**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

** **

**Washington,D.C. 20549**

 

**FORM 10-Q**

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

 

**Forthe quarterly period ended March 31, 2008**

** **

**Or**

 
| **o** | ** ** | **TRANSITION  REPORT PURSUANT TO 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.) |

 

**100Overlook Center, Princeton, New Jersey 08540**

(Address ofprincipal executive offices) (Zip Code)

** **

**(609)514-0300**

(Registrant’stelephone number, including area code)

 

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

 

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

 

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

 

As of May 1, 2008,there were 73,913,262 outstanding shares of common stock, par value $0.01 pershare, of the Registrant.

 

 

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**TABLEOF CONTENTS**

 

**FORM 10-Q**

 
|    |   | PART I- FINANCIAL INFORMATION                                                                        |
|---------|--------|-----------------------------------------------------------------------------------------------------------|
| Item 1  |   | Financial Statements  (Unaudited)                                                                         |
|    |   | Condensed Consolidated  Statements of Operations for the three months ended March 31, 2008 and  2007 |
|    |   | Condensed Consolidated  Balance Sheets as of March 31, 2008 and December 31, 2007               |
|    |   | Condensed Consolidated  Statements of Cash Flows for the three months ended March 31, 2008 and  2007 |
|    |   | Notes to Condensed Consolidated Financial Statements                                                      |
| Item 2  |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations               |
| Item 3  |   | Quantitative  and Qualitative Disclosures about Market Risk                                               |
| Item 4  |   | Controls and  Procedures                                                                                  |
|    |   |                                                                                                      |
|    |   | PART II- OTHER  INFORMATION                                                                          |
| Item 1  |   | Legal Proceedings                                                                                         |
| Item 1A |   | Risk Factors                                                                                              |
| Item 2  |   | Unregistered  Sales of Equity Securities and Use of Proceeds                                              |
| Item 3  |   | Defaults Upon  Senior Securities                                                                          |
| Item 4  |   | Submission of  Matters to a Vote of Security Holders                                                      |
| Item 5  |   | Other Information                                                                                         |
| Item 6  |   | Exhibits                                                                                                  |
|    |   |                                                                                                      |
|    |   | Signatures                                                                                                |

 

2

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**PART I — FINANCIAL INFORMATION**

 

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

 

**ROCKWOODHOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

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

**sharesin thousands)**

**(Unaudited)**

 
| ** **                                                            | ** ** | **Three months ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                            | ** ** | **March 31,**               | ** ** |
| ** **                                                            | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Net sales                                                             |       | $                                | 854.0      |   | $ | 747.7 |   |
| Cost of products  sold                                                |       | 579.1                            |       | 503.6 |   |
| Gross profit                                                          |       | 274.9                            |       | 244.1 |   |
| Selling, general  and administrative expenses                         |       | 170.1                            |       | 147.2 |   |
| Restructuring  charges, net                                           |       | 0.8                              |       | 4.0 |   |
| Loss (gain) on  sale of assets                                        |       | 0.1                              |       | (4.8 | ) |
| Operating income                                                      |       | 103.9                            |       | 97.7 |   |
| Other income  (expenses):                                             |       |                             |       |   |   |
| Interest expense                                                      |       | (73.7                            | )          | (54.7 | ) |
| Interest income                                                       |       | 2.2                              |       | 4.8 |   |
| Refinancing  expenses                                                 |       | —                           |       | (0.9 | ) |
| Foreign exchange  gain, net                                           |       | 15.1                             |       | 0.1 |   |
| Other, net                                                            |       | 0.4                              |       | (0.1 | ) |
| Other income  (expenses), net                                         |       | (56.0                            | )          | (50.8 | ) |
| Income from  continuing operations before taxes and minority interest |       | 47.9                             |       | 46.9 |   |
| Income tax  provision                                                 |       | 19.6                             |       | 20.8 |   |
| Income from  continuing operations before minority interest           |       | 28.3                             |       | 26.1 |   |
| Minority  interest in continuing operations                           |       | (0.6                             | )          | (1.1 | ) |
| Net income from  continuing operations                                |       | 27.7                             |       | 25.0 |   |
| Income from  discontinued operations, net of tax                      |       | —                           |       | 4.7 |   |
| Gain on sale of  discontinued operations, net of tax                  |       | —                           |       | 115.7 |   |
| Minority  interest in discontinued operations                         |       | —                           |       | (0.1 | ) |
| Net income                                                            |       | $                                | 27.7       |   | $ | 145.3 |   |
|                                                                  |       |                             |       |   |   |
| Basic earnings  per share:                                            |       |                             |       |   |   |
| Earnings from  continuing operations                                  |       | $                                | 0.37       |   | $ | 0.34 |   |
| Earnings from  discontinued operations, net of tax                    |       | —                           |       | 1.63 |   |
| Basic earnings  per share                                             |       | $                                | 0.37       |   | $ | 1.97 |   |
|                                                                  |       |                             |       |   |   |
| Diluted earnings  per share:                                          |       |                             |       |   |   |
| Earnings from  continuing operations                                  |       | $                                | 0.36       |   | $ | 0.33 |   |
| Earnings from  discontinued operations, net of tax                    |       | —                           |       | 1.60 |   |
| Diluted earnings  per share                                           |       | $                                | 0.36       |   | $ | 1.93 |   |
|                                                                  |       |                             |       |   |   |
| Weighted average  number of basic shares outstanding                  |       | 73,898                           |       | 73,786 |   |
| Weighted average  number of diluted shares outstanding                |       | 76,609                           |       | 75,392 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

3

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**ROCKWOODHOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

**sharesin thousands)**

**(Unaudited)**

 
| ** **                                                                                                                                                                                                                                        | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                        | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| **ASSETS**                                                                                                                                                                                                                                        |       |               |       |                  |       |
| Current assets:                                                                                                                                                                                                                                   |       |               |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                                                        |       | $                  | 298.1      |                  | $          | 350.1 |   |
| Accounts  receivable, net                                                                                                                                                                                                                         |       | 554.3              |       | 483.7                 |       |
| Inventories                                                                                                                                                                                                                                       |       | 573.8              |       | 535.4                 |       |
| Deferred income  taxes                                                                                                                                                                                                                            |       | 21.1               |       | 22.6                  |       |
| Prepaid expenses  and other current assets                                                                                                                                                                                                        |       | 61.7               |       | 70.7                  |       |
| Total current  assets                                                                                                                                                                                                                             |       | 1,509.0            |       | 1,462.5               |       |
| Property, plant  and equipment, net                                                                                                                                                                                                               |       | 1,588.1            |       | 1,512.8               |       |
| Goodwill                                                                                                                                                                                                                                          |       | 1,827.4            |       | 1,767.0               |       |
| Other intangible  assets, net                                                                                                                                                                                                                     |       | 714.7              |       | 676.8                 |       |
| Deferred debt  issuance costs, net of accumulated amortization  of $35.8 and $31.2, respectively                                                                                                                                                  |       | 41.6               |       | 41.1                  |       |
| Deferred income  taxes                                                                                                                                                                                                                            |       | 15.3               |       | 15.5                  |       |
| Other assets                                                                                                                                                                                                                                      |       | 42.0               |       | 39.2                  |       |
| Total assets                                                                                                                                                                                                                                      |       | $                  | 5,738.1    |                  | $          | 5,514.9 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                    |       |               |       |                  |       |
| Current  liabilities:                                                                                                                                                                                                                             |       |               |       |                  |       |
| Accounts payable                                                                                                                                                                                                                                  |       | $                  | 248.8      |                  | $          | 293.2 |   |
| Income taxes  payable                                                                                                                                                                                                                             |       | 13.4               |       | 12.7                  |       |
| Accrued  compensation                                                                                                                                                                                                                             |       | 77.0               |       | 83.1                  |       |
| Restructuring  liability                                                                                                                                                                                                                          |       | 9.9                |       | 14.0                  |       |
| Accrued expenses  and other current liabilities                                                                                                                                                                                                   |       | 182.9              |       | 165.8                 |       |
| Deferred income  taxes                                                                                                                                                                                                                            |       | 8.6                |       | 7.2                   |       |
| Long-term debt,  current portion                                                                                                                                                                                                                  |       | 111.3              |       | 107.4                 |       |
| Total current  liabilities                                                                                                                                                                                                                        |       | 651.9              |       | 683.4                 |       |
| Long-term debt                                                                                                                                                                                                                                    |       | 2,532.9            |       | 2,474.0               |       |
| Pension and  related liabilities                                                                                                                                                                                                                  |       | 354.5              |       | 327.5                 |       |
| Deferred income  taxes                                                                                                                                                                                                                            |       | 121.5              |       | 112.5                 |       |
| Other liabilities                                                                                                                                                                                                                                 |       | 217.2              |       | 168.8                 |       |
| Total  liabilities                                                                                                                                                                                                                                |       | 3,878.0            |       | 3,766.2               |       |
| Minority  interest                                                                                                                                                                                                                                |       | 173.7              |       | 175.3                 |       |
| Performance  restricted stock units                                                                                                                                                                                                               |       | 2.7                |       | 1.8                   |       |
|                                                                                                                                                                                                                                              |       |               |       |                  |       |
| Stockholders’  equity:                                                                                                                                                                                                                       |       |               |       |                  |       |
| Common stock  ($0.01 par value, 400,000 shares authorized, 73,998  shares issued and 73,904 shares outstanding at March 31, 2008;  400,000 shares authorized, 73,989 shares issued and 73,895 shares outstanding  at December 31, 2007) |       | 0.7                |       | 0.7                   |       |
| Paid-in capital                                                                                                                                                                                                                                   |       | 1,157.3            |       | 1,156.2               |       |
| Accumulated  other comprehensive income                                                                                                                                                                                                           |       | 454.3              |       | 371.0                 |       |
| Retained  earnings                                                                                                                                                                                                                                |       | 72.8               |       | 45.1                  |       |
| Treasury stock,  at cost                                                                                                                                                                                                                          |       | (1.4               | )          | (1.4                  | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                  |       | 1,683.7            |       | 1,571.6               |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                                  |       | $                  | 5,738.1    |                  | $          | 5,514.9 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

