derivatives Not Designated as Hedging Instruments** | ** ** | ** **                              | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest  rate contracts                              |       | $                                       | 4.0        |                           | $          | (51.7 | ) | $ | (29.8 | ) | Interest expense |   |
| Cross-currency  interest rate swaps                   |       | (0.1                                    | )          | 0.2                            |       | (2.4 | ) | Interest expense |   |
|                                                  |       | $                                       | 3.9        |                           | $          | (51.5 | ) | $ | (32.2 | ) |   |   |

 

**6. FAIRVALUE MEASUREMENTS:**

 

TheCompany follows a fair value measurement hierarchy to measure assets andliabilities. As of December 31,2009 and 2008, the assets and liabilities measured at fair value on a recurringbasis are derivatives and marketable securities. In addition, the Companymeasures its pension plan assets at fair value (see Note 15, “Employee BenefitPlans” for further details). The Company’s financial assets and liabilities aremeasured using inputs from the three levels of the fair value hierarchy. Thethree 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 December 31,2009 and 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 December 31, 2009 and 2008:

 

89

----

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

 
| ** **                                                     | ** ** | **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 |   | $ | — |   |

 

----

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

 

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

 

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

 

**Counter-partyrisk**—The Companymanages counter-party risk by entering into derivative contracts with onlymajor financial institutions of investment grade quality and by limiting theamount of exposure to each financial institution. The Company has consideredcredit adjustments in its determination of the fair value of its derivativeassets and liabilities as of December 31, 2009 and 2008 based on marketparticipant assumptions. In addition, based on the credit evaluation of eachinstitution comprising its derivative assets as of December 31, 2009 and2008, the Company believes the carrying values of these assets as of December 31,2009 and 2008 to be fully realizable.

 

**Debt**—The Company estimates that its debt under the seniorsecured credit facilities and Titanium Dioxide Pigments venture facilityagreement, based on current interest rates and terms, approximates fair value.Based on quoted market values at December 31, 2009 and 2008, the Companyestimates the fair value of its 2014 Notes approximated $561.0 million and$501.0 million, respectively.  As of December 31,2009 and 2008, the principal carrying amount of the 2014 Notes was $558.2million and $708.5 million, respectively.

 

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

 

90

----

 

7**. INVENTORIES:**

 

Inventories are comprisedof the following:

 
| ** **               | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-----------------------|------------|
| **($ in millions)** | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Raw  materials           |       | $                     | 165.6      |   | $ | 203.8 |   |
| Work-in-process          |       | 73.7                  |       | 74.2 |   |
| Finished  goods          |       | 270.7                 |       | 355.3 |   |
| Packaging  materials     |       | 7.0                   |       | 7.7 |   |
| Total                    |       | $                     | 517.0      |   | $ | 641.0 |   |

 

**8.PROPERTY, PLANT AND EQUIPMENT:**

 

Property, plant andequipment, net is comprised of the following:

 
| ** **                                               | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------|------------|-----------------------|------------|
| **($ in millions)**                                 | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Land                                                     |       | $                     | 161.1      |   | $ | 155.6 |   |
| Buildings  and improvements, including land improvements |       | 621.5                 |       | 594.6 |   |
| Machinery  and equipment                                 |       | 1,541.5               |       | 1,394.7 |   |
| Furniture  and fixtures                                  |       | 128.9                 |       | 117.9 |   |
| Mining  rights                                           |       | 86.3                  |       | 86.3 |   |
| Construction-in-progress                                 |       | 68.9                  |       | 95.7 |   |
| Property,  plant and equipment, at cost                  |       | 2,608.2               |       | 2,444.8 |   |
| Less  accumulated depreciation and amortization          |       | (905.7                | )          | (692.6 | ) |
| Property,  plant and equipment, net                      |       | $                     | 1,702.5    |   | $ | 1,752.2 |   |

 

Depreciation expense was$201.5 million, $179.1 million and $144.8 million for the years ended December 31,2009, 2008 and 2007, respectively.

 

In addition, property,plant and equipment at December 31, 2009 and 2008 includes items recordedunder capital leases as follows:

 
| ** **                                               | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------|------------|-----------------------|------------|
| **($ in millions)**                                 | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Buildings  and improvements, including land improvements |       | $                     | 51.9       |   | $ | 49.5 |   |
| Machinery  and equipment                                 |       | 3.1                   |       | 3.0 |   |
| Furniture  and fixtures                                  |       | 5.7                   |       | 6.0 |   |
|                                                     |       | 60.7                  |       | 58.5 |   |
| Accumulated  depreciation                                |       | (13.3                 | )          | (9.2 | ) |
| Total                                                    |       | $                     | 47.4       |   | $ | 49.3 |   |

 

At December 31,2009, minimum payments due under capital leases are as follows:

 
| **($ in millions)**           |   |   |   |
|------------------------------------|--------|--------|--------|
| Years  ended December 31:     |   |   |   |
| 2010                               |   | $      | 6.5    |   |
| 2011                               |   | 5.7    |   |
| 2012                               |   | 5.4    |   |
| 2013                               |   | 4.9    |   |
| 2014                               |   | 5.1    |   |
| Thereafter                         |   | 35.3   |   |
|                               |   | 62.9   |   |
| Less  amount representing interest |   | 12.1   |   |
|                               |   | $      | 50.8   |   |

 

**9. GOODWILL:**

 

For the years ended December 31,2009 and 2007, the Company did not recognize a goodwill impairment loss as aresult of the impairment analysis that was performed.  In the fourth quarter of 2008, the Companytested the recoverability of goodwill as part of its annual review.  Inconnection with the determination of fair value of the reporting units, theCompany made significant estimates and 

 

91

----

 

assumptions with respectto those reporting units and engaged independent valuation specialists toassist with this review. The first step of the review indicated that the fairvalues of the Color Pigments and Services, Timber Treatment Chemicals,Clay-based Additives, Titanium Dioxide Pigments, Specialty Compounds and RubberChemicals reporting units were less than their carrying values, thus requiringthe Company to complete the second step of the impairment review. To computethe amount of the impairment under step two, the Company determines the impliedfair value of goodwill in the same manner as if the Company had acquired thosereporting units.  Specifically, the Company allocated the fair value ofthe reporting units to all of the assets, including any unrecognized intangibleassets and liabilities of that unit, in a hypothetical calculation that wouldyield the implied fair value of goodwill.  The impairment loss is measuredas the difference between the book value of the goodwill and the implied fairvalue of the goodwill.  Based on these results, the Company recordedgoodwill impairment charges in the Color Pigments and Services business ($293.2million), Timber Treatment Chemicals business ($88.3 million) and Clay-basedAdditives business ($75.1 million) within the Performance Additives segment;Titanium Dioxide Pigments segment ($247.7 million); and Specialty Compoundssegment, including the Rubber Chemicals business ($105.2 million).  Thegoodwill impairment charges were attributed to the significant drop in globalstock valuations, the substantial reduction in the market valuation of Rockwoodand comparable companies, and the continuing negative global economic andmarket outlook.  In particular, the downturn in the construction industryhas had a negative impact on a number of the Company’s businesses.

 

Prior to completing theassessment of goodwill for impairment during the fourth quarter of 2008, theCompany performed a recoverability test of certain long-lived assets*.* As a result, the Company concluded thatthere was no impairment of those assets in the fourth quarter of 2008.

 

Below are goodwillbalances and activity by segment:

 
| ** **                                     | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|------------|------------|
| ** **                                     | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | ** ** | ** ** |
| **($ in millions)**                       | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **Total**  | ** ** |
| Balance,  December 31, 2007               |       | $             | 684.1      |            | $          | 493.9        |       | $            | 172.3      |          | $          | 258.5      |       | $ | 121.2 |   | $ | 1,730.0 |   |
| Post  closing purchase price consideration (a) |       | (18.8         | )          | —          |       | (6.0         | )          | (5.0         | )          | —        |       | (29.8      | )          |
| Goodwill  impairment charges                   |       | —        |       | (456.6          | )          | (247.7       | )          | —       |       | (105.2        | )          | (809.5     | )          |
| Acquisitions                                   |       | 9.7           |       | 34.9            |       | 114.8        |       | 25.3         |       | —        |       | 184.7      |       |
| Foreign  exchange and other (b)                |       | (27.0         | )          | (72.2           | )          | (33.4        | )          | (9.0         | )          | (16.0         | )          | (157.6     | )          |
| Balance,  December 31, 2008               |       | 648.0         |       | —          |       | —       |       | 269.8        |       | —        |       | 917.8      |       |
| Acquisitions  (c)                              |       | (1.1          | )          | —          |       | —       |       | 0.6          |       | —        |       | (0.5       | )          |
| Foreign  exchange and other (b)                |       | 14.8          |       | —          |       | —       |       | 7.1          |       | —        |       | 21.9       |       |
| Balance,  December 31, 2009               |       | $             | 661.7      |            | $          | —       |       | $            | —     |          | $          | 277.5      |       | $ | — |   | $ | 939.2 |   |

 

----

(a)                In March 2008, the Company entered into anagreement with GEA Group and GEA North America to settle all existing andfuture environmental claims in consideration of payment to the Company of €18.8million ($29.1 million) which was received on March 28, 2008. This paymentwas considered an adjustment to the purchase price per the claims settlementagreement between the Company and GEA Group and its subsidiary. As a result,the Company has reported this as an adjustment to the purchase price with acredit to goodwill in the first quarter of 2008.

 

(b)               Consists primarily of foreign currency changes.

 

(c)                Represents purchase price allocation adjustments for2008 acquisitions.

 

The gross balance ofgoodwill as of December 31, 2009 and 2008 was $1,748.7 million and $1,727.3million, respectively. The accumulated impairment charges were $809.5 millionas of December 31, 2009 and 2008 and related to the goodwill impairment chargerecorded in the fourth quarter of 2008.

 

92

----

 

**10.OTHER INTANGIBLE ASSETS:**

 

Other intangible assets,net consist of:

 
| ** **                               | ** ** | **As of December 31, 2009** | ** ** | **As of December 31, 2008** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                               | ** ** | **Gross**                        | ** ** | ** **                       | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Carrying**                     | ** ** | **Accumulated**                  | ** ** | ** ** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| **($ in millions)**                 | ** ** | **Amount**                       | ** ** | **Amortization**                 | ** ** | **Net** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Patents  and other intellectual property |       | $                                | 384.3      |                             | $          | (133.0 | ) | $ | 251.3 |   | $ | 411.9 |   | $ | (142.0 | ) | $ | 269.9 |   |
| Trade  names and trademarks              |       | 146.3                            |       | (33.7                            | )          | 112.6 |   | 141.5 |   | (27.1 | ) | 114.4 |   |
| Customer  relationships                  |       | 390.1                            |       | (117.7                           | )          | 272.4 |   | 372.2 |   | (79.1 | ) | 293.1 |   |
| Supply  agreements                       |       | 62.8                             |       | (12.3                            | )          | 50.5 |   | 57.3 |   | (6.3 | ) | 51.0 |   |
| Other                                    |       | 48.8                             |       | (30.9                            | )          | 17.9 |   | 61.7 |   | (35.3 | ) | 26.4 |   |
| Total                                    |       | $                                | 1,032.3    |                             | $          | (327.6 | ) | $ | 704.7 |   | $ | 1,044.6 |   | $ | (289.8 | ) | $ | 754.8 |   |

 

Amortization of otherintangible assets was $81.5 million, $79.8 million and $66.9 million for theyears ended December 31, 2009, 2008 and 2007, respectively.

 

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

 
| **($ in millions)** | ** ** | **Amortization** | ** ** |
|--------------------------|------------|------------------|------------|
| **Year ended******       | ** ** | **Expense**      | ** ** |
| 2010                     |       | $                | 81.7       |   |
| 2011                     |       | 78.9             |       |
| 2012                     |       | 74.9             |       |
| 2013                     |       | 71.6             |       |
| 2014                     |       | 68.3             |       |
|                          |            |                  |            |  |

 

**11.LONG-TERM DEBT:**

 

Long-term debt and loanspayable are summarized as follows:

 
| ** **                                                                                                    | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| **($ and € in millions)**                                                                           | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Senior  secured credit facilities:                                                                            |       |                  |       |   |   |
| Tranche  A-1 term loans (€4.2 and €22.8, respectively)                                              |       | $                     | 6.0        |   | $ | 31.9 |   |
| Tranche  A-2 term loans (€36.5 and €99.4, respectively)                                             |       | 52.3                  |       | 138.9 |   |
| Tranche  E term loans                                                                                         |       | 139.4                 |       | 1,104.9 |   |
| Tranche  G term loans (€65.1 and €265.2, respectively)                                              |       | 93.2                  |       | 370.5 |   |
| Tranche  H term loans                                                                                         |       | 937.2                 |       | — |   |
| Tranche  I term loans (€194.7 as of December 31, 2009)                                              |       | 278.8                 |       | — |   |
| 2014  Notes (€250.1 and $200.0 and €364.0 and $200.0, respectively)                                 |       | 558.2                 |       | 708.5 |   |
| Titanium  Dioxide Pigments venture term loans (€240.0 and €250.0, respectively)                     |       | 343.7                 |       | 349.3 |   |
| Titanium  Dioxide Pigments venture revolving short-term loans (€10.0 as of  December 31, 2009) |       | 14.3                  |       | — |   |
| Capitalized  lease obligations (€31.9 and €34.3, respectively)                                      |       | 45.7                  |       | 47.9 |   |
| Other  loans                                                                                                  |       | 59.5                  |       | 59.3 |   |
|                                                                                                          |       | 2,528.3               |       | 2,811.2 |   |
| Less  current maturities                                                                                      |       | (94.2                 | )          | (90.9 | ) |
|                                                                                                          |       | $                     | 2,434.1    |   | $ | 2,720.3 |   |

 

93

----

 

Maturities of long-termdebt are as follows:

 
| **($ in millions)** | ** ** | ** ** | ** ** |
|--------------------------|------------|------------|------------|
| 2010                     |       | $          |  94.2 |   |
| 2011                     |       | 97.8       |       |
| 2012                     |       | 283.9      |       |
| 2013                     |       | 249.0      |       |
| 2014                     |       | 1,778.6    |       |
| Thereafter               |       | 24.8       |       |
|                     |       | $          | 2,528.3    |   |

 

Senior Secured CreditFacilities

 

*a)Structure*

 

In connection with theDynamit Nobel Acquisition, the Company entered into a senior secured credit agreementon July 30, 2004.  On June 15, 2009, the Company entered intothe amended and restated credit agreement, which amended and restated in itsentirety the Company’s senior secured credit agreement. The senior securedcredit agreement, as amended, extended the maturity of certain term loans byproviding for (i) approximately $942.0 million of new tranche H term loanswith a maturity date of May 15, 2014, the aggregate amount of which isdeemed to convert a like amount of outstanding principal of existing tranche Eterm loans (that had a maturity date of July 30, 2012) under the previouscredit agreement and (ii) approximately €195.6 million ($270.0 millionusing the exchange rate on the date of amendment, June 15, 2009, of$1.3803) of new tranche I term loans with a maturity date of May 15, 2014,the aggregate amount of which is deemed to convert a like amount of outstandingprincipal of existing tranche G term loans (that had a maturity date of July 30,2012) under the previous credit agreement. See Long-Term Debt table above for senior secured credit facilitybalances as of December 31, 2009 and 2008.

 

*b)Availability*

 

The senior secured creditfacilities consist of the term loan tranches listed above as well as a seniorsecured revolving credit facility in an aggregate principal amount of $250.0million made available in U.S. dollars, Euros and/or pounds sterling, of which$70.0 million matures on July 30, 2010. A portion of the revolving creditfacility is available in the form of letters of credit and swingline loans. Inthe third quarter of 2009, the Company extended the maturity of $180 million ofavailability under the revolving credit facility from 2010 to 2012 bearinginterest at its option of either (i) Libor (subject to Libor floor of2.00%) plus 4.50% or (ii) ABR plus 3.25%. As of December 31, 2009, theCompany had no outstanding borrowings under this revolving credit facility, and$26.4 million of letters of credit issued on its behalf. Under the terms of thesenior secured credit agreement, the Company may, under certain circumstancesand subject to receipt of additional commitments from existing lenders or othereligible institutions, request that the tranche H and/or tranche I term loansand/or the revolving credit commitments be increased by an aggregate amount ofup to $250.0 million.