4

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**ROCKWOODHOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(Dollarsin millions)**

**(Unaudited)**

 
| ** **                                                                                                                                                         | ** ** | **Three months ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                                         | ** ** | **March 31,**               | ** ** |
| ** **                                                                                                                                                         | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                                                                                         |       |                             |       |   |   |
| Net income                                                                                                                                                         |       | $                                | 27.7       |   | $ | 145.3 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:                                                                                 |       |                             |       |   |   |
| Income from  discontinued operations, net of tax                                                                                                                   |       | —                           |       | (4.7 | ) |
| Gain on sale of  discontinued operations, net of tax                                                                                                               |       | —                           |       | (115.7 | ) |
| Minority  interest in discontinued operations                                                                                                                      |       | —                           |       | 0.1 |   |
| Depreciation and  amortization                                                                                                                                     |       | 61.8                             |       | 49.3 |   |
| Deferred  financing costs amortization                                                                                                                             |       | 2.3                              |       | 2.4 |   |
| Foreign exchange  gain                                                                                                                                             |       | (15.1                            | )          | (0.1 | ) |
| Fair value  adjustment of derivatives                                                                                                                              |       | 30.8                             |       | 2.8 |   |
| Bad debt  provision                                                                                                                                                |       | 0.3                              |       | 0.4 |   |
| Stock-based  compensation                                                                                                                                          |       | 1.8                              |       | — |   |
| Deferred income  taxes                                                                                                                                             |       | 7.3                              |       | 9.8 |   |
| Gain on sale of  assets                                                                                                                                            |       | (0.4                             | )          | (4.8 | ) |
| Minority  interest in continuing operations                                                                                                                        |       | 0.6                              |       | 1.1 |   |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions:                                                           |       |                             |       |   |   |
| Accounts  receivable                                                                                                                                               |       | (47.3                            | )          | (52.2 | ) |
| Inventories,  including inventory write-up reversal                                                                                                                |       | (12.7                            | )          | (3.0 | ) |
| Prepaid expenses  and other assets                                                                                                                                 |       | 3.3                              |       | (1.7 | ) |
| Accounts payable                                                                                                                                                   |       | (39.0                            | )          | (25.4 | ) |
| Income taxes  payable                                                                                                                                              |       | 1.3                              |       | 5.8 |   |
| Accrued expenses  and other liabilities                                                                                                                            |       | 4.5                              |       | 55.0 |   |
| Net cash  provided by operating activities of continuing operations                                                                                                |       | 27.2                             |       | 64.4 |   |
| Net cash  provided by operating activities of discontinued operations                                                                                              |       | —                           |       | 6.3 |   |
| **Net  cash provided by operating activities**                                                                                                                     |       | 27.2                             |       | 70.7 |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                                                                                         |       |                             |       |   |   |
| Acquisitions,  including transaction fees paid, net of cash acquired                                                                                               |       | (10.9                            | )          | (2.1 | ) |
| Post closing  purchase price consideration                                                                                                                         |       | 29.1                             |       | — |   |
| Capital  expenditures, excluding capital leases                                                                                                                    |       | (56.1                            | )          | (45.6 | ) |
| Proceeds from  formation of Viance joint venture, net                                                                                                              |       | —                           |       | 76.6 |   |
| Proceeds on sale  of assets                                                                                                                                        |       | 2.4                              |       | 9.9 |   |
| Net cash (used  in) provided by investing activities of continuing operations                                                                                      |       | (35.5                            | )          | 38.8 |   |
| Net cash (used  in) provided by investing activities of discontinued operations, including  sale proceeds of $426.2 for the three months ended March 31, 2007 |       | (4.6                             | )          | 424.5 |   |
| **Net  cash (used in) provided by investing activities**                                                                                                           |       | (40.1                            | )          | 463.3 |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                                                                                         |       |                             |       |   |   |
| Issuance of  common stock, net of fees                                                                                                                             |       | 0.1                              |       | — |   |
| Repayment of  senior secured credit facilities                                                                                                                     |       | (33.5                            | )          | (28.0 | ) |
| Repayment of  senior secured credit facilities revolver                                                                                                            |       | —                           |       | (37.0 | ) |
| Payments on  other long-term debt                                                                                                                                  |       | (3.0                             | )          | (1.6 | ) |
| Distribution to  minority shareholder                                                                                                                              |       | (2.2                             | )          | — |   |
| Net cash used in  financing activities of continuing operations                                                                                                    |       | (38.6                            | )          | (66.6 | ) |
| Net cash used in  financing activities of discontinued operations                                                                                                  |       | —                           |       | — |   |
| **Net  cash used in financing activities**                                                                                                                         |       | (38.6                            | )          | (66.6 | ) |
| Effect of  exchange rate changes on cash                                                                                                                           |       | (0.5                             | )          | (2.1 | ) |
| Net (decrease)  increase in cash and cash equivalents                                                                                                              |       | (52.0                            | )          | 465.3 |   |
| Less increase in  cash and cash equivalents from discontinued operations, net (a)                                                                                  |       | —                           |       | (1.6 | ) |
| (Decrease)  increase in cash and cash equivalents from continuing operations                                                                                       |       | (52.0                            | )          | 463.7 |   |
| Cash and cash  equivalents of continuing operations, beginning of period                                                                                           |       | 350.1                            |       | 27.7 |   |
| Cash and cash  equivalents of continuing operations, end of period                                                                                                 |       | $                                | 298.1      |   | $ | 491.4 |   |

 

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| (a) - | Excludes $4.6 of sale-related cash outflows, net for  the three months ended March 31, 2008. Excludes sale proceeds of $426.2  and intercompany transfers of $3.0 for the three months ended March 31,  2007. |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| Supplemental  disclosures of cash flow information: |   |   |   |   |   |
|-----------------------------------------------------|--------|--------|--------|--------|--------|
| Interest paid,  net                                 |   | $      | 25.9   |   | $      | 25.4 |   |
| Income taxes  paid, net of refunds                  |   | $      | 10.9   |   | $      | 5.0 |   |
| Non-cash  investing activities:                     |   |   |   |   |   |
| Acquisition of  capital equipment                   |   | $      | 7.5    |   | $      | 10.8 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

5

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**ROCKWOODHOLDINGS, INC. AND SUBSIDIARIES**

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

 

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

 

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

 

Rockwood was formed inconnection with an acquisition of certain assets, stock and businesses fromLaporte plc (“Laporte”) on November 20, 2000 (the “KKR Acquisition”) byaffiliates of Kohlberg Kravis Roberts & Co. L.P. (“KKR”). Thebusinesses acquired focused on specialty compounds, iron-oxide pigments,timber-treatment chemicals, clay-based additives and pool and spa chemicals.

 

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

 

On January 9, 2007,the Company completed the sale of its Groupe Novasep segment and on December 31,2007, the Company completed the sale of its Electronics business, excluding itsEuropean wafer reclaim business.

 

***Basis of Presentation***—The accompanyingcondensed financial statements of Rockwood are presented on a consolidatedbasis. All significant intercompany accounts and transactions have beeneliminated in consolidation. Certain prior period amounts related to reportingthe sale of the Groupe Novasep segment and the Electronics business, excludingthe wafer reclaim business, as discontinued operations, have been reclassifiedto conform to current-year classification. The Groupe Novasep segment and theElectronics business, including the wafer reclaim business, represented two ofour reportable segments.

 

The interim financialstatements included herein are unaudited. The results of operations for the interim periods are not necessarilyindicative of the results of operations for the full year.  The condensed consolidated financialstatements are presented based upon accounting principles generally accepted inthe United States of America (“U.S. GAAP”), except that certain information andfootnote disclosures, normally included in financial statements prepared inaccordance with U.S. GAAP, have been condensed or omitted. The accompanyingcondensed consolidated financial statements should be read in conjunction withthe consolidated financial statements and the notes thereto contained in theCompany’s 2007 Form 10-K. In the opinion of management, thisinformation contains all adjustments necessary, consisting of normal andrecurring accruals, for a fair presentation of the results for the periodspresented.

 

The Company’s minorityinterest in continuing operations represents the total of the minority party’sinterest in certain investments (principally Viance, LLC) that are consolidatedbut less than 100% owned.  On January 2, 2007, Chemicals Specialties, Inc.(“CSI”), a wholly-owned subsidiary of the Company within the Timber TreatmentChemicals business of the Performance Additives segment, and Rohm and HaasCompany completed the formation of Viance, LLC, a joint venture company thatprovides an extensive range of advanced wood treatment technologies andservices to the global wood treatment industry. In accordance with the consolidation principles of FIN 46 (R), *Consolidation of Variable Interest Entities – An Interpretation of ARB No. 51*,the Company has concluded that Rockwood is the primary beneficiary of the jointventure and as such has consolidated the joint venture.