 

Amounts borrowed underthe term loans, other than the revolving credit facility, that are repaid orprepaid may not be reborrowed.

 

*c)Interest and Fees*

 

As of December 31,2009, the senior secured credit facilities, as amended, consisted of:

 

·                  tranche A-1 term loans in an aggregate principalamount of €4.2 million ($6.0 million) and tranche A-2 term loans in anaggregate principal amount of €36.5 million ($52.3 million), each maturing on July 30,2011 and bearing interest at a Euribor floor of 2.00% plus 3.00% (Euribor isthe Euro inter-bank offered rate);

 

·                  tranche E term loans in an aggregate principal amountof $139.4 million, maturing on July 30, 2012 and bearing interest at aLibor floor of 2.00% plus 2.50% (Libor is the London inter-bank offered rate);

 

·                  tranche G term loans in an aggregate principal amountof €65.1 million ($93.2 million) maturing on July 30, 2012 and bearinginterest at a Euribor floor of 2.00% plus 2.75%;

 

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

 

·                  tranche I term loan in an aggregate principal amountof €194.7 million ($278.8 million) maturing on May 15, 2014 and bearinginterest at a Euribor floor of 2.00% Euribor plus 4.25%; and

 

94

----

 

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

 

ABR is the alternate baserate, which is the greater of (a) Credit Suisse’s Prime Rate, (b) theFederal Funds Effective Rate plus 0.50% or (c) the Eurodollar Rate for aone month interest period plus 1.00%.

 

The senior secured creditagreement, as amended, provides for a Libor (Euribor for Euro-denominatedtranches) floor of 2.00% subject to pricing based on Libor or Euribor with thefollowing applicable margins above Libor or Euribor: applicable margins forTranches A-1 and A-2 of 3.00%; Tranche E of 2.75%; Tranche G of 3.00%; TrancheH of 4.25%; and Tranche I of 4.50%, in each case per annum, each with a 0.25%reduction for achieving a designated credit rating, with the exception ofTranches A-1 and A-2. As of December 31, 2009, the Company continued toqualify for the 0.25% interest rate reduction as the designated credit ratingswere achieved.

 

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

 

*d)Guarantees; Security*

 

Obligations under thesenior secured credit facilities are guaranteed by Rockwood SpecialtiesInternational, Inc. and each of Rockwood Specialties Group Inc.’s existingand subsequently acquired or organized direct or indirect domesticsubsidiaries, subject to certain exceptions, and are secured by first-prioritysecurity interests in: substantially all the tangible and intangible assets ofthe Company and its direct or indirect domestic subsidiaries, subject toexceptions; all the capital stock of or other equity interest in the Companyand each of its direct or indirect domestic subsidiaries; a maximum of 65% of thecapital stock of or other equity interests in each direct foreign subsidiary ofeither Group or of any domestic subsidiary of the Company.

 

*e)Amortization and Prepayments*

 

In the first half of2009, the Company prepaid €63.2 million ($85.1 million based on the exchangerate in effect on the date of payment) and $17.2 million of its senior securedterm loans.

 

Tranche A-1 and A-2term loans are payable in January and July of each year at escalatingpercentages of the amount outstanding on the amendment date. Tranches E,G, H and I are payable in January and July of each year at amountsequal to 0.50% of the amount outstanding on the amendment date, with theremainder due at the final maturity date.

 

In addition, the Companyis required to make the following mandatory prepayments of the term loans underthe senior secured credit facilities, in each case subject to certainexceptions, with:

 

·                  100% of the net cash proceeds of all sales or otherdispositions by the Company or any of its restricted subsidiaries under thesenior secured credit facilities of assets other than net cash proceeds (a) fromthe sale or other disposition of assets in the ordinary course of business, (b) ofcertain disposals permitted under the senior secured credit agreement(including the proceeds of sales or transfers of accounts receivable (includingpursuant to a securitization) in the amount of up to $200.0 million at anytime) or (c) that are reinvested in the Company and its restrictedsubsidiaries within twelve months of the sale or other disposition (subject toextension in certain circumstances).

 

·                  100% of the net cash proceeds of issuances of certaindebt obligations.

 

·               50% of excess cash flows, as defined, in respect ofany fiscal year at the end of which the consolidated total debt to consolidatedEBITDA ratio is equal to or greater than 3.50 to 1.0, reduced by any amountsreinvested during the first six months of the year and voluntary prepayments.

 

*f)Financial Covenants*

 

The senior secured creditagreement contains the following financial covenants:

 

·                  a consolidated net senior secured debt to consolidatedAdjusted EBITDA test;

 

95

----

 

·                  a consolidated Adjusted EBITDA to consolidated cashinterest expense test; and

 

·                  limitations on capital expenditures.

 

For purposes ofcalculating compliance with the financial covenants as of any date, foreigncurrency denominated indebtedness is to be converted to U.S. dollars based onaverage exchange rates for the twelve-month period ending on such date. Inaddition to the financial covenants described above, the Company’s seniorsecured credit agreement contains various affirmative and restrictivecovenants. The restrictive covenants limit the Company’s ability to, amongother things, incur indebtedness and other liabilities; create liens; merge orconsolidate; dispose of assets; make investments; pay dividends and makepayments to shareholders; make payments on certain indebtedness or to amenddocuments related to certain indebtedness and to enter into sale leasebacktransactions. The senior secured credit agreement, as amended, replaced thetotal debt to consolidated Adjusted EBITDA ratio covenant with a senior secureddebt to consolidated Adjusted EBITDA ratio covenant such that the company may not permit its seniorsecured debt ratio to exceed 4.40 to 1.00 on the last day of any fiscal quarterthrough and including March 31, 2010, 4.25 to 1.00 on the last day of anyfiscal quarter thereafter through and including September 30, 2010, and4.00 to 1.00 on the last day of any fiscal quarter thereafter. The seniorsecured credit agreement also reset the asset sales basket, increased theavailable amount basket that applies to certain investment, debt and capitalexpenditure negative covenants and certain other baskets.

 

***2011 Notes***— On May 15, 2007, the Company redeemed itsoutstanding 10 5/8% Senior Subordinated Notes due 2011 in the aggregateprincipal amount of $273.4 million. In connection with this debt repayment, theCompany paid redemption premiums of $14.5 million and wrote off deferred financingcosts of $4.1 million.

 

***2014 Notes***—In November 2004, the Company issued €375.0 million aggregate principal amount of 7.625% senior subordinatednotes and $200.0 million aggregate principal amount of 7.500% seniorsubordinated notes, both due in 2014 (“2014 Notes”). As of December 31,2009, the 2014 Notes had an aggregate principal amount of €250.1 million ($358.2million) in the case of the Euro notes and $200.0 million in the case of theU.S. Dollar notes. The 2014 Notes are*paripassu* to future senior subordinated indebtedness and junior to allof the Company’s existing and future senior indebtedness. The 2014 Notes areguaranteed on a senior subordinated unsecured basis by certain of the Company’sdomestic subsidiaries. In the fourth quarter of 2008, the Company redeemed€11.0 million of its 2014 Notes at a discount. In the first half of 2009, the Company voluntarily repurchased at adiscount €113.9 million in aggregate principal amount ($153.2 million based onthe exchange rates in effect on the dates of repurchase) of itsEuro-denominated senior subordinated notes due in 2014.

 

***Titanium Dioxide Pigments venture term loans, revolvingcredit facility and other debt***— As of December 31, 2009, the Titanium DioxidePigments venture, which was completed in September 2008, had €240.0million ($343.7 million) outstanding under the term loans of its facilityagreement entered into in June 2008, as amended in August 2008. Thefacility also provides for a revolving credit facility of €30.0 million ($43.0million) of which €10.0 million ($14.3 million) was outstanding as of December 31,2009. The weighted average rate of the borrowings outstanding under thisrevolving credit facility was 4.229% as of December 31, 2009. Anoutstanding bank guarantee of €10.0 million ($14.3 million) related to adefined benefit pension obligation further reduced its availability under thisfacility. Both the term loan and revolving credit facility mature in June 2013.

 

As of December 31,2009, the interest rate on the term loan and revolving credit facility isEuribor (or Libor if the currency is in USD) plus 3.00%, subject to a step downdetermined by reference to a leverage ratio test. The term loan is payable ininstallments over a five-year period from the date of the facility agreement,with payments commencing twelve months from such date and the remainder due atthe final maturity date. The term loan and revolving credit facility may berepaid in advance without penalty.

 

In addition, the TitaniumDioxide Pigments venture has other debt of €24.2 million ($34.7 million),primarily due to a defined benefit plan, at interest rates ranging from 3.70%to 5.00%.

 

The facility agreementrequires the venture to meet the following financial covenants:

 

·                  a net debt to EBITDA (which is substantially similarto the definition of Adjusted EBITDA in the Company’s senior secured creditagreement) test;

 

·                  a EBITDA to cash interest expense test; and

 

·                  a cash generated for financing activities to debtservice test.

 

The covenants arecalculated in accordance with International Financial Reporting Standards andare based solely on the results of the venture’s European operations.

 

***Other term loan facilities***— The Company has euro-denominated termloan facilities that provide aggregate outstanding borrowings of approximately€7.1 million ($10.2 million) as of December 31, 2009. These term loansmature between 2010 and 2024 and bear

 

96

----

 

 

annual interest ratesranging up to 5.22%. In addition, the Company has term loan facilitiesdenominated in Chinese Renminbi and Indian Rupees, providing for borrowings ofan aggregate U.S. dollar equivalent amount of $12.8 million as of December 31,2009. These term loans mature in 2010 and bear annual interest rates of 7.56%and 13.00%, respectively. The term loan facilities described above containcustomary events of default and some of them are secured by mortgages oraccounts receivable.

 

As of December 31,2009, $1,237.0 million of the debt outstanding was denominated in Euros.

 

**12.INCOME TAXES:**

 

Income (loss) fromcontinuing operations before income taxes is as follows:

 
| ** **               | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------|------------|----------------------------------|------------|
| **($ in millions)** | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| United  States           |       | $                                | (61.2      | ) | $ | (395.2 | ) | $ | (44.6 | ) |
| Foreign                  |       | 92.9                             |       | (346.9 | ) | 196.3 |   |
|                     |       | $                                | 31.7       |   | $ | (742.1 | ) | $ | 151.7 |   |

 

The provision (benefit)for taxes on income (loss) consisted of the following:

 
| ** **                                   | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| **($ in millions)**                     | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Current  income tax expense:                 |       |                             |       |   |   |   |   |
| Federal                                      |       | $                                | 0.1        |   | $ | (0.4 | ) | $ | 2.7 |   |
| State                                        |       | 0.3                              |       | 1.6 |   | 6.6 |   |
| Foreign                                      |       | 31.3                             |       | 39.4 |   | 35.1 |   |
|                                         |       | 31.7                             |       | 40.6 |   | 44.4 |   |
| Deferred  income tax expense:                |       |                             |       |   |   |   |   |
| Federal                                      |       | 6.2                              |       | 3.2 |   | 4.9 |   |
| State                                        |       | 0.2                              |       | (0.1 | ) | (1.3 | ) |
| Foreign                                      |       | (19.5                            | )          | (32.4 | ) | 25.4 |   |
|                                         |       | (13.1                            | )          | (29.3 | ) | 29.0 |   |
| Allocation  from discontinued operations:    |       |                             |       |   |   |   |   |
| Federal                                      |       | —                           |       | (23.7 | ) | (9.3 | ) |
| State                                        |       | —                           |       | — |   | (1.8 | ) |
|                                         |       | —                           |       | (23.7 | ) | (11.1 | ) |
| Allocation  from other comprehensive income: |       |                             |       |   |   |   |   |
| Federal                                      |       | (1.4                             | )          | (11.5 | ) | — |   |
| Total  provision (benefit) for taxes         |       | $                                | 17.2       |   | $ | (23.9 | ) | $ | 62.3 |   |

 

Amounts are reflected inthe preceding table based on the location of the taxing authorities. Changes inenacted rates impact the tax provision in the year a rate change is enacted.

 

The income tax provisionfrom continuing operations has been reduced by $1.4 million, $35.2 million and$11.1 million for the years ended December 31, 2009, 2008 and 2007,respectively, through allocations from discontinued operations and othercomprehensive income in accordance with the Company’s policy disclosed in Note1, “Description of Business and Summary of Significant Accounting Policies,” asthe Company had both a loss in continuing operations and a net profit in othercategories including discontinued operations and other comprehensive income inthe United States.

 

Deferred income taxes areprovided for the effects of temporary differences between the amounts of assetsand liabilities recognized for financial reporting purposes and the amountsrecognized for income tax purposes. The deferred tax assets and liabilities aredetermined by applying the enacted tax rate in the year in which the temporarydifference is expected to reverse.

 

97

----

 

The tax effects of themajor items recorded as deferred tax assets and liabilities are as follows:

 
| ** **                                        | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|
| **($ in millions)**                          | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Current  deferred income tax assets, net:         |       |                  |       |   |   |
| Allowance  for doubtful accounts                  |       | $                     | 1.8        |   | $ | 1.8 |   |
| Restructuring                                     |       | 2.8                   |       | 2.8 |   |
| Derivative  instruments                           |       | 8.0                   |       | 10.0 |   |
| Other  current reserves and accruals              |       | 7.8                   |       | 5.6 |   |
| Valuation  allowance                              |       | (10.5                 | )          | (7.1 | ) |
| Total  current deferred income tax assets, net    |       | 9.9                   |       | 13.1 |   |
| Noncurrent  deferred income tax assets:           |       |                  |       |   |   |
| Investment  basis difference                      |       | 55.9                  |       | 57.1 |   |
| Pension  and postretirement benefits              |       | 52.0                  |       | 37.3 |   |
| Tax  loss carryforwards and credits               |       | 155.0                 |       | 43.9 |   |
| Other  noncurrent reserves and accruals           |       | 16.6                  |       | 20.5 |   |
| Foreign  exchange on debt                         |       | 45.0                  |       | 54.3 |   |
| Valuation  allowance                              |       | (122.4                | )          | (77.6 | ) |
| Total  noncurrent deferred income tax assets      |       | 202.1                 |       | 135.5 |   |
| Noncurrent  deferred income tax liabilities:      |       |                  |       |   |   |
| Derivative  instruments                           |       | (16.8                 | )          | 0.6 |   |
| Goodwill  and other intangibles                   |       | (88.7                 | )          | (94.3 | ) |
| Property,  plant and equipment                    |       | (140.8                | )          | (127.8 | ) |
| Total  noncurrent deferred income tax liabilities |       | (246.3                | )          | (221.5 | ) |
|                                              |       |                  |       |   |   |
| Net  deferred income tax liability                |       | $                     | (34.3      | ) | $ | (72.9 | ) |

 

Reconciliations of theU.S. statutory income tax rate to the effective tax rate are as follows:

 
| ** **                                  | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|
| ** **                                  | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Federal  statutory rate                     |       | 35.0                             | %          | 35.0 | % | 35.0 | % |
| State  taxes, net of federal effect         |       | 1.1                              |       | (0.1 | ) | 1.5 |   |
| Foreign/U.S.  tax differential              |       | (37.6                            | )          | (1.3 | ) | 1.2 |   |
| Goodwill                                    |       | 1.0                              |       | (26.4 | ) | 0.3 |   |
| Increase  (decrease) in valuation allowance |       | 102.4                            |       | (4.8 | ) | 7.1 |   |
| Debt  instruments                           |       | (46.6                            | )          | (3.5 | ) | 15.4 |   |
| Allocation  to discontinued operations      |       | (4.4                             | )          | 4.7 |   | (7.3 | ) |
| Noncontrolling  interest                    |       | 1.2                              |       | (0.1 | ) | (1.9 | ) |
| Foreign  tax rate reductions                |       | 0.4                              |       | 0.2 |   | (7.3 | ) |
| Other                                       |       | 1.8                              |       | (0.5 | ) | (2.9 | ) |
| Effective  tax rate                         |       | 54.3                             | %          | 3.2 | % | 41.1 | % |

 

In 2009, the effectivetax rate was negatively impacted by domestic tax losses which are not taxeffected as a result of a full valuation allowance and was positively impactedby a nonrecurring tax benefit in respect of debt related foreign currencychanges and geographic earnings mix.