 

***Nature of Operations/Segment Reporting***—TheCompany is a global developer, manufacturer and marketer of high value-addedspecialty chemicals and advanced materials. The Company currently operates invarious business lines within its five reportable segments consisting of: (1) SpecialtyChemicals, which includes lithium compounds and chemicals, metal surfacetreatment chemicals, and synthetic metal sulfides, (2) PerformanceAdditives, which includes color pigments and services, timber treatmentchemicals, clay-based additives, and water treatment chemicals, (3) TitaniumDioxide Pigments, which consists of titanium dioxide pigments, and zinc- andbarium-based compounds, (4) Advanced Ceramics, which includesceramic-on-ceramic ball head and liner components used in hip-joint prosthesessystems, ceramic cutting tools and a range of other ceramic components and (5) SpecialtyCompounds, which consists of plastic compounds. As discussed above, the Company sold its Electronics business, excludingits European wafer reclaim business, in December 2007.  As a result, the European wafer reclaimbusiness is included within “Corporate and other” for all periods presented(See Note 3, “Segment Information,” for further details).

 

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 offinancial statements and related disclosures in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, the disclosure of contingent assets and liabilities at the date ofthe financial statements, and revenue and expenses during the periods reported.These estimates include, among other things, assessing the collectibility ofaccounts receivable, the use and recoverability of inventory, the valuation ofdeferred tax 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 

 

6

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the useful lives oftangible and intangible assets, among others. Actual results could differ fromthose estimates. Such estimates also include the fair value of assets acquired and liabilitiesassumed allocated to the purchase price of business combinations consummated.

 

***Risks Associated with International Operations and CurrencyRisk***—The Company’s international operations are subjectto risks normally associated with foreign operations, including, but notlimited to, the disruption of markets, changes in export or import laws,restrictions on currency exchanges and the modification or introduction ofother governmental policies with potentially adverse effects. A majority of theCompany’s sales and expenses are denominated in currencies other than U.S.dollars. Changes in exchange rates may have a material effect on the Company’sreported results of operations and financial position. In addition, asignificant portion of the Company’s indebtedness is denominated in euros.

 

***Related Party Transactions***—Rockwoodhas engaged in transactions with certain related parties including KKR and DLJMerchant Banking Partners III, L.P. (“DLJMB”) and affiliates ofeach. Information concerning certain transactions is included in theCompany’s 2007 Form 10-K in Item 13, “Certain Relationships and RelatedTransactions, and Director Independence.” There have not been additional relatedparty transactions for the period ended March 31, 2008.

 

***Revenue Recognition***—The Companyrecognizes 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,collectibility is reasonably assured, and pricing is fixed or determinable.Accruals are made for sales returns and other allowances based on the Company’sexperience. Revenue under service agreements, which was less than 1% ofconsolidated net sales in 2007, is realized when the service is performed.  Liabilities for product warranties are lessthan 1% of consolidated net sales as of March 31, 2008 and December 31,2007.

 

***Foreign Currency Translation***— Thefunctional currency of each of the Company’s foreign subsidiaries is primarilythe respective local currency. Balance sheet accounts of the foreign operationsare translated into U.S. dollars at period-end exchange rates and income andexpense accounts are translated at average exchange rates during the period.Translation gains and losses related to net assets located outside the U.S. areshown as a component of accumulated other comprehensive income. Gains andlosses resulting from foreign currency transactions (transactions denominatedin a currency other than the entity’s functional currency), includingintercompany financing arrangements for which settlement is planned oranticipated, are included in determining net income for the period in whichexchange rates change. Gains or losses on certain intercompany loans that areof a long-term investment nature for which settlement is not planned oranticipated in the foreseeable future and gains or losses on euro-denominateddebt that is designated as a net investment hedge of the Company’seuro-denominated investments are reported and accumulated in the same manner astranslation adjustments.  These loans are all related to intercompany debtarrangements. As of March 31, 2008, intercompany debt arrangements deemedto be of a long-term investment nature for which settlement is not planned oranticipated in the foreseeable future is predominantly related to €519.4million ($820.0 million using the March 31, 2008 exchange rate of€1.00 = $1.5788) of intercompany loans.

 

***Derivatives***—The Company accounts forderivatives based on Statement of Financial Accounting Standards (“SFAS”) 133,*Accounting for Derivative Instruments and HedgingActivities*, as amended and interpreted. SFAS 133 requires that allderivatives be recognized as either assets or liabilities at fair value.Changes in the fair value of derivatives not designated as hedging instrumentsare recognized currently in earnings while changes in the fair value ofderivatives that are designated as hedging instruments are recognized as acomponent of comprehensive income. The Company uses derivative instruments tomanage its exposure to market risks associated with fluctuations in interestrates and foreign currency exchange rates. See “Comprehensive Income” sectionofNote 1 for the impact of the Company’s net investment hedges. The Company doesnot enter into derivative contracts for trading purposes nor does it useleveraged or complex instruments.

 

***Pension, Postemployment and Postretirement Costs***—Definedbenefit costs and liabilities have been determined in accordance with SFAS 87,*Employers’ Accounting for Pensions* and SFAS 158,*Employers’ Accountingfor Defined Benefit Pension and Other Postretirement Plans, an amendment ofFASB Statements No. 87, 88, 106 and 132 (R) *. Otherpostretirement benefit costs and liabilities have been determined in accordancewith SFAS 106,*Employers’ Accounting forPostretirement Benefits Other Than Pensions*  and SFAS 158. Postemployment benefit costsand liabilities have been determined in accordance with SFAS 112,*Employers’ Accounting for Postemployment Benefits.*

 

***Income Taxes***—Income taxes aredetermined in accordance with SFAS 109,*Accounting for Income Taxes* and Financial Accounting Standards Board(“FASB”) Interpretation (“FIN”) No. 48,*Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109*.  The Company’s U.S. operations are included ina consolidated federal income tax return. The amount of current and deferredtax expense is computed on a separate entity basis for each member of the groupbased on applying the principles of SFAS 109.  Deferred tax assets and liabilities arerecognized for future tax consequences attributable to differences between thefinancial statement carrying amounts and the corresponding tax carrying amountsof assets and liabilities. Deferred tax assets are also recognized for tax lossand tax credit carryforwards. A valuation allowance is recorded to reduce deferredtax assets when it is more likely than not that a tax benefit will not berealized based on available evidence weighted toward evidence that isobjectively verifiable. Deferred taxes are not provided on the undistributedearnings of subsidiaries as such amounts are considered to be permanentlyinvested or could be distributed to the parent company in a tax free manner.

 

7

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FIN 48 clarifies theaccounting for uncertainty in income taxes recognized in an entity’s financialstatements in accordance with FASB Statement No. 109,*Accounting for Income Taxes* andprescribes a recognition threshold and measurement attribute for financialstatement disclosure of tax positions taken or expected to be taken on a tax return.Under FIN 48, the impact of an uncertain income tax position on the income taxreturn must be recognized at the largest amount that is more-likely-than-not tonot be sustained upon audit by the relevant authority. An uncertain income taxposition will not be recognized if it has less than a 50% likelihood of beingsustained. Additionally, FIN 48 provides guidance on derecognizing,classification, interest and penalties, accounting in interim periods,disclosure and transition.

 

***Comprehensive Income***—Comprehensiveincome includes net income and the other comprehensive income components whichinclude unrealized gains and losses from foreign currency translation and fromcertain intercompany transactions that are of a long-term investment nature,pension-related adjustments that are recorded directly into a separate sectionof stockholders’ equity in the balance sheets and net investment hedges.  Foreign currency translation amounts are notadjusted for income taxes since they relate to indefinite length investments innon-U.S. subsidiaries and certain intercompany debt.

 

Comprehensive income issummarized as follows:

 
| ** **                               | ** ** | **Three months ended** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|
| ** **                               | ** ** | **March 31,**               | ** ** |
| **($ in millions)**            | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Net income                               |       | $                                | 27.7       |   | $ | 145.3 |   |
| Pension related  adjustments, net of tax |       | 0.5                              |       | 0.5 |   |
| Foreign currency  translation            |       | 116.8                            |       | 36.8 |   |
| Intercompany  foreign currency loans     |       | 62.8                             |       | 2.1 |   |
| Net investment  hedge, net of tax        |       | (96.8                            | )          | (10.4 | ) |
| Total  comprehensive income              |       | $                                | 111.0      |   | $ | 174.3 |   |

 

In November 2004,the Company completed the sale of €375.0 million aggregate principalamount of 7.625% senior subordinated notes and $200.0 million aggregateprincipal amount of 7.500% senior subordinated notes, both due in 2014 (“2014Notes”). In connection with the 2014 Notes, the Company entered into across-currency swap with a five-year term and a notional amount of€155.6 million that effectively converted the U.S. dollar fixed-rate debtin respect of the dollar notes sold into euro fixed-rate debt. The Company hasdesignated this contract as a hedge of the foreign currency exposure of its netinvestment in its euro-denominated operations. There was no ineffective portionof the net investment hedge as of March 31, 2008. The Company does notexpect any of the loss on the net investment hedge residing in comprehensiveincome at March 31, 2008 to be reclassified into earnings during thesubsequent twelve months.

 

In addition, the Companydesignated the remaining portion of the euro-denominated debt that is recordedon the U.S. books as a net investment hedge of our euro-denominated investmentsas of October 1, 2005 (euro-denominated debt of €667.7 million or $1,054.1million based on the March 31, 2008 exchange rate of €1.00 =$1.5788).  As a result, effective October 1, 2005, any foreigncurrency gains and losses resulting from the euro-denominated debt discussedabove are accounted for as a component of accumulated other comprehensiveincome. There was no ineffective portion of the net investment hedge as of March 31,2008. The Company does not expect any of the loss on the net investment hedgeresiding in comprehensive income at March 31, 2008 to be reclassified intoearnings during the subsequent twelve months.

 

***Accounting for Environmental Liabilities***—Inthe ordinary course of business, Rockwood is subject to extensive and changingfederal, state, local and foreign environmental laws and regulations, and hasmade provisions for the estimated financial impact of environmental cleanuprelated costs. Rockwood’s policy has been to accrue costs of a non-capitalnature related to environmental clean-up when those costs are believed to beprobable and can be reasonably estimated. If the aggregate amount of theobligation and the amount and timing of the cash payments for a site are fixedor reliably determinable, the liability is discounted. Expenditures that extendthe life of the related property or mitigate or prevent future environmentalcontamination are capitalized and expenditures related to existing conditionsresulting from past or present operations and from which no current or futurebenefit is discernible are immediately expensed. The quantification ofenvironmental exposures requires an assessment of many factors, includingchanging laws and regulations, advancements in environmental technologies, thequality of information available related to specific sites, the assessmentstage of each site investigation and the length of time involved in remediationor settlement. In some matters, Rockwood may share costs with other parties.Rockwood does not include anticipated recoveries from insurance carriers orother third parties in its accruals for environmental liabilities.

 

***Cash and Cash Equivalents***—All highlyliquid instruments and money market funds with an original maturity of threemonths or less are considered to be cash equivalents. The carrying amountapproximates fair value because of the short maturities of these instruments.

 

***Stock-Based Compensation***—The Companyhas in place the 2005 Amended and Restated Stock Purchase and Option Plan of RockwoodHoldings, Inc. and Subsidiaries (the “Plan”). Under the Plan, the Companymay grant stock options, restricted stock and 

 

8

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other stock-based awardsto the Company’s employees and directors and allow employees and directors topurchase shares of its common stock. There are 10,000,000 authorized sharesavailable for grant under the Plan. Effective January 1, 2006, the Companyadopted SFAS No. 123R,*Share-BasedPayment*, and related interpretations and began expensing thegrant-date fair value of stock options.

 

The compensation cost forstock options, restricted stock units and Board of Director stock grantsrecorded under the Plan caused income from continuing operations before taxesand minority interest to decrease by $1.9 million and less than $0.1 millionfor the three months ended March 31, 2008 and 2007, respectively.  See Note 10, “Stock-Based Compensation,” forfurther details.

 

The Company grantedadditional stock options and performance restricted stock units in 2007 tocertain employees of Rockwood Corporate Headquarters and its business units.The performance restricted stock units contain a provision in which the unitsshall immediately vest and become converted into the right to receive a cashpayment upon a change in control as defined in the equity agreement. Asthe provisions for redemption are outside the control of the Company, the fairvalue of these units as of March 31, 2008 have been recorded as mezzanineequity (outside of permanent equity) in the Condensed Consolidated BalanceSheets.

 

***Recent Accounting Pronouncements***—Thefollowing represents the impact of recently issued accounting pronouncements:

 

In September 2006,SFAS No. 157,*Fair Value Measurements*,was issued. This statement defines fair value, establishes a framework formeasuring fair value in generally accepted accounting principles (“GAAP”), andexpands disclosures about fair value measurements. This statement does notrequire any new fair value measurements. Certain disclosure provisions of thisstandard were effective for the Company as of January 1, 2008 and aredisclosed in Note 14, “Fair Value Measurements.” The adoption of SFAS No. 157did not have a material impact on the Company’s financial statements.

 

In February 2008,the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position(FSP) Financial Accounting Standard (FAS) 157-1, *Applicationof FASB Statement No. 157 to FASB Statement No. 13 and Its RelatedInterpretive Accounting Pronouncements That Address Leasing Transactions,*and FSP FAS 157-2, *Effective Date of FASBStatement No. 157.* FSP FAS 157-1 removes leasing from the scopeof SFAS No. 157.  FSP FAS 157-2delays the effective date of SFAS No. 157 from 2008 to 2009 for allnonfinancial assets and nonfinancial liabilities, except those that arerecognized or disclosed at fair value in the financial statements on arecurring basis (at least annually).  TheCompany will apply the provisions of FSP 157-2 on January 1, 2009 and doesnot expect this FSP to have a material impact on its financial statements.

 

In February 2007,SFAS No. 159,*The Fair Value Option forFinancial Assets and Financial Liabilities*—*Including an Amendment of FASB Statement No. 115,*was issued. This statement permits an entity to choose to measure manyfinancial instruments and certain other items at fair value and permits allentities to choose to measure eligible items at fair value at specifiedelection dates. This statement is effective for the Company as of January 1,2008.  The Company adopted this standard on January 1, 2008. However,the Company has elected not to measure any instruments at fair value under SFASNo. 159.

 

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

 

In December 2007,SFAS No. 160,*Noncontrolling Interestsin Consolidated Financial Statements, an amendment of ARB No. 51,*was issued. Per this statement, the accounting and reporting for minorityinterests will be recharacterized as noncontrolling interests and classified asa component of equity (but separate from parent’s equity). This statement alsoestablishes reporting requirements that provide sufficient disclosures thatclearly identify and distinguish between the interests of the parent and theinterests of the noncontrolling owners. This statement also applies to entitiesthat prepare consolidated financial statements, except not-for-profitorganizations, but will affect only those entities that have an outstanding noncontrollinginterest in one or more subsidiaries or that deconsolidate a subsidiary. Thisstatement is effective for the Company as of January 1, 2009. The Companyis currently evaluating the impact this statement will have on its financialstatements primarily relating to its Viance, LLC joint venture.

 

In December 2007,the SEC issued Staff Accounting Bulletin (“SAB”) No. 110, which providedinterpretive guidance regarding the use of a “simplified” method, as discussedin SAB No. 107, in developing an estimate of expected term of “plainvanilla” share options in accordance with SFAS No. 123R,*Share-Based Payment.*  SAB 110 is effective for share optionsgranted as of January 1, 2008. SAB 110 extended the use of the simplifiedmethod beyond December 31, 2007, under certain circumstances, whichincluded not having sufficient historical exercise data to provide a reasonablebasis upon which to estimate expected term due to the limited period of time acompany’s equity shares have been publicly traded. As Rockwood became a publiccompany in August 2005, there is not sufficient historical exercise dataavailable to estimate expected term. As a result, the Company will continue touse the “simplified” method to estimate expected term for share option grantsuntil more relevant detailed information becomes widely available.

 

In September 2006,SFAS No. 158,*Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans, an amendment of FASBStatements No. 87, 88, 106 and 132 (R),* was issued. The Companyadopted the recognition provisions of SFAS 

 

9

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No. 158 andinitially applied them to the funded status of its defined benefitpostretirement plans as of December 31, 2006. This statement also requiresan employer to measure the funded status of a plan as of the date of itsyear-end statement of financial position, with limited exceptions. Therequirement to measure plan assets and benefit obligations as of the date ofthe employer’s fiscal year-end statement of financial position is effective forthe Company for the 2008 fiscal year end. The Company currently measures itsfunded status as of the date of the Company’s fiscal year-end consolidatedbalance sheet for most of its plans.  TheCompany does not expect a material impact on its financial statements as aresult of this change in 2008.

 

In March 2008, SFAS No. 161,*Disclosures about Derivative Instruments and HedgingActivities - an Amendment of FASB Statement 133*was issued*.*This statement changes the disclosure requirements for derivative instrumentsand hedging activities, including enhanced disclosures about (a) how andwhy an entity uses derivative instruments, (b) how derivative instrumentsand related hedged items are accounted for under SFAS No. 133,*Accounting for Derivative Instruments and HedgingActivities* and its relatedinterpretations, and (c) how derivative instruments and relatedhedged items affect an entity’s financial position, financial performance, andcash flows.  SFAS No. 161 iseffective for the Company as of January 1, 2009. The Company is currentlyevaluating the impact this statement will have on its financial statements.

 

**2.       DISCONTINUED OPERATIONS:**

 

On January 9, 2007,the Company completed the sale of its Groupe Novasep segment. The transactionwas valued at approximately €425 million, which included the repayment of thirdparty and intercompany indebtedness.  Inconnection with SFAS No. 144, *“Accountingfor the Impairment or Disposal of Long-Lived Assets,”*the Company’sfinancial statements have been reclassified to reflect the Groupe Novasep segmentas a discontinued operation for all periods presented.