 

For 2008, the effectiveincome tax rate compared to the federal statutory rate was negatively impactedby non-deductible book goodwill impairments.

 

The Company’s U.S.operations are included in a consolidated federal income tax return. The amountof current and deferred tax expense is computed on a separate entity basis foreach member of the group based on applying the principles of ASC 740.

 

As of December 31,2009, the Company has U.S. federal and foreign corporate tax loss carryforwards(excluding state and local amounts) of approximately $496.0 million, of which$202.1 million expire in 2029, $67.2 million expire between 2010 and 2026 and 

 

98

----

 

$226.7 million which haveno current expiration date. The Company also has state and local tax losscarryforwards of approximately $300.7 million expiring in years 2010 through2029.

 

The worldwide valuationallowance increased by $48.2 million to $132.9 million at December 31,2009. Of this amount, $34.4 million was a charge to income tax expense relatingprimarily to net operating losses and $13.8 million primarily represents anincrease to other comprehensive income.

 

The valuation allowanceas of December 31, 2009 and 2008 is attributable to deferred tax assetsrelated to certain items, such as tax loss carryforwards in the United States,including certain states, and Germany, China and other foreign countries forwhich it is more likely than not that the related tax benefits will not berealized. It is the Company’s policy that the valuation allowance is decreasedor increased in the year management determines that it is more likely than notthat the deferred tax assets will be realized.

 

A table reflecting theactivity in the valuation allowance is as follows:

 
| ** **                                   | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| **($ in millions)**                     | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Balance,  January 1                     |       | $                                | 84.7       |   | $ | 99.9 |   | $ | 98.1 |   |
| Increase  as reflected in income tax expense |       | 34.4                             |       | 42.1 |   | 4.7 |   |
| Other  (a)                              |       | 13.8                             |       | (57.3 | ) | (2.9 | ) |
| Balance,  December 31                   |       | $                                | 132.9      |   | $ | 84.7 |   | $ | 99.9 |   |

 

----

(a)                Primarily related to net investment hedges, as well asthe mark-to-market of the Company’s Euro-denominated debt and discontinuedoperations.

 

At December 31, 2009and 2008, the Company had undistributed foreign earnings of $949.3 million and$881.7 million, respectively, which the Company intends to be permanentlyreinvested. The Company has determined that it is not practicable to compute adeferred tax liability for foreign withholding taxes or U.S. income taxes onthese earnings. In accordance with the indefinite reversal criteria, theforeign currency gains recorded in other comprehensive income related tointercompany debt and foreign currency translation have not been tax affected.

 

The Company recordsliabilities for potential assessments in various tax jurisdictions. Theliabilities relate to tax return positions which, although supportable by theCompany, may be challenged by the tax authorities. The Company adjusts theseliabilities as a result of changes in tax legislation, interpretations of lawsby Courts, rulings by tax authorities, changes in estimates and the closing ofthe statute of limitations. The Company’s effective tax rate in any given yearincludes the impact of any changes to these liabilities. Favorable resolution ofan issue would generally be recognized as a reduction to the Company’s annualtax rate.

 

The Company adopted astandard on January 1, 2007 that clarified the accounting for uncertaintyin income taxes recognized in an entity’s financial statements and prescribed arecognition threshold and measurement attribute for financial statementdisclosure of tax positions taken or expected to be taken on a tax return. Thetotal amount of unrecognized tax benefits as of the date of adoption was $44.1million. In conjunction with the adoption, the Company has classified uncertaintax positions as non-current income tax liabilities (other liabilities) unlessexpected to be paid within one year. As of December 31, 2009, the totalamount of unrecognized tax benefits was $27.7 million including interest andpenalties. A reconciliation of the beginning and ending balances of the totalamounts of unrecognized tax benefits is as follows:

 
| **($ in millions)**                                                | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Unrecognized  tax benefits at January 1                            |       | $        | 48.0       |     | $          | 41.2     |       | $ | 44.1 |   |
| Increases  in tax positions for prior years                             |       | 2.9      |       | 9.1      |       | 15.5     |       |
| Decreases  in tax positions for prior years                             |       | (2.0     | )          | (2.9     | )          | (15.4    | )          |
| Increases  in tax positions for the current year                        |       | 0.9      |       | 3.8      |       | 10.5     |       |
| Decreases  due to settlements with taxing authorities                   |       | (0.7     | )          | (2.6     | )          | (14.2    | )          |
| Lapse  in statute of limitations                                        |       | (2.5     | )          | (0.1     | )          | (0.7     | )          |
| Foreign  exchange                                                       |       | 0.4      |       | (0.5     | )          | 1.4      |       |
| Unrecognized  tax benefits at December 31, before reconciling item |       | 47.0     |       | 48.0     |       | 41.2     |       |
| Reconciling  item: Offset against deferred tax assets                   |       | (19.3    | )          | (18.2    | )          | (14.5    | )          |
| Unrecognized  tax benefits at December 31                          |       | $        | 27.7       |     | $          | 29.8     |       | $ | 26.7 |   |

 

In accordance with theCompany’s policy, where tax losses can be carried back or forward to offsetliabilities for uncertain tax benefits, then the deferred tax assets associatedwith such tax losses are netted against liabilities for uncertain tax benefitsarising in 

 

99

----

 

the same year as thelosses, and also against liabilities for uncertain tax benefits arising indifferent years. This policy results in a $19.3 million reduction inliabilities and deferred tax assets as of December 31, 2009.

 

Included in the balanceof unrecognized tax benefits at December 31, 2009 are $27.3 million of taxbenefits that, if recognized, would affect the effective tax rate and $0.4million that, if recognized, would result in an adjustment to other taxaccounts.

 

The Company recognizesinterest and penalties related to unrecognized tax benefits in its income taxprovision. The Company had accrued $7.9 million, $7.1 million and $4.3 million forinterest and penalties as of December 31, 2009, 2008 and 2007,respectively.

 

The Company is currentlyunder audit in certain jurisdictions and during the next twelve months, it isreasonably possible that resolution of these audits could result in a benefitof up to $11.7 million or a cost of up to $18.3 million. Audit outcomes and thetiming of audit settlements are subject to significant uncertainty.

 

The Company is subject totaxation in the U.S., various states, and foreign jurisdictions. In 2009, theInternal Revenue Service completed its audit of the Company’s 2004 tax year.The Company’s tax filings in other major jurisdictions are open toinvestigation by tax authorities; in the U.K. from 2007 and in Germany from2001.

 

Tax law changes wereenacted in Germany and the U.K. in the third quarter of 2007 and in Italy inthe fourth quarter of 2007. The change in law and tax rates had an impact onthe existing deferred tax assets and liabilities recorded in thosejurisdictions. The impact of the change in the law and tax rates was recordedas a discrete tax benefit in the income tax provision for the year ended December 31,2007. If the tax law changes had not occurred, the effective tax rate wouldhave been 47.9% for the year ended December 31, 2007.

 

**13.OPERATING LEASE OBLIGATIONS:**

 

The following is aschedule of minimum future rentals under the terms of noncancelable operatingleases as of December 31, 2009:

 
| **($ in millions)**       | ** ** | ** ** | ** ** |
|--------------------------------|------------|------------|------------|
| Years  ended December 31: |       |       |       |
| 2010                           |       | $          | 16.8       |   |
| 2011                           |       | 12.4       |       |
| 2012                           |       | 8.7        |       |
| 2013                           |       | 6.1        |       |
| 2014                           |       | 5.0        |       |
| Thereafter                     |       | 9.7        |       |
| Total                          |       | $          | 58.7       |   |

 

Rent expense under alloperating leases was $28.2 million, $28.3 million and $24.7 million for theyears ended December 31, 2009, 2008 and 2007, respectively. Rentescalations and other lease concessions are reflected on a straight-line basisover the minimum lease term. Minimum future rentals include the effect of anyindex or rate that was applicable at lease inception.

 

**14.STOCK-BASED COMPENSATION:**

 

The aggregatecompensation cost for stock options, restricted stock units and Board ofDirector stock grants, as discussed below, caused income from continuingoperations before taxes to decrease by $4.7 million, $4.1 million and $3.9million for the years ended December 31, 2009, 2008 and 2007,respectively.

 

***Restricted Stock***—Restricted stock of the Company can be granted withor without payment of consideration with restrictions on the recipient’s rightto transfer or sell the stock.

 

*Performance-based restrictedstock units.*TheCompany typically grants performance-based restricted stock unit awards to itsmanagement and key employees. Certain employees have “company-wide performancetargets,” for which vesting is based on the achievement of specified AdjustedEBITDA and earnings per share levels, while others have “divisional performancetargets” for 

 

100

----

 

which vesting is based ona particular division’s achievement of Adjusted EBITDA performance. The Companygranted a “target amount” of performance restricted stock units, whereby if thespecified performance target is met, shares of the Company’s common stock wouldbe awarded upon vesting of these units. However, these awards provide the employeewith the possibility of earning from 0% to 200% of the share targeted unitsgranted based upon performance versus the target.

 

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

 

In December 2008,the Company awarded 606,256 performance restricted stock units to managementand key employees, which will vest on December 31, 2011 as long as theemployee continues to be employed by the Company on such date and based uponthe achievement of certain performance targets as approved by the CompensationCommittee. The number of shares of the Company’s common stock ultimatelyawarded upon vesting is determined based on the Company’s achievement ofspecified performance criteria over the period January 1,2009 through December 31, 2009. The performance targets forthese awards were set, and effectively granted, in February 2009 when suchperformance targets were approved by the Compensation Committee. For this December 2008grant, certain performance targets were achieved, and as a result, 180,057shares will vest as long as the employees continue to be employed by theCompany on December 31, 2011.

 

*Time-based restricted stockunits.*TheCompany typically grants time-based restricted stock unit awards to itsmanagement and key employees. In December 2009 and 2008, the Companygranted 127,375 and 320,867, respectively, time restricted stock units tomanagement and key employees, which will vest on December 31, 2012 and December 31,2011, respectively as long as the employee continues to be employed by theCompany on such date.

 

With regard to ourperformance-based restricted stock units, the Company reversed previouslyrecorded expense in 2009 related to performance targets that were no longerprobable to be achieved. As a result, the net effect of compensation costrelated to restricted stock units caused income from continuing operations toincrease by $0.6 million for the year ended December 31, 2009.  A tax expense of $0.1 million was recordedfor the year ended December 31, 2009.  The compensation cost related to restricted stock units of the Companycaused income from continuing operations before taxes to decrease by $0.2million and $1.8 million for the years ended December 31, 2008 and 2007,respectively. The total tax benefit recognized related to restricted stock was$0.1 million and $0.2 million for the years ended December 31, 2008 and2007, respectively. The weighted average grant date fair value of therestricted shares granted in 2009, 2008 and 2007 were $10.40, $16.57 and$31.94, respectively, per stock unit. As of December 31, 2009, there was$10.6 million of unrecognized compensation cost related to restricted stockunits, which is expected to be recognized over a weighted-average period ofapproximately 2.7 years.

 

A summary of the statusof the Company’s nonvested restricted stock units granted pursuant to the Planat December 31, 2009 and 2008 and changes during the year ended December 31,2009 is presented below:

 
| ** **                           | ** ** | **Shares**      | ** ** | **Weighted  Average  Fair Value** | ** ** |
|--------------------------------------|------------|-----------------|------------|-----------------------------------|------------|
| ** **                           | ** ** | **(‘000)** | ** ** | ** **                        | ** ** |
| Nonvested  at December 31, 2008 |       | 700             |       | $                                 | 21.56      |   |
| Granted                              |       | 733             |       | 10.40                             |       |
| Vested                               |       | (1              | )          | 20.70                             |       |
| Forfeited                            |       | (5              | )          | 14.02                             |       |
| Nonvested  at December 31, 2009 |       | 1,427           |       | $                                 | 15.67      |   |

 

***Stock Purchase***—Eligible employees and directors can purchase sharesof the Company’s common stock at prices as determined by its board ofdirectors. There were no stock purchases by eligible employees and directors in2009, 2008 or 2007.

 

***Board of Directors Stock Grant***—The Company granted 37,392 shares of itscommon stock to its independent directors during the year ended December 31,2009. Compensation cost related to the directors’ stock grant caused incomefrom continuing operations before taxes and net income to decrease by $0.5million, $0.3 million and $0.1 million for the years ended December 31,2009, 2008 and 2007, respectively.

 

101

----

 

***Board of Directors Stock Options***—Stock options granted to directors underthis Plan shall have an exercise price at least equal to the fair market valueof the Company’s common stock on the date of grant. Options available for grantunder this Plan are time options which have a life of ten years from the dateof grant and vest in three equal annual installments on each of the first threeanniversaries of the grant date. The Company did not grant any stock options todirectors in 2009.

 

***Stock Options***—Stock options granted to employees under the Planshall have an exercise price at least equal to the fair market value of theCompany’s common stock on the date of grant. The Company has granted two typesof options under the Plan (time and performance options).

 

*Time-Based Stock Options*. Time options granted in 2004 have alife of ten years from the date of grant and vest in installments of 20% oneach of the first five anniversaries of the grant date. Time options grantedafter 2004 typically have a life of seven years and vest in three equal annualinstallments on each of the first three anniversaries of December 31 ofthe year granted. In 2009, the Company granted 277,419 time-based stock optionsto management and key employees.

 

The compensation costrelated to stock options of the Company caused income from continuingoperations before taxes to decrease by $4.8 million, $3.6 million and $2.0million in the years ended December 31, 2009, 2008 and 2007,respectively. The total tax benefit recognized related to stock optionswas $0.5 million, $0.4 million and $0.3 million in the years ended December 31,2009, 2008 and 2007, respectively.

 

As of December 31,2009, there was $7.8 million of unrecognized compensation cost related tononvested stock options, which is expected to be recognized over aweighted-average period of approximately 2.2 years.

 

The weighted-average fairvalue of options granted during the years ended December 31, 2009, 2008and 2007 was $13.13, $4.26 and $10.41, respectively. The fair value of stockoptions granted in the years ended December 31, 2009, 2008 and 2007 areestimated on the date of grant using the Black-Scholes option pricing modelthat used the assumptions noted in the following table:

 
| ** **                | ** ** | **Year ended December 31,** | ** ** |
|---------------------------|------------|----------------------------------|------------|
| ** **                | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Expected  term (in years) |       | 4.5                              |       | 4.5 |   | 4.5 |   |
| Expected  volatility      |       | 68                               | %          | 54 | % | 30 | % |
| Risk-free  rate           |       | 2.3                              | %          | 1.6 | % | 4.2 | % |
| Expected  dividends       |       | N/A                              |       | N/A |   | N/A |   |

 

The expected termrepresents the period of time that options granted are expected to beoutstanding based on the simplified method for determining the expected term ofan employee share option. The Company does not have sufficient historicalexercise data to provide a reasonable basis upon which to estimate expectedterm. As a result, the Company’s expected term was based on the simplifiedmethod.  The expected volatility for awards granted in December 2008and 2009 is based on historical share prices of the Company since it became apublic company.  For awards granted prior to December 2008, theexpected volatility was based on the expected volatilities of comparable peercompanies that are publicly traded as Rockwood became a public Company in August 2005and did not have a long period of history of the Company’s share price. The risk-free rate is based on the U.S. Treasury yield curve in effect at thetime of grant. Expected dividends are not applicable as the Company currentlydoes not pay and does not expect to pay a dividend on its shares.

 

In addition, therecognition of expense only occurs for awards that will eventually vest. This requires pre-vesting forfeitures to be estimated at the time of grant andmodified, if necessary, if actual forfeitures differ from estimatedforfeitures. The Company’s forfeiture rates are based upon historicalshare-based equity award cancellations.

 

The total intrinsic valueof stock options exercised during the years ended December 31, 2009, 2008and 2007 was $0.4 million, $3.6 million and $2.1 million, respectively. Cashreceived from option exercises during 2009 was $1.0 million. The total fairvalue of shares vested during the years ended December 31, 2009, 2008 and2007 was $7.0 million, $4.3 million and $3.4 million, respectively.

 

During 2008, the Companyextended the exercise period of 193,165 fully vested share options held by fouremployees and accelerated the vesting of 55,857 share options held by sixemployees. As a result of the modifications, the Company recognized additionalexpense of $0.2 million for the year ended December 31, 2008.

 

102

----

 

A summary of the statusof the Company’s options granted pursuant to the Plan at December 31, 2009and 2008 and changes during the year ended December 31, 2009 is presentedbelow:

 
| ** **                                                                       | ** ** | **Shares**      | ** ** | **Weighted Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------|------------|---------------------------------------|------------|-----------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                       | ** ** | **(‘000)** | ** ** | ** **                            | ** ** | **(years)**                                         | ** ** | **($ in millions)**       | ** ** |
| Outstanding  at December 31, 2008                                           |       | 5,228           |       | $                                     | 17.10      |                                                |       |                           |       |   |
| Granted                                                                          |       | 277             |       | 23.79                                 |       |                                                |       |                           |       |
| Exercised                                                                        |       | (67             | )          | 14.61                                 |       |                                                |       |                           |       |
| Forfeited                                                                        |       | (20             | )          | 27.57                                 |       |                                                |       |                           |       |
| Outstanding  at December 31, 2009                                           |       | 5,418           |       | $                                     | 17.43      |                                                | 4.2        |                           | $          | 42.0 |   |
|                                                                             |       |            |       |                                  |       |                                                |       |                           |       |
| Options  vested at December 31, 2009 and expected to vest in the future (a) |       | 5,361           |       | $                                     | 17.44      |                                                | 4.2        |                           | $          | 41.5 |   |
|                                                                             |       |            |       |                                  |       |                                                |       |                           |       |
| Options  exercisable at December 31, 2009                                   |       | 4,271           |       | $                                     | 17.65      |                                                | 3.7        |                           | $          | 32.3 |   |

 

----

(a)                The number of options expected to vest takes intoaccount an estimate of expected forfeitures.

 

**15.EMPLOYEE BENEFIT PLANS:**

 

The Company maintainsvarious defined benefit pension plans, which cover certain employees in theU.S., U.K., Germany, Finland and other countries. In Germany, plan obligationsinclude the provision of postretirement benefits covering private healthinsurance premiums. Two U.S. subsidiaries provide certain retirees withhealthcare and life insurance.

 

Funding requirements andinvestment policies for the Company’s various defined benefit plans aregoverned by local statutes and fiduciary standards outlined below.

 

The following tablessummarize the benefit obligations, plan assets and the funded status of thepension plans, along with the amounts recognized in the Consolidated BalanceSheets and the weighted average assumptions used.

 

103

----

 
| ** **                                                                                 | ** ** | **Pension Benefits** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                 | ** ** | **U.S. Plans**       | ** ** | **Non-U.S. Plans** | ** ** |
| **($ in millions)**                                                                   | ** ** | **2009**             | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| *Change in benefit obligation:*                                                            |       |                 |       |   |   |   |   |   |   |
| Benefit  obligation at beginning of year                                                   |       | $                    | 29.8       |   | $ | 27.7 |   | $ | 567.1 |   | $ | 471.2 |   |
| Service  cost                                                                              |       | 0.2                  |       | 0.2 |   | 8.3 |   | 7.4 |   |
| Interest  cost                                                                             |       | 1.8                  |       | 1.7 |   | 33.4 |   | 28.4 |   |
| Actuarial  loss (gain)                                                                     |       | 1.4                  |       | 1.1 |   | 53.1 |   | (29.7 | ) |
| Benefits  paid                                                                             |       | (1.0                 | )          | (1.1 | ) | (33.3 | ) | (27.4 | ) |
| Plan  changes                                                                              |       | —               |       | — |   | 7.0 |   | — |   |
| Acquisitions                                                                               |       | —               |       | — |   | — |   | 170.6 |   |
| Foreign  exchange loss (gain)                                                              |       | —               |       | — |   | 23.5 |   | (52.0 | ) |
| Effect  of curtailment/settlement                                                          |       | —               |       | — |   | (3.0 | ) | — |   |
| Other                                                                                      |       | —               |       | 0.2 |   | 1.6 |   | (1.4 | ) |
| Benefit  obligation at end of year                                                         |       | $                    | 32.2       |   | $ | 29.8 |   | $ | 657.7 |   | $ | 567.1 |   |
| *Change in fair value of plan assets:*                                                     |       |                 |       |   |   |   |   |   |   |
| Fair  value of plan assets at beginning of year                                            |       | $                    | 19.0       |   | $ | 26.7 |   | $ | 209.7 |   | $ | 130.6 |   |
| Actual  return on assets                                                                   |       | 4.6                  |       | (7.7 | ) | 28.2 |   | (42.6 | ) |
| Employer  contributions                                                                    |       | 0.8                  |       | 1.1 |   | 6.4 |   | 5.3 |   |
| Benefits  paid from fund                                                                   |       | (1.0                 | )          | (1.1 | ) | (15.0 | ) | (8.6 | ) |
| Acquisitions                                                                               |       | —               |       | — |   | — |   | 157.3 |   |
| Foreign  exchange gain (loss)                                                              |       | —               |       | — |   | 11.0 |   | (30.9 | ) |
| Effect  of curtailment/settlement                                                          |       | —               |       | — |   | (2.1 | ) | — |   |
| Other                                                                                      |       | —               |       | — |   | (0.3 | ) | (1.4 | ) |
| Fair  value of plan assets at end of year                                                  |       | $                    | 23.4       |   | $ | 19.0 |   | $ | 237.9 |   | $ | 209.7 |   |
| * *                                                                                   |       |                 |       |   |   |   |   |   |   |
| Funded  status                                                                             |       | $                    | (8.8       | ) | $ | (10.8 | ) | $ | (419.8 | ) | $ | (357.4 | ) |
| *Amounts recognized in the consolidated balance sheets:*                                   |       |                 |       |   |   |   |   |   |   |
| Current  liabilities                                                                       |       | $                    | —     |   | $ | — |   | $ | (13.8 | ) | $ | (13.5 | ) |
| Noncurrent  liabilities (a)                                                                |       | (8.8                 | )          | (10.8 | ) | (406.0 | ) | (343.9 | ) |
| Net  amount recognized                                                                     |       | $                    | (8.8       | ) | $ | (10.8 | ) | $ | (419.8 | ) | $ | (357.4 | ) |
| *Amounts recognized in accumulated other comprehensive  income:*                           |       |                 |       |   |   |   |   |   |   |
| Net  actuarial losses                                                                      |       | $                    | 8.8        |   | $ | 11.0 |   | $ | 47.4 |   | $ | 7.5 |   |
| Prior  service cost                                                                        |       | 0.1                  |       | 0.1 |   | 7.2 |   | — |   |
| Accumulated  other comprehensive loss                                                      |       | $                    | 8.9        |   | $ | 11.1 |   | $ | 54.6 |   | $ | 7.5 |   |
|                                                                                       |       |                 |       |   |   |   |   |   |   |
| Accumulated  benefit obligation                                                            |       | $                    | 32.2       |   | $ | 29.8 |   | $ | 614.9 |   | $ | 526.9 |   |
| * *                                                                                   |       |                 |       |   |   |   |   |   |   |
| *Information for pension plans with an accumulated benefit*                                |       |                 |       |   |   |   |   |   |   |
| *obligation in excess of plan assets:*                                                     |       |                 |       |   |   |   |   |   |   |
| Accumulated  benefit obligation                                                            |       | $                    | 32.2       |   | $ | 29.8 |   | $ | 614.2 |   | $ | 500.4 |   |
| Fair  value of plan assets                                                                 |       | $                    | 23.4       |   | $ | 19.0 |   | $ | 237.2 |   | $ | 178.9 |   |
|                                                                                       |       |                 |       |   |   |   |   |   |   |
| *Weighted-average assumptions used to determine benefit  obligations at December 31:* |       |                 |       |   |   |   |   |   |   |
| Discount  rate                                                                             |       | 5.89                 | %          | 6.18 | % | 5.29 | % | 6.02 | % |
| Rate  of compensation increase                                                             |       | N/A                  |       | N/A |   | 3.15 | % | 3.13 | % |

 

----

(a)                Balances include $11.3 million and $10.7 million as ofDecember 31, 2009 and 2008, respectively, related to certain Germandefined benefit obligations which are reported as “Other Liabilities” in theConsolidated Balance Sheets. Balances do not include $6.8 million and $8.4million as of December 31, 2009 and 2008, respectively, representingcertain individually immaterial pension and postretirement medical benefitplans which are reported within “Pension and Related Liabilities” in theConsolidated Balance Sheets.

 

104

----

 
| ** **                                                                                                    | ** ** | **U.S. Plans** | ** ** | **Non-U.S. Plans** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|----------------|------------|--------------------|------------|
| **($ in millions)**                                                                                      | ** ** | **2009**       | ** ** | **2008**           | ** ** | **2007** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
| *Weighted-average assumptions used to determine net  periodic benefit cost for years ended December 31:* |       |           |       |               |       |   |   |   |   |   |   |   |   |
| Discount  rate                                                                                                |       | 6.18           | %          | 6.26               | %          | 5.76 | % | 6.02 | % | 5.53 | % | 4.62 | % |
| Expected  return on plan assets (a)                                                                           |       | 8.28           | %          | 8.28               | %          | 8.28 | % | 6.17 | % | 6.00 | % | 5.19 | % |
| Rate  of compensation increase                                                                                |       | N/A            |       | N/A                |       | N/A |   | 3.13 | % | 3.32 | % | 3.19 | % |
| *Components of net pension benefit costs:*                                                                    |       |           |       |               |       |   |   |   |   |   |   |   |   |
| Service  cost                                                                                                 |       | $              | 0.2        |               | $          | 0.2 |   | $ | 0.2 |   | $ | 8.3 |   | $ | 7.4 |   | $ | 7.0 |   |
| Interest  cost                                                                                                |       | 1.8            |       | 1.7                |       | 1.6 |   | 33.4 |   | 28.4 |   | 21.3 |   |
| Expected  return on assets                                                                                    |       | (1.6           | )          | (2.2               | )          | (2.0 | ) | (13.7 | ) | (10.9 | ) | (6.5 | ) |
| Net  amortization of actuarial losses (gains)                                                                 |       | 0.7            |       | —             |       | 0.1 |   | 0.1 |   | (0.4 | ) | (1.0 | ) |
| Other                                                                                                         |       | —         |       | —             |       | — |   | 1.2 |   | — |   | — |   |
| Net  periodic pension cost (benefit)                                                                          |       | 1.1            |       | (0.3               | )          | (0.1 | ) | 29.3 |   | 24.5 |   | 20.8 |   |
| Settlement/curtailment                                                                                        |       | —         |       | —             |       | — |   | (0.4 | ) | — |   | — |   |
| Total  pension cost (benefit)                                                                                 |       | $              | 1.1        |               | $          | (0.3 | ) | $ | (0.1 | ) | $ | 28.9 |   | $ | 24.5 |   | $ | 20.8 |   |

 

----

(a)                The long-term rate of return on assets listed above isthe average of expected returns developed for each plan weighted by each plan’sassets, as of January 1 of the year measured. Rates of return have beenestimated based on various asset-appropriate price and yield indices, adjustedfor projected inflation and long-term dividend growth.

 

The following benefitpayments, which reflect expected future service, as appropriate, are expectedto be paid:

 
| **($ in millions)**                          | ** ** | **U.S. Plans** | ** ** | **Non-U.S.  Plans** | ** ** |
|---------------------------------------------------|------------|----------------|------------|---------------------|------------|
| 2010                                              |       | $              | 1.1        |                | $          | 35.5 |   |
| 2011                                              |       | 1.3            |       | 35.2                |       |
| 2012                                              |       | 1.4            |       | 37.1                |       |
| 2013                                              |       | 1.6            |       | 37.4                |       |
| 2014                                              |       | 1.8            |       | 38.7                |       |
| Years  2015 - 2019                                |       | 10.9           |       | 200.9               |       |
| *Expected employer contributions to plan assets:* |       |           |       |                |       |
| 2010                                              |       | $              | 1.1        |                | $          | 5.5 |   |

 

***Recognition of actuarial losses***—In 2010, the Company expects torecognize $2.3 million of previously unrecognized actuarial losses.

 

***Other postretirement benefits***—The Company had liabilities of $4.0million and $4.9 million as of December 31, 2009 and 2008, respectively,related to other postretirement benefit plans reported as “Pension and RelatedLiabilities” in the Consolidated Balance Sheets. These plans recorded expensesof $0.3 million, $0.4 million and $0.4 million in 2009, 2008 and 2007,respectively.

 

***Plans with projected benefit obligations in excess of planassets***—TheCompany’s defined benefit plans all had projected benefit obligations in excessof plan assets.

 

***Contributions***—During the year ended December 31, 2009, theCompany made contributions of approximately $7.2 million to its defined benefitpension trusts and an additional $18.3 million in benefit payments directly toplan participants. For 2010, the Company expects to make payments of approximately$6.6 million as contributions to pension trusts plus benefit payments directlyto plan participants of approximately $18.8 million.

 

***Investment policies and strategies***—The Company’s plans have varyingstatutory and plan governance requirements. For example, U.K. plan investmentsare limited to listed securities not affiliated with the Company or theinvestment advisor and equities are divided between domestic and foreignequity. U.S. plan investments are generally limited to mutual funds. Althoughthe Company has representatives of local management involved in the governanceof all plans, some plans or statutes also have representation by workers,employee unions, and/or corporate-level executives.

 

Plans in Finland, theU.K. and the U.S. represent over 90% of total plan assets. In these countries,the general investment objectives are to maximize the expected return on theplans’ assets without unduly prejudicing the security of the members’ accruedbenefits and with sufficient liquidity to meet current plan cash flowrequirements. As each plan is locally governed, asset allocations may varybetween plans. Most plans do not have fixed targets but vary their investmentallocations based on plan trustees’ consultation with professional investmentadvisors as to whether these allocations remain appropriate in light ofrelative investment performance and 

 

105

----

 

risk and/or actuarialchanges related to plan participants. The following table presentsweighted-average of the plans’ targeted investment allocations in 2009 as wellas the actual weighted-average investment allocations as of December 31,2009 and 2008:

 
| ** **                                  | ** ** | **U.S. Plans** | ** ** | **Non-U.S. Plans** | ** ** |
|---------------------------------------------|------------|----------------|------------|--------------------|------------|
| ** **                                  | ** ** | **Target**     | ** ** | **2009**           | ** ** | **2008** | ** ** | **Target** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Cash  and cash equivalents                  |       | —         | %          | —             | %          | — | % | 6 | % | 3 | % | 1 | % |
| Equity  securities                          |       | 61             |       | 62                 |       | 58 |   | 33 |   | 32 |   | 39 |   |
| Fixed  income                               |       | 39             |       | 38                 |       | 42 |   | 51 |   | 53 |   | 46 |   |
| Insurance  contracts, real estate and other |       | —         |       | —             |       | — |   | 10 |   | 12 |   | 14 |   |

 

The following tablepresents the Company’s plan assets using the fair value hierarchy as of December 31,2009. See Note 6, “Fair Value Measurements,” for descriptions of the Company’sfair value hierarchy levels.

 
| ** **                              | ** ** | **As of**                  | ** ** | **Fair Value Measurements** | ** ** |
|-----------------------------------------|------------|----------------------------|------------|-----------------------------|------------|
| **(in millions)**                       | ** ** | **December 31, 2009** | ** ** | **Level 1**                 | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Cash  and cash equivalents              |       | $                          | 7.3        |                        | $          | 2.5 |   | $ | 4.8 |   | $ | — |   |
| Equity  securities:                     |       |                       |       |                        |       |   |   |   |   |
| Domestic  large-cap growth (a) (b) |       | 23.0                       |       | 0.3                         |       | 22.7 |   | — |   |
| International  large-cap growth (a)     |       | 17.8                       |       | 0.3                         |       | 17.5 |   | — |   |
| Other  equity funds                     |       | 49.1                       |       | 2.2                         |       | 46.9 |   | — |   |
| Fixed  income securities:               |       |                       |       |                        |       |   |   |   |   |
| Domestic  government bonds (a) (b) |       | 13.0                       |       | —                      |       | 13.0 |   | — |   |
| International  government bonds (a)     |       | 7.9                        |       | —                      |       | 7.9 |   | — |   |
| Corporate  bonds (a)                    |       | 58.1                       |       | 3.4                         |       | 54.7 |   | — |   |
| Plan  sponsor                           |       | 32.5                       |       | —                      |       | 32.5 |   | — |   |
| Other  bond funds                       |       | 8.8                        |       | 2.7                         |       | 6.1 |   | — |   |
| Other                                   |       | 15.3                       |       | 0.7                         |       | 14.6 |   |   |   |
| Other  investments:                     |       |                       |       |                        |       |   |   |   |   |
| Insurance  contracts                    |       | 24.5                       |       | —                      |       | 24.5 |   | — |   |
| Real  estate funds                      |       | 1.4                        |       | —                      |       | 1.4 |   | — |   |
| Other                                   |       | 2.6                        |       | —                      |       | 2.6 |   | — |   |
| Total                                   |       | $                          | 261.3      |                        | $          | 12.1 |   | $ | 249.2 |   | $ | — |   |

 

----

(a)                Represents a direct investment or mutualpooled fund.