 

On December 31,2007, the Company completed the sale of its Electronics business, excluding itsEuropean wafer reclaim business, for $315.6 million. In connection with SFAS No. 144,**the Company’s financial statements havebeen reclassified to reflect the Electronics business sold as a discontinuedoperation for all periods presented.

 

Operating results of thediscontinued operations of Groupe Novasep and the Electronics business sold forthe three months ended March 31, 2007 were as follows:

 
| ** **                                    | ** ** | **Groupe**  | ** ** | **Electronics** | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|-------------|------------|-----------------|------------|------------|------------|
| **($ in millions)**                 | ** ** | **Novasep** | ** ** | **Business**    | ** ** | **Total**  | ** ** |
| Net sales                                     |       | $           | 8.9        |            | $          | 48.4       |       | $ | 57.3 |   |
| Cost of products  sold                        |       | 7.0         |       | 35.5            |       | 42.5       |       |
| Gross profit                                  |       | 1.9         |       | 12.9            |       | 14.8       |       |
| Selling, general  and administrative expenses |       | 1.0         |       | 7.6             |       | 8.6        |       |
| Restructuring  charges                        |       | —      |       | 0.5             |       | 0.5        |       |
| Gain on sale of  business/assets              |       | (117.7      | )          | —          |       | (117.7     | )          |
| Operating income                              |       | 118.6       |       | 4.8             |       | 123.4      |       |
| Other income  (expenses):                     |       |        |       |            |       |       |       |
| Interest expense                              |       | (0.3        | )          | —          |       | (0.3       | )          |
| Interest income                               |       | —      |       | 0.3             |       | 0.3        |       |
| Foreign exchange  gain, net                   |       | —      |       | 0.3             |       | 0.3        |       |
| Other income  (expenses), net                 |       | (0.3        | )          | 0.6             |       | 0.3        |       |
| Income before  taxes and minority interest    |       | 118.3       |       | 5.4             |       | 123.7      |       |
| Income tax  provision                         |       | 2.1         |       | 1.2             |       | 3.3        |       |
| Net income  before minority interest          |       | 116.2       |       | 4.2             |       | 120.4      |       |
| Minority  interest                            |       | (0.1        | )          | —          |       | (0.1       | )          |
| Net income                                    |       | $           | 116.1      |            | $          | 4.2        |       | $ | 120.3 |   |

 

As of March 31,2007, the Company had received net cash proceeds of $426.2 million from thesale of Groupe Novasep. These proceeds were reported as net cash provided byinvesting activities of discontinued operations for the three months ended March 31,2007 in the Company’s Condensed Consolidated Statements of Cash Flows. Net cashproceeds for the year ended December 31, 2007 from the sale of Groupe Novasepwere $420.7 million.  The net gain on theGroupe Novasep sale recorded in the first quarter of 2007 was $115.7 million(net of $2.0 million of German 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, clay-based additives and water treatment chemicals business lines; (3) TitaniumDioxide Pigments; (4) Advanced Ceramics; and (5) Specialty 

 

10

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Compounds.

 

Items that cannot be readilyattributed to individual segments have been classified as “Corporate and other.”Corporate and other operating loss primarily represents payroll, professionalfees and other operating expenses of centralized functions such as treasury,tax, legal, internal audit and consolidation accounting as well as the cost ofoperating our central offices (including some costs maintained based on legalor tax considerations). The primary components of Corporate and other loss, inaddition to operating loss, are interest expense on external debt (includingthe amortization of deferred financing costs), foreign exchange losses orgains, and mark-to-market gains or losses on derivatives. Major componentswithin the reconciliation of income before taxes (described more fully below)include systems/organization establishment expenses, interest expense onexternal debt, foreign exchange losses or gains, and refinancing expensesrelated to external debt. Corporate and other identifiable assets primarilyrepresent deferred financing costs that have been capitalized in connectionwith corporate external debt financing, deferred income tax assets and cashbalances maintained in accordance with centralized cash management techniques.The “Corporate and other” classification also includes the results ofoperations, assets (primarily real estate) and liabilities (including pensionand environmental) of legacy businesses formerly belonging to Dynamit Nobel andthe wafer reclaim business. The European wafer reclaim business line is a providerof semiconductor wafer refurbishment services with market positions in Europe.This business works with semiconductor manufacturers to refurbish used testwafers and return them to the manufacturer for reuse in test and processmonitor applications.  In February 2007,the Company completed the sale of its U.S. wafer reclaim business. Theseoperations are substantially unrelated by nature to businesses currently withinthe Company’s operating segments.

 

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

 
| ** **                                  | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **         | ** ** | ** **       | ** ** |
|---------------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|--------------------|------------|------------------|------------|
| ** **                                  | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | **Corporate**      | ** ** | ** **       | ** ** |
| **($ in millions)**               | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **and other** | ** ** | **Consolidated** | ** ** |
| **Three  months ended March 31, 2008** |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| Net sales                                   |       | $             | 311.7      |            | $          | 211.6        |       | $            | 125.8      |          | $          | 133.2              |       | $                | 69.0       |   | $ | 2.7 |   | $ | 854.0 |   |
| Total Adjusted  EBITDA                      |       | 80.5          |       | 31.2            |       | 23.9         |       | 38.5         |       | 8.7           |       | (14.4              | )          | 168.4            |       |
| **Three  months ended March 31, 2007** |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| Net sales                                   |       | $             | 267.9      |            | $          | 184.8        |       | $            | 116.1      |          | $          | 105.5              |       | $                | 69.6       |   | $ | 3.8 |   | $ | 747.7 |   |
| Total Adjusted  EBITDA (a)                  |       | 68.3          |       | 32.6            |       | 22.4         |       | 28.8         |       | 8.1           |       | (13.2              | )          | 147.0            |       |

 
| ** **                  | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **                  | ** ** | ** **                | ** ** | ** **       | ** ** |
|-----------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|-----------------------------|------------|---------------------------|------------|------------------|------------|
| ** **                  | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | **Corporate**               | ** ** | ** **                | ** ** | ** **       | ** ** |
| ** **                  | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **and other (b)** | ** ** | **Eliminations (c)** | ** ** | **Consolidated** | ** ** |
| Identifiable  assets as of: |       |          |       |            |       |         |       |         |       |          |       |                        |       |                      |       |             |       |
| March 31,  2008        |       | $             | 2,038.0    |            | $          | 1,406.5      |       | $            | 856.3      |          | $          | 921.0                       |       | $                         | 283.9      |             | $          | 407.5 |   | $ | (175.1 | ) | $ | 5,738.1 |   |
| December 31,  2007     |       | 1,900.1       |       | 1,384.4         |       | 801.4        |       | 843.6        |       | 281.8         |       | 462.7                       |       | (159.1                    | )          | 5,514.9          |       |
|                             |            |               |            |                 |            |              |            |              |            |               |            |                             |            |                           |            |                  |            |  |  |  |  |  |  |  |  |

 

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| (a)    |   | This amount does not  include $9.2 million of Adjusted EBITDA for the three months ended  March 31, 2007 from the Electronics business sold on December 31,  2007 and $1.8 million of Adjusted EBITDA for the three months ended  March 31, 2007 from the former Groupe Novasep segment sold on  January 9, 2007.                                                                                                                |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (b)    |   | This amount includes  $52.7 million and $47.4 million of assets from the legacy businesses formerly  belonging to Dynamit Nobel at March 31, 2008 and December 31, 2007,  respectively.                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (c)    |   | Amounts contained in  the “Eliminations” column represent the individual subsidiaries’ retained  interest in their cumulative net cash balance (deposits less withdrawals)  included in the corporate centralized cash system and within the identifiable  assets of the respective segment. These amounts are eliminated as the  corporate centralized cash system is included in the Corporate segment’s  identifiable assets. |

 

Geographic informationregarding net sales based on seller’s location and long-lived assets aredescribed in Note 4, “Segment Information,” in the Company’s 2007 Form 10-K.

 

On a segment basis, theCompany defines Adjusted EBITDA as operating income excluding depreciation andamortization, certain non-cash gains and charges, certain other special gainsand charges deemed by senior management to be non-recurring gains and chargesand certain items deemed by senior management to have little or no bearing onthe day-to-day operating performance of its business segments and reportingunits. The adjustments made to operating income directly correlate with theadjustments to net income in calculating Adjusted EBITDA on a consolidatedbasis pursuant to the senior secured credit agreement, which reflectsmanagement’s interpretations thereof. The indenture governing the 2014 Notesexcludes certain adjustments permitted under the senior credit agreement.Senior management uses Adjusted EBITDA on a segment basis as the primarymeasure to evaluate the ongoing performance of the Company’s business segmentsand reporting units.

 

The Company uses AdjustedEBITDA on a segment basis to assess its operating performance. Because theCompany views Adjusted EBITDA on a segment basis as an operating performancemeasure, the Company uses income (loss) from continuing operations before taxesand minority interest as the most comparable GAAP measure.