 

(b)               “Domestic”refers to investment in the plan’s home country.  Most plan assets arelocated in Finland, the U.K., the U.S. or Germany.

 

*Level 1*

 

Direct investments in publicly tradedequity and debt securities are valued at quoted market prices. Similarly,mutual funds are public investment vehicles valued at quoted market prices,which represent the net asset value of the shares held.

 

*Level 2*

 

Direct investments in corporate andgovernment bonds that are not actively traded are based on institutional bidevaluations using proprietary models. Commingled and proprietary funds arevalued at unit or net asset values provided by investment managers, which arebased on the fair value of the underlying investments utilizing publicinformation, independent external valuation from third-party services, third-partyadvisors, or standard bond or other investment valuation models. Insurance contracts are valued as reported by the issuer, typicallyeither using cash surrender value - the amount a plan would receive if acontract was cashed out at year end — or based on the present value of theexpected future cash flows. Participations in real estate funds are valued atnet asset value as determined by the fund manager. The plan sponsor loan isvalued at its principal amount, consistent with its valuation in Rockwood’sconsolidated financial statements.

 

**OtherRetirement Benefit Plans**

 

***Savings Plans***—The Company sponsors various defined contributionplans for certain employees. Contributions under the plans are based onspecified percentages of employee compensation. In aggregate, the Company’scontributions to these plans were $6.7 million, $13.3 million and $10.6 millionin 2009, 2008 and 2007, respectively.

 

106

----

 

 

***Multiemployer Plans***—The Company participates in three multiemployerplans. Contributions under the plans are based on specified percentages ofemployee contributions. The Company’s contributions to the plans were $6.1million, $5.0 million and $4.8 million in 2009, 2008 and 2007, respectively.

 

**16.EARNINGS PER SHARE:**

 

Basic and dilutedearnings (loss) per common share (“EPS”) were computed using the followingshare data:

 
| ** **                                                                                  | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| **($ in millions, except per share amounts; shares in thousands)**                     | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| **EPS Numerator:**                                                                          |       |                             |       |   |   |   |   |
| Amounts  attributable to Rockwood Holdings, Inc.:                                      |       |                             |       |   |   |   |   |
| Income  (loss) from continuing operations                                                   |       | $                                | 18.3       |   | $ | (634.6 | ) | $ | 81.5 |   |
| Income  from discontinued operations                                                        |       | 2.8                              |       | 3.3 |   | 25.2 |   |
| Gain  on sale of discontinued operations, net of tax                                        |       | —                           |       | 42.9 |   | 210.4 |   |
| Net  income (loss)                                                                          |       | $                                | 21.1       |   | $ | (588.4 | ) | $ | 317.1 |   |
|                                                                                        |       |                             |       |   |   |   |   |
| **EPS Denominator:**                                                                        |       |                             |       |   |   |   |   |
| Basic  weighted average number of common shares outstanding                                 |       | 74,096                           |       | 73,983 |   | 73,817 |   |
| Effect  of dilutive stock options and other incentives                                      |       | 755                              |       | — |   | 2,462 |   |
| Diluted  weighted average number of common shares outstanding and common stock  equivalents |       | 74,851                           |       | 73,983 |   | 76,279 |   |
|                                                                                        |       |                             |       |   |   |   |   |
| **Basic earnings (loss) per common share attributable to  Rockwood Holdings, Inc.:**   |       |                             |       |   |   |   |   |
| Earnings  (loss) from continuing operations                                                 |       | $                                | 0.25       |   | $ | (8.58 | ) | $ | 1.10 |   |
| Earnings  from discontinued operations, net of tax                                          |       | 0.03                             |       | 0.63 |   | 3.20 |   |
| Basic  earnings (loss) per common share                                                     |       | $                                | 0.28       |   | $ | (7.95 | ) | $ | 4.30 |   |
|                                                                                        |       |                             |       |   |   |   |   |
| **Diluted earnings (loss) per common share attributable to  Rockwood Holdings, Inc.:** |       |                             |       |   |   |   |   |
| Earnings  (loss) from continuing operations                                                 |       | $                                | 0.24       |   | $ | (8.58 | ) | $ | 1.07 |   |
| Earnings  from discontinued operations, net of tax                                          |       | 0.04                             |       | 0.63 |   | 3.09 |   |
| Diluted  earnings (loss) per common share                                                   |       | $                                | 0.28       |   | $ | (7.95 | ) | $ | 4.16 |   |

 

Stock options underemployee compensation plans representing common stock of 1,069,304 shares,6,620,466 shares and 1,031,629 shares were outstanding as of December 31,2009, 2008 and 2007, respectively, but were not included in the computation ofdiluted earnings per common share because their inclusion would have had ananti-dilutive effect.

 

**17.WARRANTS:**

 

In connection with theissuance of the redeemable convertible preferred stock in connection with the July 2003refinancing, the Company issued warrants to an affiliate of KKR, exercisable atany time at a $14.61 per share exercise price, to purchase 958,315 additionalshares of common stock of the Company. The warrants expire July 23, 2013.The Company has attributed a portion of the proceeds from issuance of theredeemable convertible preferred stock to the fair value of the warrants. Thewarrants were valued at $6.1 million and were recorded as a component ofstockholders’ equity.

 

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

 

The Company recordsrestructuring liabilities that represent charges incurred in connection withconsolidations and cessations of certain of its operations, includingoperations from acquisitions, as well as headcount reduction programs. Thesecharges consist primarily of severance and facility closure costs. Severancecharges are based on various factors including the employee’s length ofservice, contract provisions, salary levels and local governmental legislation.At the time a related charge is recorded, the Company calculates its best estimatebased upon detailed analysis. Although significant changes are not expected,actual costs may differ from these estimates.

 

During the year ended December 31,2009, the Company expensed $7.0 million of restructuring charges, whichincluded asset write-offs of $0.7 million. The major components of therestructuring charge included $3.7 million in the Specialty Chemicals segmentprimarily related to facility closures and headcount reductions and $2.2million in the Performance Additives segment, primarily related to arestructuring plan implemented in the Color Pigments and Services business inconnection with the integration of the businesses acquired from Elementis plc,including the reorganization and relocation of the North American Finance and ITservices,

 

107

----

 

and the closure of threemanufacturing facilities in 2008. In addition, “restructuring and otherseverance costs” in the Consolidated Statements of Operations included otherseverance-related costs of $13.8 million related to headcount reductionsundertaken throughout the Company.

 

During the year ended December 31,2008, the Company expensed $17.7 million of restructuring charges, whichincluded asset write-offs of $3.5 million in the Color Pigments and Servicesbusiness of the Performance Additives segment. The major components of therestructuring charge included $7.6 million in the Performance Additives segmentprimarily related to the integration of the businesses acquired from Elementisplc.  In the Specialty Chemicals segment, $8.2 million was recordedprimarily for severance costs arising from the cessation and relocation ofmanufacturing in certain locations. In addition, “restructuring and otherseverance costs” in the Consolidated Statements of Operations included otherseverance-related costs of $17.6 million related to headcount reductionsundertaken throughout the Company.

 

During the year ended December 31,2007, the Company expensed $12.0 million of restructuring charges. In theCorporate and other segment, facility closure and severance costs of $4.7million were recorded, primarily related to the restructuring of the waferreclaim business.  In addition, $2.6 million was recorded in the SpecialtyChemicals segment, $2.5 million was recorded in the Advanced Ceramics segmentand $2.2 million was recorded in the Performance Additives segment formiscellaneous headcount reductions and facility closures.

 

Restructuring actionsfrom 2008 and 2009 are expected to be completed in 2010. Selected informationfor outstanding liabilities from recent restructuring actions is as follows:

 
| **($ in millions)**                   | ** ** | **Severance/  Relocation** | ** ** | **Facility  Closure** | ** ** | **Total** | ** ** |
|--------------------------------------------|------------|----------------------------|------------|-----------------------|------------|-----------|------------|
| Liability  balance, December 31, 2008 |       | $                          | —     |                  | $          | —    |       | $ | — |   |
| Restructuring  charge in 2009              |       | 0.3                        |       | 1.4                   |       | 1.7       |       |
| Utilized                                   |       | (0.2                       | )          | (0.9                  | )          | (1.1      | )          |
| Liability  balance, December 31, 2009 |       | $                          | 0.1        |                  | $          | 0.5       |       | $ | 0.6 |   |

 
| **($ in millions)**                   | ** ** | **Severance/  Relocation** | ** ** | **Facility  Closure** | ** ** | **Total** | ** ** |
|--------------------------------------------|------------|----------------------------|------------|-----------------------|------------|-----------|------------|
| Liability  balance, December 31, 2007 |       | $                          | —     |                  | $          | —    |       | $ | — |   |
| Acquisitions  (a)                          |       | 5.6                        |       | —                |       | 5.6       |       |
| Restructuring  charge in 2008              |       | 12.1                       |       | 0.9                   |       | 13.0      |       |
| Utilized                                   |       | (5.0                       | )          | (0.9                  | )          | (5.9      | )          |
| Foreign  exchange and other                |       | 0.7                        |       | 0.1                   |       | 0.8       |       |
| Liability  balance, December 31, 2008 |       | 13.4                       |       | 0.1                   |       | 13.5      |       |
| Restructuring  charge in 2009              |       | 1.3                        |       | 1.7                   |       | 3.0       |       |
| Utilized                                   |       | (10.7                      | )          | (1.5                  | )          | (12.2     | )          |
| Foreign  exchange and other                |       | (0.6                       | )          | —                |       | (0.6      | )          |
| Liability  balance, December 31, 2009 |       | $                          | 3.4        |                  | $          | 0.3       |       | $ | 3.7 |   |

 

----

(a)                Relates primarily to the Titanium Dioxide Pigmentsventure and other bolt-on acquisitions.

 

Prior Years

 

As of December 31,2009, restructuring liabilities include outstanding obligations of $3.2 millionfrom prior year actions primarily related to an unexpired lease in connectionwith the restructuring of the Wafer Reclaim business.  These actions are now complete, with theexception of one action to be completed in 2010.

 

108

----

 

Restructuring reserves bysegment are as follows:

 
| ** **                 | ** ** | **December 31,** | ** ** |
|----------------------------|------------|-----------------------|------------|
| **($ in millions)**   | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Specialty  Chemicals       |       | $                     | 3.7        |   | $ | 8.1 |   |
| Performance  Additives     |       | 0.7                   |       | 2.3 |   |
| Titanium  Dioxide Pigments |       | —                |       | 1.4 |   |
| Advanced  Ceramics         |       | 1.0                   |       | 4.5 |   |
| Specialty  Compounds       |       | —                |       | 0.5 |   |
| Corporate  and other       |       | 2.1                   |       | 2.1 |   |
|                       |       | $                     | 7.5        |   | $ | 18.9 |   |

 

**19.ACCUMULATED OTHER COMPREHENSIVE INCOME:**

 

Changes in accumulatedother comprehensive income (loss) are as follows:

 
| **($ in millions)**                                                       | ** ** | **Pension********related  adjustments,  net of tax (a)** | ** **                                                                                                         | **Foreign  currency  translation (b)** | ** ** | **Intercompany  foreign currency  loans (b)**                                                                | ** ** | **Net  investment hedge,  net of tax (c)** | ** **                                                                                                   | **Cash flow  hedges,  net of tax (d)** | ** ** | **Total  accumulated  other comprehensive  income (loss)**                                                         | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------|----------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|--------------------------------------------------------------------------------------------------------------|----------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|
| Balance  at December 31, 2006                                             |       | $                                                        |                    (24.2 | )                                      | $          |                   200.8 |       | $                                          |                   132.2 |                                   | $          |                    (74.8 | )          | $ |                          — |   | $ |                        234.0 |   |
| Period  change                                                                 |       | 36.7                                                     |                                                                                                               | 177.6                                  |       | 66.8                                                                                                         |       | (108.3                                     | )                                                                                                            | —                                 |       | 172.8                                                                                                              |       |
| Foreign  currency translation of entities sold, primarily Electronics business |       | —                                                   |                                                                                                               | (35.8                                  | )          | —                                                                                                       |       | —                                     |                                                                                                         | —                                 |       | (35.8                                                                                                              | )          |
| Balance  at December 31, 2007                                             |       | 12.5                                                     |                                                                                                               | 342.6                                  |       | 199.0                                                                                                        |       | (183.1                                     | )                                                                                                            | —                                 |       | 371.0                                                                                                              |       |
| Period  change                                                                 |       | (27.9                                                    | )                                                                                                                  | (146.0                                 | )          | (32.2                                                                                                        | )          | 38.9                                       |                                                                                                         | 0.2                                    |       | (167.0                                                                                                             | )          |
| Balance  at December 31, 2008                                             |       | (15.4                                                    | )                                                                                                                  | 196.6                                  |       | 166.8                                                                                                        |       | (144.2                                     | )                                                                                                            | 0.2                                    |       | 204.0                                                                                                              |       |
| Period  change                                                                 |       | (24.4                                                    | )                                                                                                                  | 47.6                                   |       | 15.6                                                                                                         |       | (37.9                                      | )                                                                                                            | (0.4                                   | )          | 0.5                                                                                                                |       |
| Balance  at December 31, 2009                                             |       | $                                                        | (39.8                                                                                                              | )                                      | $          |                   244.2 |       | $                                          |                   182.4 |                                   | $          | (182.1                                                                                                             | )          | $ |                      (0.2 | ) | $ |                        204.5 |   |

 

----

(a)                The tax effect on the pension related adjustments is abenefit (expense) of $11.4 million, $6.2 million and $(17.6) million for 2009,2008 and 2007, respectively.

 

(b)               The foreign currency translation and intercompany loanadjustments are not adjusted for income taxes in accordance with the indefinitereversal criteria.

 

(c)                The tax effect on the net investment hedge is an(expense) benefit of $(2.0) million and $0.4 million for 2008 and 2007, respectively.

 

(d)               The tax effect on the cash flow hedges is an expenseof $0.1 million and $0.3 million for 2009 and 2008, respectively.

 

Gains and losses onintercompany foreign currency loans that are of a long-term investment naturefor which settlement is not planned or anticipated in the foreseeable futureare reported as a component of accumulated other comprehensive income.

 

**20.COMMITMENTS AND CONTINGENCIES:**

 

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

 

**AdvertisingMatter**

 

On March 3, 2009,Osmose, Inc. (“OI”) filed an action against Viance 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 ACQ productand OI’s MCQ product were false and misleading in

 

109

----

 

violation of the LanhamAct, constituted unfair competition, violated the Georgia Deceptive TradePractices Act, were defamatory and that Viance tortiously interfered with OI’sbusiness relationships. OI is seeking damages related to their attorney’s feesand costs and punitive damages. OI also sought a temporary restraining order (“TRO”)and a preliminary injunction prohibiting Viance from continuing to make certainclaims in advertisements related to their MCQ product. On March 20,2009, the district court granted Osmose’s motion for a TRO. Viance raisedcertain counterclaims related to OI’s advertisements and both parties’ claimswere heard at a recent hearing. In September 2009, the district courtissued a preliminary injunction prohibiting Viance from making certain claimsrelated to MCQ in its advertisements and denied Viance’s request for apreliminary injunction related to certain claims in Osmose’s advertisements,which Viance subsequently appealed. The Company will continue to vigorouslydefend this matter. While the Company believes the defendants havemeritorious defenses against OI’s 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 litigation,and the resolution of this matter may have a material adverse effect on itsresults of operations or cash flows in any quarterly or annual reportingperiod.

 

**EC HeatStabilizers Investigation**

 

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

 

**LanxessMatter**

 

On January 18, 2010,Lanxess Deutschland GmbH filed suit in the District Court of Pori, Finlandagainst Sachtleben Pigments Oy (“Sachtleben”), a subsidiary of the Company’sTitanium Dioxide Pigments venture, claiming breach of contract in connectionwith Sachtleben’s termination of a supply agreement with plaintiff.  The plaintiff is seeking up to €7.0 millionin damages plus accrued interest and legal fees.  The Company believes Sachtleben hasmeritorious defenses against the plaintiff’s claims, and although Sachtlebendoes not believe that resolution of this matter will have a material adverseeffect on its business or financial condition, the Company cannot predict theultimate outcome of this litigation, and the resolution of this matter may havea material adverse effect on its results of operations or cash flows in anyquarterly or annual reporting period.

 

**FormerGlass Sealants Business**

 

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

 

**OtherMatters**

 

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

 

Reserves in connectionwith product liability matters do not individually exceed $1.0 million and inthe aggregate $4.5 million as of December 31, 2009. The Company’s reserveestimates are based on available facts, including damage claims and input fromits internal and external legal counsel, past experience, and, in someinstances where defense costs are being paid by its insurer, known insurancerecoveries. The Company is unable to estimate the amount or range of anypotential incremental charges should facts and

 

110

----

 

circumstances change andmay in the future revise its estimates based on new information becoming available.Further, the Company cannot predict the outcome of any litigation or thepotential for future litigation.

 

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

 

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

 

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

 

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

 

**General**

 

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

 

**Safety,Health and Environmental Management Systems**

 

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

 

**SHECapital Expenditures**

 

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

 

**RegulatoryDevelopments**

 

Greenhouse gases have increasingly becomethe subject of international, national, state and local attention.  On September 22, 2009, the EnvironmentalProtection Agency (“EPA”) passed its final greenhouse gas monitoring andreporting rule that will require certain facilities in the U.S. to measuretheir greenhouse gases beginning January 1, 2010 and begin reporting thesemeasurements on March 31, 2011. Currently, the Company believes thatthis rule will affect four of its facilities. The Company does notbelieve, based upon currently available information, that this rule willhave a material impact on its results of operations.  However, further legislation of greenhousegases and carbon dioxide has been proposed in the U.S., U.K. and otherjurisdictions.  Any such laws maydirectly and

 

111

----

 

indirectly have a material and adverseimpact on our results of operations, such as through higher costs for energyand certain raw materials and additional capital expenditures to comply withsuch laws.

 

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

 

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

 

**RemediationLiabilities**

 

Environmental laws have asignificant effect on the nature and scope of any clean-up of contamination atcurrent and former operating facilities, the costs of transportation andstorage of chemicals and finished products and the costs of the storage and disposalof wastes. In addition, “Superfund” statutes in the United States as well asstatutes in other jurisdictions impose strict, joint and several liability forclean-up costs on the entities that generated waste and/or arranged for itsdisposal at contaminated third party sites, as well as the past and presentowners and operators of contaminated sites. All responsible parties may berequired to bear some or all clean-up costs regardless of fault, legality ofthe original disposal or ownership of the disposal site.

 

 

112

----

 

The following tableprovides a list of the Company’s present and former facilities withenvironmental contamination for which the Company has reserved for at December 31,2009:

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

 

----

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

 

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

 

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

 

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

 

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

 

The Company is alsoresponsible for environmental matters at some of its former off-site disposallocations owned by third parties. These sites are considered Superfund sites asdefined by the EPA or state regulatory authority. The Company is a potentiallyresponsible party or*de minimis*participant at the following Superfund locations: Casmalia, CA; Laurel, MD;Niagara Falls, NY; South Gate, CA; and Whittier, CA and has reserves for thesematters totaling $0.1 million at December 31, 2009. In addition, theGerman authorities have ordered the Company to investigate and, depending onthe results, potentially remediate a portion of a former site in Liebenau,Germany. The Company is currently in the process of gathering additionalinformation regarding the site and cannot predict the potential scope of anysuch remediation.

 

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

 

113

----

 

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

 

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

 

In September 2009, asubsidiary of the Company’s Specialty Chemicals segment was cited by the U.S.EPA for failure to report hazardous material production quantities under theToxic Substances Control Act - 2005 Inventory Update Rule. The business hasprovided the required information and expects to pay a fine as a result of thisviolation. The Company does not believe, based upon currently availableinformation, that this issue will have a material adverse impact on its resultsof operations, financial position or liquidity.

 

***Environmental Reserves***

 

The Company hasestablished financial reserves relating to anticipated environmental cleanup obligations,site reclamation and remediation and closure costs, which are reviewed at leastquarterly based on currently available information. Liabilities are recordedwhen potential liabilities are either known or believed to be probable and canbe reasonably estimated. In the event that the Company establishes a financialreserve in connection with site remediation costs, the Company records areserve for the estimated cost of the remediation, even though the costs of theremediation will likely be spread out over many years. The Company does notinclude 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 $55.1 million and $55.1 million for known environmentalliabilities as of December 31, 2009 and 2008, respectively. As of December 31,2009 and 2008, $53.6 million and $55.1 million, respectively, were classifiedas other non-current liabilities in the Consolidated BalanceSheets. Included in the $55.1 million as of December 31, 2009 is$22.8 million that is discounted using discount rates ranging from 5.0% to7.5%, with the undiscounted amount of these reserves equaling $33.5 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 December 31,2009 is from $55.1 million to $91.2 million. For the year ended December 31,2009, the Company recorded charges of $13.8 million to increase itsenvironmental liabilities and made payments of $14.4 million for clean-up andremediation costs, which reduced its environmental liabilities. These amountsincluded costs incurred and paid for a State Superfund remediation project inLaurel, MD related to legacy obligations assumed in connection with theacquisition of Laporte, plc in 2000. For this Superfund project, the Companywas indemnified by Evonik Degussa GmbH for most of these costs. For the yearended December 31, 2009, the recurring cost of managing hazardous substancesfor ongoing operations is $45.9 million.

 

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

 

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

 

114

----

 

***Commitments***

 

As of December 31,2009, the Company has unconditional purchase obligations of $543.0 millionprimarily consisting of take-or-pay contracts to purchase goods and energy thatare enforceable and legally binding and that specify all significant terms,including: fixed or minimum quantities to be purchased; fixed, minimum or variableprice provisions; and the approximate timing of the transaction. These purchaseobligations are expected to be incurred as follows: $228.3 million in less thanone year, $211.4 million in two-three years, $34.5 million in four-five yearsand $68.8 million after five years.

 

**Item9. Changes in and Disagreements with Accountants on Accounting and FinancialDisclosure.**

 

None.

 

**Item9A. 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 December 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 thefourth quarter of 2009.

 

115

----

 

**MANAGEMENT’SREPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING**

 

The management ofRockwood Holdings, Inc. and subsidiaries (the “Company”) is responsiblefor establishing and maintaining adequate internal control over financialreporting. The Company’s internal control system was designed to providereasonable assurance to the Company’s management and board of directorsregarding the preparation and fair presentation of published financialstatements.

 

Our disclosure controlsand procedures are designed to ensure that (a) information required to bedisclosed in our reports under the Securities Exchange Act of 1934 is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms and (b) such information is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, to allow timely decisions regarding required disclosures.All internal control systems, no matter how well designed, have inherentlimitations. Therefore, even those systems determined to be effective canprovide only reasonable assurance with respect to financial statementpreparation and presentation.

 

Management assessed theeffectiveness of the Company’s internal control over financial reporting as of December 31,2009. In making this assessment, management used the criteria set forth by theCommittee of Sponsoring Organizations of the Treadway Commission (“COSO”) in*Internal Control—Integrated Framework*.Based on this assessment, management believes that, as of December 31,2009, the Company’s internal control over financial reporting is effectivebased on those criteria.

 

The effectiveness of theCompany’s internal control over financial reporting as of December 31, 2009has been audited by Deloitte & Touche LLP, an independent registeredpublic accounting firm, who expressed an unqualified opinion as stated in theirreport included herein.

 
| /s/  SEIFI GHASEMI                                 |   |
|----------------------------------------------------|--------|
| Seifi  Ghasemi                                     |   |
| Chairman  and Chief Executive Officer              |   |
| February 26,  2010                            |   |
|                                               |   |
| /s/  ROBERT J. ZATTA                               |   |
| Robert  J. Zatta                                   |   |
| Senior  Vice President and Chief Financial Officer |   |
| February 26,  2010                            |   |

 

116

----

 

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directorsand Stockholders ofRockwood Holdings, Inc. **Princeton, New Jersey

 

We have audited theinternal control over financial reporting of Rockwood Holdings, Inc. andsubsidiaries (the “Company”) as of December 31, 2009, based on the**criteria established in *Internal Control—Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internalcontrol over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting, included in the accompanyingManagement’s Report on Internal Control over Financial Reporting.  Ourresponsibility is to express an opinion on the Company’s internal control overfinancial reporting based on our audit.

 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether effective internal controlover financial reporting was maintained in all material respects.  Ouraudit included obtaining an understanding of internal control over financialreporting, assessing the risk that a material weakness exists, testing and evaluatingthe design and operating effectiveness of internal control based on theassessed risk, and performing such other procedures as we considered necessaryin the circumstances.  We believe that our audit provides a reasonablebasis for our opinion.

 

A company’s internalcontrol over financial reporting is a process designed by, or under thesupervision of, the company’s principal executive and principal financialofficers, or persons performing similar functions, and effected by the company’sboard of directors, management, and other personnel to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles.  A company’s internal control overfinancial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of the inherentlimitations of internal control over financial reporting, including thepossibility of collusion or improper management override of controls, materialmisstatements due to error or fraud may not be prevented or detected on atimely basis.  Also, projections of any evaluation of the effectiveness ofthe internal control over financial reporting to future periods are subject tothe risk that the controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

In our opinion, theCompany maintained, in all material respects, effective internal control overfinancial reporting as of December 31, 2009, based on the criteriaestablished in *Internal Control—IntegratedFramework*issued by the Committee of Sponsoring Organizations of theTreadway Commission.

 

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated financial statements and financial statementschedule as of and for the year ended December 31, 2009 of the Company andour report, dated February 26, 2010, expressed an unqualified opinion onthose financial statements and financial statement schedule.

 

 
| /s/ Deloitte &  Touche LLP |   |
|--------------------------------|--------|
| Parsippany, New Jersey         |   |
| February 26, 2010         |   |

 

117

----

 

**Item 9B.Other Information**

 

None.

 

**PART III**

 

**Item 10.Directors, Executive Officers and Corporate Governance.**

 

Information concerning directors, executive officers of the Company andcorporate governance is included under the caption “Proposal One—Electionof Directors,” “Corporate Governance and Related Matters,” “Executive Officers,”“Stock Ownership—Section 16(a) Beneficial Ownership ReportingCompliance” and “Proxies on Voting Procedures—Stockholder Director Nominationsand Proposals for the 2011 Annual Meeting” in the Proxy Statement for the 2010Annual Meeting of Stockholders and is incorporated herein by reference.

 

**Item 11.Executive Compensation.**

 

Information concerning executive compensation is included under thecaptions “Executive Compensation,” “Corporate Governance and RelatedMatters—Compensation Committee Interlocks and Insider Participation,” “CorporateGovernance and Related Matters—Compensation Committee Report” and “DirectorCompensation” in the Proxy Statement for the 2010 Annual Meeting ofStockholders and is incorporated herein by reference.

 

**Item 12.Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters.**

 

Information concerning security ownership of certain beneficial ownersand management is included under the caption “Stock Ownership—SecurityOwnership of Certain Beneficial Owners and Management” and “ExecutiveCompensation —Equity Compensation Plan Information” in the Proxy Statement forthe 2010 Annual Meeting of Stockholders and is incorporated herein byreference.

 

**Item 13.Certain Relationships and Related Transactions, and Director Independence.**

 

Information concerning certain transactions is included under thecaption “Certain Relationships and Related Party Transactions,” “Corporate Governanceand Related Matters—Director Independence” in the Proxy Statement for the 2010Annual Meeting of Stockholders and is incorporated herein by reference.

 

**Item 14.Principal Accounting Fees and Services.**

 

Information concerning certain transactions is included under thecaption “Audit and Related Fees” and “Corporate Governance and RelatedMatters—Audit Committee” in the Proxy Statement for the 2010 Annual Meeting ofStockholders and is incorporated herein by reference.

 

118

----

 

**PART IV**

 

**Item 15.Exhibits and Financial Statement Schedules.**

 

List of documents filed as part of this report:

 
| ** ** | ** **                                                                                                                  | **Page No.** |
|------------|-----------------------------------------------------------------------------------------------------------------------------|-------------------|
| 1.         | Financial Statements:                                                                                                       |              |
|       |                                                                                                                        |              |
|       | Consolidated  Statements of Operations for the years ended December 31, 2009, 2008 and  2007                           | 70                |
|       | Consolidated Balance  Sheets as of December 31, 2009 and 2008                                                          | 71                |
|       | Consolidated  Statements of Cash Flows for the years ended December 31, 2009, 2008 and  2007                           | 72                |
|       | Consolidated  Statements of Changes in Stockholders’ Equity for the years ended  December 31, 2009, 2008 and 2007 | 73                |
|       | Notes to  Consolidated Financial Statements                                                                                 | 74                |
|       |                                                                                                                        |              |
| 2.         | Financial Statement Schedules.                                                                                              | 120               |
|       |                                                                                                                        |              |
| 3.         | Exhibits.                                                                                                                   | 124               |

 

119

----

 

2.  FinancialStatement Schedules

 

**ROCKWOODHOLDINGS, INC. (PARENT COMPANY)**

**SCHEDULEI—CONDENSED FINANCIAL INFORMATION OF REGISTRANT**

**CONDENSEDSTATEMENTS OF OPERATIONS**

**(Dollarsin millions)**

 
| ** **                                                      | ** ** | **2009**   | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Equity in  undistributed earnings of subsidiaries               |       | $          | 21.1       |       | $          | (588.4     | )          | $ | 317.1 |   |
|                                                            |       |       |       |       |       |       |       |   |   |   |
| Net income  (loss) attributable to Rockwood Holdings, Inc. |       | $          | 21.1       |       | $          | (588.4     | )          | $ | 317.1 |   |

 

These condensed financial statements should be read in conjunction withthe accompanying consolidated financial statements and notes thereto of RockwoodHoldings, Inc. and Subsidiaries.

 

See accompanying notes tocondensed financial statements.

 

120

----

 

**ROCKWOODHOLDINGS, INC. (PARENT COMPANY)**

**SCHEDULEI—CONDENSED FINANCIAL INFORMATION OF REGISTRANT**

**CONDENSEDBALANCE SHEETS**

**(Dollarsin millions, except per share amounts; shares in thousands)**

 
| ** **                                                                                                                                                                                                                                          | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                          | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **ASSETS**                                                                                                                                                                                                                                          |       |                  |       |   |   |
| Current assets:                                                                                                                                                                                                                                     |       |                  |       |   |   |
| Cash and cash  equivalents                                                                                                                                                                                                                          |       | $                     | 6.3        |   | $ | 5.3 |   |
| Total current  assets                                                                                                                                                                                                                               |       | 6.3                   |       | 5.3 |   |
| Investment in  subsidiaries                                                                                                                                                                                                                         |       | 830.0                 |       | 808.4 |   |
| Due from  affiliates                                                                                                                                                                                                                                |       | 15.8                  |       | 11.7 |   |
| Total assets                                                                                                                                                                                                                                        |       | $                     | 852.1      |   | $ | 825.4 |   |
| **LIABILITIES**                                                                                                                                                                                                                                     |       |                  |       |   |   |
| Deferred income  taxes                                                                                                                                                                                                                              |       | $                     | (0.2       | ) | $ | (0.2 | ) |
| Total  liabilities                                                                                                                                                                                                                                  |       | (0.2                  | )          | (0.2 | ) |
| Restricted stock  units                                                                                                                                                                                                                             |       | 1.5                   |       | 2.1 |   |
| **EQUITY**                                                                                                                                                                                                                                          |       |                  |       |   |   |
| Rockwood  Holdings, Inc. stockholders’ equity:                                                                                                                                                                                            |       |                  |       |   |   |
| Common stock  ($0.01 par value, 400,000 shares authorized, 74,259 shares issued and 74,165  shares outstanding at December 31, 2009; 400,000 shares authorized,  74,155 shares issued and 74,061 shares outstanding at December 31, 2008) |       | 0.7                   |       | 0.7 |   |
| Paid-in capital                                                                                                                                                                                                                                     |       | 1,169.2               |       | 1,163.5 |   |
| Accumulated  other comprehensive income                                                                                                                                                                                                             |       | 204.5                 |       | 204.0 |   |
| Retained  (deficit) earnings                                                                                                                                                                                                                        |       | (522.2                | )          | (543.3 | ) |
| Treasury stock,  at cost                                                                                                                                                                                                                            |       | (1.4                  | )          | (1.4 | ) |
| Total Rockwood  Holdings, Inc. stockholders’ equity                                                                                                                                                                                       |       | 850.8                 |       | 823.5 |   |
| Total  liabilities and equity                                                                                                                                                                                                                       |       | $                     | 852.1      |   | $ | 825.4 |   |

 

These condensed financial statements should be read in conjunction withthe accompanying consolidated financial statements and notes thereto ofRockwood Holdings, Inc. and Subsidiaries.