 

11

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

 
| ** **                                                                   | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **         | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|--------------------|------------|------------------|------------|
| ** **                                                                   | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | **Corporate**      | ** ** | ** **       | ** ** |
| **($ in millions)**                                                | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **and other** | ** ** | **Consolidated** | ** ** |
| **Three  months ended March 31, 2008**                                  |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| Income (loss)  from continuing operations before taxes and minority interest |       | $             | 52.7       |            | $          | 5.2          |       | $            | 2.1        |          | $          | 18.1               |       | $                | 3.6        |   | $ | (33.8 | ) | $ | 47.9 |   |
| Interest expense  (a)                                                        |       | 12.8          |       | 8.1             |       | 8.9          |       | 8.7          |       | 2.3           |       | 32.9               |       | 73.7             |       |
| Interest income                                                              |       | (0.7          | )          | —          |       | —       |       | (0.1         | )          | (0.2          | )          | (1.2               | )          | (2.2             | )          |
| Depreciation and  amortization                                               |       | 16.1          |       | 16.5            |       | 12.9         |       | 11.9         |       | 2.9           |       | 1.5                |       | 61.8             |       |
| Restructuring  charges, net                                                  |       | —        |       | 0.6             |       | —       |       | 0.2          |       | —        |       | —             |       | 0.8              |       |
| Systems/organization  establishment expenses                                 |       | 0.3           |       | 0.7             |       | —       |       | 0.1          |       | 0.1           |       | —             |       | 1.2              |       |
| Inventory  write-up reversal                                                 |       | 0.4           |       | —          |       | —       |       | —       |       | —        |       | —             |       | 0.4              |       |
| Loss on sale of  assets                                                      |       | —        |       | —          |       | —       |       | 0.1          |       | —        |       | —             |       | 0.1              |       |
| Foreign exchange  gain, net                                                  |       | (0.6          | )          | —          |       | —       |       | (0.5         | )          | —        |       | (14.0              | )          | (15.1            | )          |
| Other                                                                        |       | (0.5          | )          | 0.1             |       | —       |       | —       |       | —        |       | 0.2                |       | (0.2             | )          |
| Total Adjusted  EBITDA                                                       |       | $             | 80.5       |            | $          | 31.2         |       | $            | 23.9       |          | $          | 38.5               |       | $                | 8.7        |   | $ | (14.4 | ) | $ | 168.4 |   |
| **Three  months ended March 31, 2007**                                  |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| Income (loss)  from continuing operations before taxes and minority interest |       | $             | 46.8       |            | $          | 16.0         |       | $            | 4.2        |          | $          | 10.8               |       | $                | 3.0        |   | $ | (33.9 | ) | $ | 46.9 |   |
| Interest expense  (a)                                                        |       | 9.4           |       | 3.3             |       | 7.9          |       | 7.9          |       | 2.4           |       | 23.8               |       | 54.7             |       |
| Interest income                                                              |       | (0.8          | )          | (0.2            | )          | —       |       | 0.2          |       | (0.2          | )          | (3.8               | )          | (4.8             | )          |
| Depreciation and  amortization                                               |       | 12.8          |       | 12.6            |       | 10.3         |       | 9.6          |       | 2.7           |       | 1.3                |       | 49.3             |       |
| Restructuring  charges, net                                                  |       | 0.2           |       | —          |       | —       |       | 0.1          |       | —        |       | 3.7                |       | 4.0              |       |
| Systems/organization  establishment expenses                                 |       | —        |       | 0.5             |       | —       |       | 0.2          |       | 0.2           |       | —             |       | 0.9              |       |
| Cancelled  acquisition and disposal costs                                    |       | —        |       | —          |       | —       |       | —       |       | —        |       | 0.1                |       | 0.1              |       |
| Refinancing  expenses                                                        |       | —        |       | —          |       | —       |       | —       |       | —        |       | 0.9                |       | 0.9              |       |
| Loss (gain) on  sale of assets                                               |       | —        |       | 0.1             |       | —       |       | —       |       | —        |       | (4.9               | )          | (4.8             | )          |
| Foreign exchange  loss (gain), net                                           |       | 0.2           |       | 0.1             |       | —       |       | —       |       | —        |       | (0.4               | )          | (0.1             | )          |
| Other                                                                        |       | (0.3          | )          | 0.2             |       | —       |       | —       |       | —        |       | —             |       | (0.1             | )          |
| Total Adjusted  EBITDA (b)                                                   |       | $             | 68.3       |            | $          | 32.6         |       | $            | 22.4       |          | $          | 28.8               |       | $                | 8.1        |   | $ | (13.2 | ) | $ | 147.0 |   |

 

----

(a)     Includeslosses of $30.8 million and $2.8 million for the three months ended March 31,2008 and 2007, respectively, representing the movement in the mark-to-marketvaluation of the Company’s interest rate and cross-currency hedginginstruments.

 

(b)     Thisamount does not include $9.2 million of Adjusted EBITDA for the three monthsended March 31, 2007 from the Electronics business sold on December 31,2007 and $1.8 million of Adjusted EBITDA for the three months ended March 31,2007 from the former Groupe Novasep segment sold on January 9, 2007.

 

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*

 

The process of refocusingand restructuring the businesses acquired in the KKR Acquisition andestablishing the post-acquisition corporate entity, along with the impact ofthe Dynamit Nobel Acquisition and the Company’s initial public offering,resulted in a number of charges that have affected Rockwood’s historicalresults. These charges, along with certain other items, are added to orsubtracted from income (loss) from continuing operations before taxes andminority interest to derive Adjusted EBITDA, as defined below. These itemsinclude the following:

 

·            *Restructuring and related charges*: Restructuring charges of $0.8 million and $4.0 million were recorded in thethree months ended March 31, 2008 and 2007, respectively, formiscellaneous restructuring activities, including headcount reductions andfacility closures (see Note 13, “Restructuring Liability,” for furtherdetails).

 

·            *Systems/organization establishment expenses*: For the three months ended March 31, 2008, expenses of $1.2 million wererecorded related to the integration of businesses acquired, primarily relatedto the acquisition of the Elementis plc business in the Performance Additivessegment in August 2007.  For thethree months ended March 31, 2007, expenses of $0.9 million were recordedprimarily in connection with the integration of the Viance, LLC joint ventureand the integration of businesses acquired in 2006 in the Advanced Ceramics andSpecialty Compounds segments.

 

·            *Cancelled acquisition and disposal costs*: Costs of $0.1 million were recorded for the three months ended March 31,2007 in connection with non-consummated acquisitions and dispositions.

 

·            *Inventory write-up reversal*:  UnderSFAS 141,*Business Combinations*,all inventories acquired in an acquisition must be revalued to “fair value.” Inconnection with acquisitions, the Company allocates a portion of the totalpurchase price to 

 

12

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inventory to reflectmanufacturing profit in inventory at the date of the acquisitions. Thisresulted in a reduction of gross profit of $0.4 million for the three monthsended March 31, 2008 in the Specialty Chemicals segment as the inventorywas sold in the normal course of business.

 

·            *Refinancingexpenses: *In March 2007,the Company expensed $0.9 million related to the fourth amendment of the seniorsecured credit agreement to refinance all outstanding borrowings under thetranche F term loans with new tranche G term loans.

 

·            *Loss (gain) on sale of assets*:  TheCompany recorded a loss, net of $0.1 million for the three months ended March 31,2008 respectively, related to asset sales in the Advanced Ceramics segment. Inthe three months ended March 31, 2007, the Company recorded gains of $4.8million primarily related to the sale of the U.S. wafer reclaim business.

 

·            *Foreign exchange gain (loss), net*: During the periods presented, the Company recorded foreign exchange gains and(losses) from intercompany financing related-receivables, long-term debt andother non-operating transactions. For the three months ended March 31,2008 and 2007, gains of $15.1 million and $0.1 million, respectively, wererecorded. The increase in foreign exchange gains is due to the impact ofthe stronger euro as of March 31, 2008 versus December 31, 2007,related to non-operating euro-denominated transactions.

 

**4.ACQUISITIONS:**

 

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

 

**Elementisplc Global Color Pigments Business**

 

On August 31, 2007,the Company completed the acquisition of the global color pigments business ofElementis plc for a purchase price of approximately $140.0 million. Thisacquisition includes facilities in North America, Europe and China and is beingintegrated into the Color Pigments and Services business, which is part of thePerformance Additives segment. The financial position of the business acquiredis included in the Consolidated Balance Sheet as of December 31, 2007 and March 31,2008. The results of operations and cash flows of the business acquired for theperiods after August 31, 2007 are included for the quarter ended March 31,2008. The excess of the total purchase price over the estimated fair value ofthe net assets acquired at closing has been allocated to goodwill and isestimated to be $23.1 million as of March 31, 2008. Certain environmentalmatters were assumed in the acquisition. The Company estimates that thepotential exposure range for these items is from $4.5 million to $16.7 million.At March 31, 2008, $4.5 million of related reserves are recorded. Theallocation of the purchase price to the identifiable assets acquired and theenvironmental liabilities assumed are preliminary and are subject to changeupon the finalization of purchase accounting which is expected to be completedduring 2008.

 

In addition to theacquisition described above, the Company has completed other smalleracquisitions in 2007 and in the first quarter of 2008. Depending on the timingand complexity involved, the purchase price allocation to the net assetsacquired for certain acquisitions completed within the last year waspreliminary as of March 31, 2008.