 

See accompanying notes tocondensed financial statements.

 

121

----

 

**ROCKWOODHOLDINGS, INC. (PARENT COMPANY)**

**SCHEDULEI—CONDENSED FINANCIAL INFORMATION OF REGISTRANT**

**CONDENSED STATEMENTS OF CASH FLOWS**

**(Dollarsin millions)**

 
| ** **                                                                                               | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                               | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                               |       |                             |       |   |   |   |   |
| Net income  (loss) attributable to Rockwood Holdings, Inc.                                               |       | $                                | 21.1       |   | $ | (588.4 | ) | $ | 317.1 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities:                |       |                             |       |   |   |   |   |
| Equity in  undistributed income of subsidiaries                                                          |       | (21.1                            | )          | 588.4 |   | (317.1 | ) |
| Deferred income  taxes                                                                                   |       | —                           |       | — |   | — |   |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions: |       |                             |       |   |   |   |   |
| Due from  affiliates                                                                                     |       | —                           |       | — |   | 0.1 |   |
| Income taxes  payable                                                                                    |       | —                           |       | — |   | (0.2 | ) |
| Accrued expenses  and other liabilities                                                                  |       | —                           |       | — |   | (0.2 | ) |
| **Net  cash used in operating activities**                                                               |       | —                           |       | — |   | (0.3 | ) |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                               |       |                             |       |   |   |   |   |
| **Net  cash used in investing activities**                                                               |       | —                           |       | — |   | — |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                               |       |                             |       |   |   |   |   |
| Issuance of  common stock, net of fees                                                                   |       | 1.0                              |       | 2.3 |   | 1.5 |   |
| **Net  cash provided by financing activities**                                                           |       | 1.0                              |       | 2.3 |   | 1.5 |   |
| Net increase in  cash and cash equivalents                                                               |       | 1.0                              |       | 2.3 |   | 1.2 |   |
| Cash and cash  equivalents, beginning of year                                                            |       | 5.3                              |       | 3.0 |   | 1.8 |   |
| Cash and cash  equivalents, end of year                                                                  |       | $                                | 6.3        |   | $ | 5.3 |   | $ | 3.0 |   |

 

These condensed financial statements should be read in conjunction withthe accompanying consolidated financial statements and notes thereto ofRockwood Holdings, Inc. and Subsidiaries.

 

See accompanying notes tocondensed financial statements.

 

122

----

 

**Notes toCondensed Financial Statements**

 

The accompanying condensed financial statements of Rockwood Holdings, Inc.(the “Registrant”) should be read in conjunction with the consolidatedfinancial statements and notes thereto of Rockwood Holdings, Inc. andSubsidiaries included elsewhere in this filing.

 

**1.     BASIS OFPRESENTATION**

 

Pursuant to rules and regulations of the Securities and ExchangeCommission, the unconsolidated condensed financial statements of RockwoodHoldings, Inc. (“the Company”) do not reflect all of the information andnotes normally included with financial statements prepared in accordance withgenerally accepted accounting principles. Therefore, these financial statementsshould be read in conjunction with the consolidated financial statements andrelated notes thereto included in this filing.

 

*Accounting for subsidiaries—*The Company has accounted for itssubsidiaries under the equity method in the unconsolidated condensed financialstatements.

 

**2.    STOCK-BASED COMPENSATION**

 

The Company has in place the 2009 Stock Incentive Plan. See Note 14, “Stock-BasedCompensation” to the consolidated financial statements.

 

**3.     DIVIDENDRESTRICTIONS**

 

Under the terms of the senior secured credit facilities of RockwoodHoldings, Inc. and subsidiaries, certain subsidiaries may not, subject tocertain exceptions, (i) declare or pay any dividends, other than dividendspayable solely in its equity interests; (ii) redeem or otherwise acquireor retire for value any of its or its parent companies’ equity interests; (iii) makeany principal payment on or otherwise acquire or retire for value anysubordinated indebtedness; or (iv) make any loan or capital contributionto, or purchase any securities or assets of, any person. So long as no defaultexists, the Company’s subsidiaries may make certain otherwise restrictedpayments, such as (i) redeeming capital stock with the proceeds fromconcurrent equity contributions; (ii) repurchasing shares of their capitalstock pursuant to employee stock plans or shareholder agreements; (iii) payingdividends to any parent company; (iv) paying taxes; (v) makingcertain permitted investments; or (vi) redeeming or refinancing certainother debt obligations; however, some of these permitted payments are subjectto certain limitations and others may only be made subject to compliance withcertain financial covenants, such as Senior Secured Debt to Consolidated EBITDAratio (as defined).

 

Generally, under the terms of the 2014 Notes, the Company’ssubsidiaries may not (i) declare or pay any dividend on their equityinterests other than dividends payable solely in equity interests or inoptions, warrants, or other rights to purchase such equity interests; (ii) redeemor otherwise acquire or retire for value any of the Company’s subsidiaries orthe Company’s equity interests; (iii) make any principal payment on orotherwise acquire or retire for value any subordinated indebtedness; or (iv) makeany loan or capital contribution to, or purchase any securities or assets of,any person. These restrictions do not apply if, at the time of taking any ofthese actions, (a) no Default or Event of Default exists under the Company’sdebt obligations, (b) immediately after taking such action, the Companycould incur additional indebtedness without violating the Company’s debtcovenants, and (c) the total amount of payments made pursuant to the aboveactions does not exceed the sum of (1) 50% of net income, (2) theproceeds of any capital contributions or equity offerings, and (3) thefair market value of any unrestricted subsidiary redesignated as a restrictedsubsidiary. Numerous exceptions to these general prohibitions exist that permitthe Company’s subsidiaries to make certain restricted payments withoutcompliance with (a), (b) and (c).

 

123

----

 

 

3.    Exhibits:

 

See the Exhibit Index immediately following the signature page tothis report. Such Exhibit Index is hereby incorporated by reference.

 

124

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the Registrant has duly caused this AnnualReport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|   | ROCKWOOD HOLDINGS, INC. |
|--------|------------------------------|
|   |                         |
|   |                         |
|   | By:                          | /s/ SEIFI GHASEMI |
|   |                         | Seifi Ghasemi |
|   |                         | Chairman and Chief Executive Officer |
|   |                         | Date: February 26, 2010 |

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this Annual Report has been signed below by the following persons on behalf ofthe Registrant and in the capacities and on the dates indicated

 
| **Name** | ** **         | **Title** | ** **                                        | **Date** |
|----------|--------------------|-----------|---------------------------------------------------|----------|
|     |               |      |                                              |     |   |
| /s/      | SEIFI GHASEMI      |      | Chairman and Chief Executive Officer and Director |     | February 26, 2010 |
| By:      | Seifi Ghasemi      |      | (Principal Executive Officer)                     |     |   |
|     |               |      |                                              |     |   |
| /s/      | ROBERT J. ZATTA    |      | Senior Vice President and Chief Financial Officer |     | February 26, 2010 |
| By:      | Robert J. Zatta    |      | (Principal Financial Officer)                     |     |   |
|     |               |      |                                              |     |   |
| /s/      | JAMES T. SULLIVAN  |      | Corporate Controller and Treasurer                |     | February 26, 2010 |
| By:      | James T. Sullivan  |      | (Principal Accounting Officer)                    |     |   |
|     |               |      |                                              |     |   |
| /s/      | BRIAN F. CARROLL   |      | Director                                          |     | February 26, 2010 |
| By:      | Brian F. Carroll   |      |                                              |     |   |
|     |               |      |                                              |     |   |
| /s/      | NANCE K. DICCIANI  |      | Director                                          |     | February 26, 2010 |
| By:      | Nance K. Dicciani  |      |                                              |     |   |
|     |               |      |                                              |     |   |
| /s/      | SHELDON R. ERIKSON |      | Director                                          |     | February 26, 2010 |
| By:      | Sheldon R. Erikson |      |                                              |     |   |
|     |               |      |                                              |     |   |
| /s/      | TODD A. FISHER     |      | Director                                          |     | February 26, 2010 |
| By:      | Todd A. Fisher     |      |                                              |     |   |
|     |               |      |                                              |     |   |
| /s/      | DOUGLAS L. MAINE   |      | Director                                          |     | February 26, 2010 |
| By:      | Douglas L. Maine   |      |                                              |     |   |
|     |               |      |                                              |     |   |
| /s/      | J. KENT MASTERS    |      | Director                                          |     | February 26, 2010 |
| By:      | J. Kent Masters    |      |                                              |     |   |

 

125

----

 

**Exhibit Index**

 
| **Exhibit No.** | ** ** | **Description  of Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1 (A)              |       | Business and Share Sale and Purchase Agreement,  dated September 25, 2000 between Rockwood Holdings, Inc. and  Laporte plc                                                                                                                                                                                                                                                                                                                                                                                                     |
| 2.2 (B)              |       | Sale and Purchase Agreement, dated April 19,  2004 among mg technologies ag and MG North America Holdings Inc., as Sellers  and other parties named as purchasers therein                                                                                                                                                                                                                                                                                                                                                           |
| 2.3(J)               |       | Share Purchase Agreement dated November 29,  2006 by and among Rockwood Specialties Group GmbH and Gilde Buyout Partners  BV, Banexi Capital and Groupe Novasep management.                                                                                                                                                                                                                                                                                                                                                         |
| 2.4 (K)              |       | Stock Purchase Agreement dated as of October 7,  2007 by and between Rockwood Specialties Group, Inc. and OM  Group, Inc.                                                                                                                                                                                                                                                                                                                                                                                                 |
| 3.1 (G)              |       | Form of Amended and Restated Certificate of  Incorporation of Rockwood Holdings, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 3.2 (S)              |       | Third Amended and Restated By-Laws of Rockwood  Holdings, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.1 (G)              |       | Form of Certificate of Common Stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.2 (G)              |       | Warrant Agreement, dated as of July 23, 2003,  between Rockwood Holdings, Inc. and KKR Millennium Fund L.P.                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.3 (G)              |       | Registration Rights Agreement, dated as of  November 20, 2000, among Rockwood Holdings, Inc., KKR 1996 Fund  L.P. and KKR Partners II, L.P.                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.4 (G)              |       | First Amendment, dated as of July 23, 2003, to the  Registration Rights Agreement, among Rockwood Holdings, Inc., KKR 1996  Fund L.P., KKR Partners II, L.P. and KKR Millennium Fund L.P.                                                                                                                                                                                                                                                                                                                                      |
| 4.5 (A)              |       | Registration Rights Agreement, dated as of  July 23, 2003, among Rockwood Specialties Group, Inc., the Guarantors  named therein and Merrill Lynch & Co., Merrill Lynch, Pierce,  Fenner & Smith Incorporated, J.P. Morgan Securities Inc. and  Goldman, Sachs & Co., as Initial Purchasers                                                                                                                                                                                                         |
| 4.6 (G)              |       | Stockholders Agreement, dated as of July 29,  2004, among Rockwood Holdings, Inc., KKR 1996 Fund, L.P., KKR Partners  II, L.P., KKR Millennium Fund, L.P., KKR Partners III, L.P., KKR European  Fund, Limited Partnership and DLJ Merchant Banking Partners III, L.P., DLJ  Offshore Partners III-1, C.V., DLJ Offshore Partners III-2, C.V., DLJ  Offshore Partners III, C.V., DLJ MB Partners III GmbH & Co. KG,  Millennium Partners II, L.P. and MBP III Plan Investors, L.P.                                    |
| 4.7 (C)              |       | Indenture, dated as of November 10, 2004, among  Rockwood Specialties Group, Inc., the Guarantors named therein and The  Bank of New York, as Trustee                                                                                                                                                                                                                                                                                                                                                                          |
| 4.8 (C)              |       | Registration Rights Agreement, dated as of  November 10, 2004, among Rockwood Specialties Group, Inc., the  Guarantors named therein and Credit Suisse First Boston (Europe) Limited,  Goldman, Sachs & Co., UBS Limited, Credit Suisse First Boston LLC,  UBS Securities LLC, BNP Paribas Securities Corp., ING Financial Markets LLC,  NatCity Investments, Inc., Rabo Securities USA, Inc. and WestLB AG,  London Branch, as the Initial Purchasers                                                      |
| 4.9 (G)              |       | Investors’ Rights Agreement, dated as of  November 20, 2000, among K-L Holdings, Inc., KKR 1996 Fund L.P.,  KKR Partners II L.P. and Merrill Lynch Capital Corporation                                                                                                                                                                                                                                                                                                                                                    |
| 4.10 (G)             |       | Amendment and Supplement No. 1 dated as of  February 7, 2001 to the Investors’ Rights Agreement, dated as of  November 20, 2000,among Rockwood Holdings, Inc., KKR 1996 Fund  L.P., KKR Partners II, L.P., Merrill Lynch Capital Corporation and Allianz  Lebensversicherungs—AG, Stuttgart                                                                                                                                                                                                                |
| 4.11 (G)             |       | Supplement No. 2 dated as of January 14,  2005 to the Investors’ Rights Agreement, dated as of November 20, 2000,  among Rockwood Holdings, Inc., Merrill Lynch Capital Corporation and  SPCP Group, L.L.C.                                                                                                                                                                                                                                                                                                     |
| 4.12 (I)             |       | Amendment to Stockholders Agreement and Waiver,  dated as of January 27, 2006, by and among Rockwood Holdings, Inc.,  KKR 1996 Fund, L.P., KKR Partners II, L.P., KKR Millennium Fund, L.P., KKR  Partners III, L.P., KKR European Fund, Limited Partnership and DLJ Merchant  Banking Partners III, L.P., DLJ Offshore Partners III-1, C.V., DLJ Offshore  Partners III-2, C.C., DLJ Offshore Partners III, C.V., DLJ MB Partners III  GmbH & Co. KG, Millennium Partners II, L.P. and MBP III Plan  Investors, L.P. |
| 10.1 (R)             |       | Amended and Restated Credit Agreement, dated as of  June 15, 2009, among Rockwood Specialties Group, Inc., Rockwood  Specialties Limited, Rockwood Specialties International, Inc., the  lenders party thereto, Credit Suisse, as Administrative agent and Collateral  agent, and UBS Securities LLC and Goldman Sachs Credit Partners L.P., as  Co-Syndication Agents                                                                                                                                                    |
| 10.2(D)              |       | Security Agreement, dated as of July 30, 2004,  among Rockwood Specialties International, Inc., Rockwood Specialties  Group, Inc., as US Borrower, the Subsidiaries of the U.S. Borrower named  therein and Credit Suisse First Boston, acting through its Cayman Islands  Branch, as Administrative Agent                                                                                                                                                                                                                |

 