 

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

 

**5.       INVENTORIES:**

 

Inventories are comprisedof the following:

 
| ** **                    | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|--------------------|------------|-----------------------|------------|
| **($ in millions)** | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| Raw materials                 |       | $                  | 192.9      |                  | $          | 186.9 |   |
| Work-in-process               |       | 68.5               |       | 61.0                  |       |
| Finished goods                |       | 305.9              |       | 281.4                 |       |
| Packaging  materials          |       | 6.5                |       | 6.1                   |       |
| Total                         |       | $                  | 573.8      |                  | $          | 535.4 |   |

 

13

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**6.       GOODWILL:**

 

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      |            | $          | 515.4        |       | $            | 187.8      |          | $          | 258.5      |       | $ | 121.2 |   | $ | 1,767.0 |   |
| Post closing  purchase price consideration (a) |       | (18.2         | )          | —          |       | (6.0         | )          | (4.9         | )          | —        |       | (29.1      | )          |
| Acquisitions                                   |       | 2.1           |       | —          |       | —       |       | —       |       | —        |       | 2.1        |       |
| Foreign exchange  and other (b)                |       | 41.9          |       | 7.5             |       | 15.3         |       | 21.9         |       | 0.8           |       | 87.4       |       |
| Balance,  March 31, 2008                  |       | $             | 709.9      |            | $          | 522.9        |       | $            | 197.1      |          | $          | 275.5      |       | $ | 122.0 |   | $ | 1,827.4 |   |

 

----

(a)                Under the terms ofthe sale and purchase agreement entered into in connection with the DynamitNobel Acquisition in April 2004, GEA Group and its subsidiary, GEA NorthAmerica Inc. (“GEA North America”), were obligated to indemnify the Company forcertain legal, tax and environmental liabilities and obligations that relate tothe period prior to the closing, subject to certain limits and exclusions. In March 2008,the Company entered into an agreement with GEA Group and GEA North America tosettle all existing and future non-tax related claims in consideration ofpayment to the Company of €18.8 million ($29.1 million) which was received on March 28,2008. This payment was considered an adjustment to the purchase price per theclaims settlement agreement between the Company and GEA Group and itssubsidiary. As a result, the Company has reported this as an adjustment to thepurchase price with a credit to goodwill in the first quarter of 2008.  See Note 15, “Commitments and Contingencies,”for further details.

 

(b)               Consists primarilyof foreign currency changes.

 

**7.       OTHER INTANGIBLE ASSETS:**

 

Other intangible assets,net consist of:

 
| ** **                               | ** ** | **As of March 31, 2008** | ** ** | **As of December 31, 2007** | ** ** |
|------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                               | ** ** | **Gross**                                    | ** ** | ** **                                      | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Carrying**                                 | ** ** | **Accumulated**                                 | ** ** | ** ** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| **($ in millions)**            | ** ** | **Amount (a)**                          | ** ** | **Amortization**                                | ** ** | **Net** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Patents and  other intellectual property |       | $                                            | 427.8      |                                            | $          | (133.6 | ) | $ | 294.2 |   | $ | 395.6 |   | $ | (116.7 | ) | $ | 278.9 |   |
| Trade names and  trademarks              |       | 149.0                                        |       | (25.9                                           | )          | 123.1 |   | 147.2 |   | (23.0 | ) | 124.2 |   |
| Customer  relationships                  |       | 309.2                                        |       | (67.1                                           | )          | 242.1 |   | 273.3 |   | (57.3 | ) | 216.0 |   |
| Supply  agreements                       |       | 31.3                                         |       | (3.7                                            | )          | 27.6 |   | 29.6 |   | (2.9 | ) | 26.7 |   |
| Other                                    |       | 57.8                                         |       | (30.1                                           | )          | 27.7 |   | 57.7 |   | (26.7 | ) | 31.0 |   |
| Total                                    |       | $                                            | 975.1      |                                            | $          | (260.4 | ) | $ | 714.7 |   | $ | 903.4 |   | $ | (226.6 | ) | $ | 676.8 |   |

 

----

(a)                The increase from December 31,2007 is primarily related to the impact of currency changes and additions fromacquisitions.

 

Amortization of otherintangible assets was $18.7 million and $15.1 million for the three monthsended March 31, 2008 and 2007, respectively.

 

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

** **

**($ in millions)**

 
| ** **          | ** ** | **Amortization** | ** ** |
|---------------------|------------|------------------|------------|
| **Year ended** | ** ** | **Expense**      | ** ** |
| 2008                |       | $                | 73.4       |   |
| 2009                |       | 66.4             |       |
| 2010                |       | 64.7             |       |
| 2011                |       | 59.5             |       |
| 2012                |       | 55.6             |       |
|                     |            |                  |            |  |

 

14

----

 

**8.       LONG-TERM DEBT**

 

Long-term debt and loanspayable are summarized as follows:

 
| ** **                                                                                       | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **($ , € and £ in millions)**                            | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| Senior secured  credit facilities:                                                               |       |               |       |                  |       |
| Tranche A-1 term  loans (€26.1 and €29.3, respectively)                                |       | $                  | 41.2       |                  | $          | 42.8 |   |
| Tranche A-2 term  loans (€113.6 and €127.8, respectively)                              |       | 179.4              |       | 186.5                 |       |
| Tranche E term  loans                                                                            |       | 1,110.7            |       | 1,116.4               |       |
| Tranche G term  loans (€266.6 and €267.9, respectively)                                |       | 420.9              |       | 390.9                 |       |
| 2014 Notes  (€375.0 and $200.0 as of March 31, 2008 and December 31, 2007)        |       | 792.0              |       | 747.1                 |       |
| Other term loan  facilities                                                                      |       | 23.5               |       | 24.2                  |       |
| Capitalized  lease obligations (€33.4 and €34.1, respectively)                         |       | 52.7               |       | 49.7                  |       |
| Preferred stock  of subsidiary (£12.0 as of March 31, 2008 and December 31, 2007) |       | 23.8               |       | 23.8                  |       |
|                                                                                             |       | 2,644.2            |       | 2,581.4               |       |
| Less current maturities                                                                          |       | (111.3             | )          | (107.4                | )          |
|                                                                                             |       | $                  | 2,532.9    |                  | $          | 2,474.0 |   |

 

**9.     INCOME TAXES:**

 

Income tax expense hasbeen computed based on the projected effective tax rate for the year. Theeffective tax rate for the three months ended March 31, 2008 and 2007 was 40.9%and 44.3%, respectively. The effective tax rate is lower in 2008 compared to2007 primarily as a result of lower statutory rates in various Europeancountries and geographic mix. The difference between the effective tax rate andthe U.S. federal statutory rate of 35.0% is primarily a function of foreignrate differentials and the impact of the valuation allowance on domesticearnings.

 

In the three months endedMarch 31, 2008, the Company increased its worldwide valuation allowancesby $44.5 million. The increase in the valuation allowance was the result of anincrease in the U.S. net deferred tax assets. The change in the valuationallowance for the first quarter of 2008 increased the tax provision by $6.1million. The following table reflects the activity in the valuation allowancefor worldwide net operating losses and other deferred income tax assets:

 
| ** **                                               | ** ** | **Valuation** | ** ** |
|----------------------------------------------------------|------------|---------------|------------|
| **($ in millions)**                            | ** ** | **Allowance** | ** ** |
| Balance as of  December 31, 2007                    |       | $             | 100.8      |   |
| Increase as  reflected in income tax expense             |       | 6.1           |       |
| Increase as reflected  in other comprehensive income (a) |       | 38.4          |       |
| Balance as of  March 31, 2008                       |       | $             | 145.3      |   |

 

----

(a)     Primarilyrelated to net investment hedge losses, as well as the mark-to-market of theCompany’s Euro-denominated debt, recorded in accumulated other comprehensiveincome in the Condensed Consolidated Balance Sheets.

 

In the first quarter of2008, based on the Company’s policy and review of available information,including the Company’s steady-state analysis, it was determined that there wasnot sufficient positive evidence of future taxable income in order to releasethe U.S. valuation allowance that has been recorded. During the first threemonths of 2008, the Company’s net deferred tax assets and liabilities weremaintained at a zero level, other than a noncurrent deferred tax liabilityrelating to goodwill with an indefinite reversal period and the Federal AMTCredit. It is the Company’s policy that the valuation allowance is reversed inthe year management determines it is more likely than not that the deferred taxassets will be realized.

 

Unrecognized tax benefitsat March 31, 2008 were $28.2 million, including $25.5 million of taxbenefits that, if recognized, would affect the effective tax rate. Alsoincluded in the balance of unrecognized tax benefits at March 31, 2008,are $2.2 million of tax benefits that if recognized, would result in a decreaseto goodwill recorded in purchase business combinations, and $0.5 million of taxbenefits 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 $4.3 million for interest and penalties at December 31,2007. During the three months ended March 31, 2008, the accrual forinterest and penalties was increased by $0.5 million. As of March 31,2008, the Company had accrued a total of $4.8 million.

 

During the next twelvemonths, it is reasonably possible that resolution of uncertain tax liabilitiescould result in a benefit of up to $3.0 million or a cost of up to $22.0million. Audit outcomes and the timing of audit settlements are subject tosignificant uncertainty.

 

The Company is subject totaxation in the U.S., various states, and foreign jurisdictions. The Company’stax filings in major 

 

15

----

 

jurisdictions are open toinvestigation by tax authorities; in the U.S. from 2000, in the U.K. from 2003,and in Germany from 2000.