126

----

 
| 10.3(D)  |   | Pledge Agreement, dated as of July 30, 2004,  among Rockwood Specialties Group, Inc., as U.S. Borrower, the  Subsidiaries of the U.S. Borrower named therein and Credit Suisse First  Boston, acting through its Cayman Islands Branch, as Administrative Agent                                          |
|----------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.4(D)  |   | Guarantee, dated as of July 30, 2004, among  Rockwood Specialties International, Inc., Rockwood Specialties  Group, Inc., as U.S. Borrower, the Subsidiaries of the U.S. Borrower  named therein and Credit Suisse First Boston, acting through its Cayman  Islands Branch, as Administrative Agent |
| 10.5(D)  |   | Guarantee, dated as of July 30, 2004, among  Rockwood Specialties Group, Inc., the Subsidiaries of Rockwood  Specialties Limited named therein and Credit Suisse First Boston, acting  through its Cayman Islands Branch, as Administrative Agent                                                        |
| 10.6(D)  |   | Guarantee, dated as of July 30, 2004, among the  Subsidiaries of Rockwood Specialties Group, Inc. named therein and  Credit Suisse First Boston, acting through its Cayman Islands Branch, UBS  Securities LLC and Goldman Sachs Credit Partners L.P. and UBS AG, Stamford  Branch, as Agents            |
| 10.7(A)  |   | Deed of Tax Covenant dated September 25, 2000  between Rockwood Holdings, Inc. and Laporte plc                                                                                                                                                                                                           |
| 10.8(A)  |   | Environmental Deed dated September 25, 2000  between Rockwood Holdings, Inc. and Laporte plc                                                                                                                                                                                                             |
| 10.9(A)  |   | Form of Management Stockholder’s Agreement,  dated as of February 2, 2001, between Rockwood Holdings, Inc. and  each Management Stockholder (as defined therein)                                                                                                                               |
| 10.10(G) |   | Form of Management Stockholder’s Agreement,  dated as of November 30, 2004 between Rockwood Holdings, Inc. and  each Management Stockholder (as defined therein)                                                                                                                               |
| 10.11(G) |   | Form of Amended and Restated Management  Stockholder’s Agreement, dated as of October, 2004, between Rockwood  Holdings, Inc. and each Management Stockholder (as defined therein)                                                                                                                  |
| 10.12(A) |   | Form of Sale Participation Agreement, dated as  of January 30, 2001, among Rockwood Holdings, Inc., each Management  Stockholder party to the Management Stockholders’ Agreement, dated as of  January 30, 2001, KKR Partners II L.P. and KKR 1996 Fund L.P.                              |
| 10.13(G) |   | Form of Sale Participation Agreement, dated as  of November 30, 2004, among KKR 1996 Fund L.P., KKR Partners II L.P., KKR  Millennium Fund, L.P., KKR Partners III, L.P. and KKR European Fund, Limited  Partnership and each Management Stockholder (as defined therein)                                |
| 10.14(G) |   | Form of Amended and Restated Sale Participation  Agreement, dated as of October, 2004, between Rockwood Holdings, Inc.  and each Management Stockholder (as defined therein)                                                                                                                             |
| 10.15(A) |   | Form of Pledge Agreement in favor of Rockwood  Specialties, Inc. made by an executive officer in connection with 2001  management equity program                                                                                                                                                         |
| 10.16(E) |   | Amended and Restated Management Stockholder’s  Agreement, dated as of September 24, 2004, between Rockwood  Holdings, Inc. and Seifi Ghasemi                                                                                                                                                        |
| 10.17(E) |   | Amended and Restated Sale Participation Agreement,  dated as of September 24, 2004, among Seifi Ghasemi, KKR 1996 Fund L.P.,  KKR Partners II, L.P., KKR Millennium Fund, L.P., KKR Partners III, L.P. and  KKR European Fund, Limited Partnership                                                            |
| 10.18(E) |   | Time Stock Option Agreement, dated as of  September 24, 2004, between Rockwood Holdings, Inc. and Seifi  Ghasemi (included as Exhibit A to the Second Amendment to the Employment  Agreement listed as Exhibit 10.37 herewith)                                                                 |
| 10.19(H) |   | Time/Performance Stock Option Agreement, dated as of  September 24, 2004, between Rockwood Holdings, Inc. and Seifi  Ghasemi                                                                                                                                                                             |
| 10.20(F) |   | Amended and Restated Management Stockholder’s  Agreement, dated as of October 15, 2004, between Rockwood  Holdings, Inc. and Robert J. Zatta                                                                                                                                                        |
| 10.21(F) |   | Time/Performance Stock Option Agreement, dated as of  October 15, 2004, between Rockwood Holdings, Inc. and Robert J.  Zatta                                                                                                                                                                             |
| 10.22(F) |   | Performance Stock Option Agreement, dated as of  October 15, 2004, between Rockwood Holdings, Inc. and Robert J.  Zatta                                                                                                                                                                                  |
| 10.23(F) |   | Amended and Restated Sale Participation Agreement,  dated as of October 15, 2004, between Rockwood Holdings, Inc. and  Robert J. Zatta                                                                                                                                                                   |
| 10.24(G) |   | Amendment to Stock Option Agreement, dated as of  October 15, 2004, between Rockwood Holdings, Inc. and Robert J.  Zatta                                                                                                                                                                                 |
| 10.25(F) |   | Amended and Restated Management Stockholder’s  Agreement, dated as of October 15, 2004, between Rockwood  Holdings, Inc. and Thomas J. Riordan                                                                                                                                                      |
| 10.26(F) |   | Time/Performance Stock Option Agreement, dated as of  October 15, 2004, between Rockwood Holdings, Inc. and Thomas J.  Riordan                                                                                                                                                                           |

 

127

----

 
| 10.27(F)  |   | Performance Stock Option Agreement, dated as of  October 15, 2004, between Rockwood Holdings, Inc. and Thomas J.  Riordan                                                                                                                                                                                                                                                                      |
|-----------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.28(F)  |   | Amended and Restated Sale Participation Agreement,  dated as of October 15, 2004, between Rockwood Holdings, Inc. and  Thomas J. Riordan                                                                                                                                                                                                                                                       |
| 10.29(G)  |   | Amendment to Stock Option Agreement, dated as of  October 15, 2004, between Rockwood Holdings, Inc. and Thomas J.  Riordan                                                                                                                                                                                                                                                                     |
| 10.30(O)  |   | Amended and Restated Employment Agreement, dated  November 13, 2008, by and between Rockwood Holdings, Inc. and Seifi  Ghasemi                                                                                                                                                                                                                                                                 |
| 10.31(O)  |   | Employment Agreement, dated November 13, 2008,  by and between Rockwood Holdings, Inc. and Robert J. Zatta                                                                                                                                                                                                                                                                                     |
| 10.32(O)  |   | Employment Agreement, dated November 13, 2008,  by and between Rockwood Holdings, Inc. and Thomas Riordan                                                                                                                                                                                                                                                                                      |
| 10.33(Q)  |   | Profit-Sharing/401(K) Plan for Employees of  Rockwood Specialties Inc. as amended and restated effective as of  January 1, 2008                                                                                                                                                                                                                                                           |
| 10.34(Q)  |   | The Rockwood Specialties Inc. Money Purchase  Pension Plan as amended and restated effective as of January 1, 2008                                                                                                                                                                                                                                                                             |
| 10.35(Q)  |   | Supplementary Savings Plan of Rockwood  Specialties Inc. as amended and restated effective as of January 1,  2009                                                                                                                                                                                                                                                                              |
| 10.36(A)  |   | Rockwood Specialties Inc. Deferred Compensation  Plan                                                                                                                                                                                                                                                                                                                                               |
| 10.37(G)  |   | Management Services Agreement dated as of  July 29, 2004 between Kohlberg Kravis Roberts & Co. L.P., DLJ  Merchant Banking Partners III, L.P. and Rockwood Holdings, Inc.                                                                                                                                                                                                             |
| 10.38(G)  |   | Termination Agreement dated as of May 13, 2005  between Kohlberg Kravis Roberts & Co. L.P., DLJ Merchant Banking  Partners III, L.P. and Rockwood Holdings, Inc.                                                                                                                                                                                                                      |
| 10.39(G)  |   | Restricted Stock Unit Award Agreement effective as  of November 1, 2001 between Rockwood Holdings, Inc. and Seifi  Ghasemi                                                                                                                                                                                                                                                                     |
| 10.40(G)  |   | Form of 2001 Stock Option Agreement, dated as  of February 2, 2001, between K-L Holdings, Inc. and an employee of  the Company or a Subsidiary or Affiliate of the Company.                                                                                                                                                                                                               |
| 10.41(G)  |   | Form of 2004 Stock Option Agreement between  Rockwood Holdings, Inc. and an employee of the Company or a Subsidiary  or Affiliate of the Company.                                                                                                                                                                                                                                              |
| 10.42(U)  |   | 2009 Rockwood Holdings, Inc. Stock Incentive Plan                                                                                                                                                                                                                                                                                                                                                        |
| 10.43 (U) |   | 2009 Rockwood Holdings, Inc. Short-Term Incentive  Plan                                                                                                                                                                                                                                                                                                                                                  |
| 10.44(G)  |   | Form of Non-Employee Director Stock Option  Agreement                                                                                                                                                                                                                                                                                                                                               |
| 10.45(L)  |   | Form of Company’s Stock Option Agreement  (May 2007)                                                                                                                                                                                                                                                                                                                                      |
| 10.46(L)  |   | Form of Performance Restricted Stock Unit Award  Agreement (May 2007)                                                                                                                                                                                                                                                                                                                          |
| 10.47(M)  |   | Form of Company’s Stock Option Agreement  (December 2007)                                                                                                                                                                                                                                                                                                                                 |
| 10.48(M)  |   | Form of Performance Restricted Stock Unit Award  Agreement (December 2007)                                                                                                                                                                                                                                                                                                                     |
| 10.49(N)  |   | Master Agreement, dated May 21, 2008, by and among,  Rockwood Holdings, Inc., Rockwood Specialties Group, Inc. and  certain of their affiliates and Kemira Oyj and certain of its affiliates                                                                                                                                                                                              |
| 10.50(N)  |   | Shareholders’ and Joint Venture Agreement, dated  May 21, 2008, by and among, Rockwood Holdings, Inc., Rockwood  Specialties Group, Inc. and certain of their affiliates and Kemira Oyj  and certain of its affiliates                                                                                                                                                               |
| 10.51(N)  |   | Share and Asset Purchase and Transfer Agreement,  dated May 21, 2008, by and among, Rockwood Holdings, Inc., Rockwood  Specialties Group, Inc. and certain of their affiliates and Kemira Oyj  and certain of its affiliates                                                                                                                                                              |
| 10.52(N)  |   | Facility Agreement, made between Deukalion  Einhundertvierundzwanzigste Vermögensverwaltungs GmbH, Sachtleben Chemie  GmbH, White Pigments Holding Oy, and Kemira Pigments Oy, Merchant Banking,  Skandinaviska Enskilda Banken AB as Agent, Security Agent and Issuing Bank;  and Nordea Bank Finland Plc as Arranger and Original Lender; and the lenders  party thereto                          |
| 10.53(Q)  |   | Facility Agreement, as amended and restated, made between  Deukalion Einhundertvierundzwanzigste Vermögensverwaltungs GmbH, Sachtleben  Chemie GmbH, White Pigments Holding Oy, and Kemira Pigments Oy, Merchant  Banking, Skandinaviska Enskilda Banken AB as Agent, Security Agent and  Issuing Bank; and Nordea Bank Finland Plc as Arranger and Original Lender;  and the lenders party thereto |
| 10.54(P)  |   | Form of Stock Option Agreement  (December 2008)                                                                                                                                                                                                                                                                                                                                                |
| 10.55(P)  |   | Form of Restricted Stock Unit Award Agreement  (December 2008)                                                                                                                                                                                                                                                                                                                                 |
| 10.56(P)  |   | Form of Performance Restricted Stock Unit Award  Agreement (December 2008)                                                                                                                                                                                                                                                                                                                     |
| 10.57(T)  |   | Form of Stock Option Agreement  (December 2009)                                                                                                                                                                                                                                                                                                                                                |
| 10.58(T)  |   | Form of Restricted Stock Unit Award Agreement  (December 2009)                                                                                                                                                                                                                                                                                                                                 |
| 10.59(T)  |   | Form of Performance Restricted Stock Unit Award  Agreement (December 2009)                                                                                                                                                                                                                                                                                                                     |
| 10.60*    |   | First Amendment to the Profit-Sharing/401(K) Plan  for Employees of Rockwood Specialties Inc.                                                                                                                                                                                                                                                                                                            |
| 10.61*    |   | First Amendment to the Rockwood Specialties Inc.  Money Purchase Pension Plan                                                                                                                                                                                                                                                                                                                            |
| 21.1*     |   | List of Subsidiaries                                                                                                                                                                                                                                                                                                                                                                                     |

 

128

----

 
| 23.1* |   | Consent of Deloitte & Touche LLP                                                                                                                                                                                                                                                                                         |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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. |

 

----

| *      |   | Filed herewith.                                                                                                                               |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                          |
| (A)    |   | Incorporated by reference to Rockwood Specialties  Group, Inc.’s Registration Statement on form S-4 (File  No. 333-109686).    |
|   |   |                                                                                                                                          |
| (B)    |   | Incorporated by reference to the Current Report on  Form 8-K of Rockwood Specialties Group, Inc filed on May 4, 2004.               |
|   |   |                                                                                                                                          |
| (C)    |   | Incorporated by reference to the Current Report on  Form 8-K of Rockwood Specialties Group, Inc filed on November 12,  2004.        |
|   |   |                                                                                                                                          |
| (D)    |   | Incorporated by reference to the Current Report on  Form 8-K of Rockwood Specialties Group, Inc filed on August 4,  2004.           |
|   |   |                                                                                                                                          |
| (E)    |   | Incorporated by reference to the Current Report on  Form 8-K of Rockwood Specialties Group, Inc filed on September 30,  2004.       |
|   |   |                                                                                                                                          |
| (F)    |   | Incorporated by reference to the Current Report on  Form 8-K of Rockwood Specialties Group, Inc filed on October 19,  2004.         |
|   |   |                                                                                                                                          |
| (G)    |   | Incorporated by reference to the Company’s  Registration Statement on Form S-1 (File No. 333-122764).                          |
|   |   |                                                                                                                                          |
| (H)    |   | Incorporated by reference to the Annual Report on  Form 10-K of the Rockwood Specialties Group, Inc. filed on  April 29, 2005. |
|   |   |                                                                                                                                          |
| (I)    |   | Incorporated by reference to the Company’s Current  Report on Form 8-K filed on February 2, 2006.                              |
|   |   |                                                                                                                                          |
| (J)    |   | Incorporated by reference to the Company’s Current Report  on Form 8-K filed on January 16, 2007.                              |
|   |   |                                                                                                                                          |
| (K)    |   | Incorporated by reference to the Company’s Current  Report on Form 8-K filed on January 7, 2008.                               |
|   |   |                                                                                                                                          |
| (L)    |   | Incorporated by reference to the Company’s Current  Report on Form 8-K filed on May 22, 2007.                                  |
|   |   |                                                                                                                                          |
| (M)    |   | Incorporated by reference to the Company’s Current  Report on Form 8-K filed on December 20, 2007.                             |
|   |   |                                                                                                                                          |
| (N)    |   | Incorporated by reference to the Company’s Quarterly  Report on Form 10-Q filed on August 6, 2008.                             |
|   |   |                                                                                                                                          |
| (O)    |   | Incorporated by reference to the Company’s Current  Report on Form 8-K filed on November 13, 2008.                             |
|   |   |                                                                                                                                          |
| (P)    |   | Incorporated by reference to the Company’s Current  Report on Form 8-K filed on December 12, 2008.                             |
|   |   |                                                                                                                                          |
| (Q)    |   | Incorporated by reference to the Company’s Annual  Report on Form 10-K filed on March 2, 2009.                                 |
|   |   |                                                                                                                                          |
| (R)    |   | Incorporated by reference to the Company’s Current  Report on Form 8-K filed on June 17, 2009.                                 |
|   |   |                                                                                                                                          |
| (S)    |   | Incorporated by reference to the Company’s Current  Report on Form 8-K filed on November 24, 2009.                             |
|   |   |                                                                                                                                          |
| (T)    |   | Incorporated by reference to the Company’s Current  Report on Form 8-K filed on December 11, 2009.                             |
|   |   |                                                                                                                                          |
| (U)    |   | Incorporated by reference to the Proxy Statement for  the 2009 Annual Meeting.                                                                |

 

129

----