 

**10.     STOCK-BASED COMPENSATION:**

 

The Company has in placethe 2005 Amended and Restated Stock Purchase and Option Plan of RockwoodHoldings, Inc. and Subsidiaries (the “Plan”). Under the Plan, the Companymay grant stock options, restricted stock and other stock-based awards to theCompany’s employees and directors and allow employees and directors to purchaseshares of its common stock. There are 10,000,000 authorized shares availablefor grant under the Plan.

 

In December 2007,the Company awarded 167,951 performance restricted stock units to managementand key employees which will vest on December 31, 2010 as long as theemployee continues to be employed by the Company on this date and upon theachievement of certain performance targets. The number of shares of the Company’scommon stock ultimately awarded upon vesting is determined based on theachievement of specified performance criteria over the period January 1,2008 through December 31, 2010. However, in accordance with SFAS No. 123R,the Company did not recognize any compensation cost in 2007 for this issuancebecause the performance measures that form the basis for vesting of theserestricted stock units were not known as of December 31, 2007. Theseperformance measures were established on February 29, 2008, when theCompany’s financial statements for 2007 were filed with the Securities andExchange Commission. The weighted average grant date fair value of theserestricted stock units was $30.69 per stock unit.

 

The compensation cost forstock options, restricted stock units and Board of Director stock grantsrecorded under the Plan resulted in a decrease to income from continuingoperations before taxes and minority interest of $1.9 million and less than$0.1 million for the three months ended March 31, 2008 and 2007,respectively. The total tax benefit recognized related to stock options was$0.2 million and less than $0.1 million for the three months ended March 31,2008 and 2007, respectively.

 

**11.     EMPLOYEE BENEFIT PLANS:**

 

The following tablerepresents the net periodic benefit costs and related components in accordancewith SFAS 158,*Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans, an amendment of FASBStatements No. 87, 88, 106 and132 (R)*:

 
| ** **                            | ** ** | **Three months ended** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|
| ** **                            | ** ** | **March 31,**               | ** ** |
| **($ in millions)**         | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Service cost                          |       | $                                | 1.8        |   | $ | 1.9 |   |
| Interest cost                         |       | 7.0                              |       | 5.7 |   |
| Expected return  on assets            |       | (2.7                             | )          | (2.1 | ) |
| Net amortization  of actuarial losses |       | —                           |       | 0.1 |   |
| Total pension  cost                   |       | $                                | 6.1        |   | $ | 5.6 |   |

 

16

----

 

**12.    EARNINGS PER COMMON SHARE:**

 

Basic and dilutedearnings per common share (“EPS”) were computed using the following commonshare data:

 
| ** **                                                                                                      | ** ** | **Three months ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                      | ** ** | **March 31,**               | ** ** |
| **($ in millions, except per share amounts; shares in thousands)** | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| **EPS  Numerator - Basic:**                                                                                     |       |                             |       |   |   |
| Net income from  continuing operations applicable to common shareholders                                        |       | $                                | 27.7       |   | $ | 25.0 |   |
| Income from  discontinued operations, net of tax                                                                |       | —                           |       | 4.7 |   |
| Gain on sale of  discontinued operations, net of tax                                                            |       | —                           |       | 115.7 |   |
| Minority interest  in discontinued operations, net of tax                                                       |       | —                           |       | (0.1 | ) |
| Net income  applicable to common shareholders                                                                   |       | $                                | 27.7       |   | $ | 145.3 |   |
|                                                                                                            |       |                             |       |   |   |
| **EPS  Denominator - Basic:**                                                                                   |       |                             |       |   |   |
| Weighted average  number of common shares outstanding                                                           |       | 73,898                           |       | 73,786 |   |
|                                                                                                            |       |                             |       |   |   |
| **Basic  earnings per common share:**                                                                           |       |                             |       |   |   |
| Earnings from  continuing operations                                                                            |       | $                                | 0.37       |   | $ | 0.34 |   |
| Earnings from  discontinued operations, net of tax                                                              |       | —                           |       | 1.63 |   |
| Basic earnings  per common share                                                                                |       | $                                | 0.37       |   | $ | 1.97 |   |
|                                                                                                            |       |                             |       |   |   |
| **EPS  Numerator - Diluted:**                                                                                   |       |                             |       |   |   |
| Net income from  continuing operations                                                                          |       | $                                | 27.7       |   | $ | 25.0 |   |
| Income from  discontinued operations, net of tax                                                                |       | —                           |       | 4.7 |   |
| Gain on sale of  discontinued operations, net of tax                                                            |       | —                           |       | 115.7 |   |
| Minority  interest in discontinued operations, net of tax                                                       |       | —                           |       | (0.1 | ) |
| Net income  applicable to common shareholders                                                                   |       | $                                | 27.7       |   | $ | 145.3 |   |
|                                                                                                            |       |                             |       |   |   |
| **EPS  Denominator - Diluted:**                                                                                 |       |                             |       |   |   |
| Weighted average  number of common shares outstanding                                                           |       | 73,898                           |       | 73,786 |   |
| Effect of  dilutive stock options and other incentives                                                          |       | 2,711                            |       | 1,606 |   |
| Weighted average  number of common shares outstanding and common stock equivalents                              |       | 76,609                           |       | 75,392 |   |
|                                                                                                            |       |                             |       |   |   |
| **Diluted  earnings per common share:**                                                                         |       |                             |       |   |   |
| Earnings from  continuing operations                                                                            |       | $                                | 0.36       |   | $ | 0.33 |   |
| Earnings from  discontinued operations, net of tax                                                              |       | —                           |       | 1.60 |   |
| Diluted earnings  per common share                                                                              |       | $                                | 0.36       |   | $ | 1.93 |   |

 

Stock options underemployee compensation plans representing common stock of 1,031,629 shares wereoutstanding as of March 31, 2008, but were not included in the computationof diluted earnings per common share because their inclusion would have had ananti-dilutive effect.

 

**13.    RESTRUCTURING LIABILITY:**

 

The Company recordedrestructuring charges of $0.8 million and $4.0 million for the three monthsended March 31, 2008 and 2007, respectively.  The Company records restructuring liabilitiesthat represent charges incurred in connection with consolidations andcessations of certain of its operations, including operations fromacquisitions, as well as headcount reduction programs. These charges consistprimarily of write-offs of assets and severance costs. Severance charges arebased on various factors including the employee’s length of service, contractprovisions, salary levels and local governmental legislation. At the time arelated charge is recorded, the Company calculates its best estimate based upondetailed analysis. Although significant changes are not expected, actual costsmay differ from these estimates.

 

During the three months ended March 31, 2008, the Company expensed$0.8 million of restructuring charges. In the Performance Additives segment,the Company implemented a restructuring plan in its Color Pigments and Servicesbusiness in connection with the integration of the business acquired fromElementis plc which will include the reorganization and relocation of its NorthAmerican Finance and IT services and the closure of three manufacturingfacilities by the end of 2008. For the three months ended March 31, 2008,the Company recorded $0.6 million of severance costs related to thisrestructuring plan and expects to record approximately $1.5 million ofadditional costs during the remainder of 2008. In the Advanced Ceramicssegment, $0.2 million was recorded in the first quarter of 2008 formiscellaneous headcount reductions.

 

17

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During the three monthsended March 31, 2007, the Company expensed $4.0 million of restructuringcharges.  In the Corporate and othersegment, facility closure and severance costs of $3.7 million were recordedprimarily related to the restructuring of the wafer reclaim business.  In addition, $0.2 million was recorded in theSpecialty Chemicals segment and $0.1 million was recorded in the AdvancedCeramics segment for miscellaneous headcount reductions.

 

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

 

In 2005, the Companyrecorded restructuring charges for miscellaneous restructuring actions,including the announced closure of the Baulking, United Kingdom facility in theClay-based Additives business and the announced restructuring of the wafer reclaimbusiness. The Company recorded severance and related costs for employees inconnection with the closure of the wafer reclaim facilities (one each in theU.K. and U.S.). In addition, miscellaneous headcount reductions were recordedin the Specialty Chemicals, Performance Additives and Advanced Ceramicssegments.

 

Selected information forthe 2008 restructuring actions follows:

 
| ** **                                 | ** ** | **Severance** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|---------------|------------|------------|------------|
| **($ in millions)**              | ** ** | **Costs**     | ** ** | **Total**  | ** ** |
| **2008**                                   | ** ** | ** **    | ** ** | ** ** | ** ** |
| Liability  balance, December 31, 2007 |       | $             | —     |       | $          | — |   |
| Restructuring  charge in 2008              |       | 0.9           |       | 0.9        |       |
| Utilized in 2008                           |       | (0.7          | )          | (0.7       | )          |
| Liability  balance, March 31, 2008    |       | $             | 0.2        |       | $          | 0.2 |   |

 

These actions areexpected to be completed during 2008.

 

Selected information forthe 2007 restructuring actions follows:

 
| ** **                                 | ** ** | ** **    | ** ** | **Facility** | ** ** | ** **     | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|---------------|------------|--------------|------------|----------------|------------|------------|------------|
| ** **                                 | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Relocation** | ** ** | ** ** | ** ** |
| **($ in millions)**              | ** ** | **Costs**     | ** ** | **Costs**    | ** ** | **Costs**      | ** ** | **Total**  | ** ** |
| **2007**                                   | ** ** | ** **    | ** ** | ** **   | ** ** | ** **     | ** ** | ** ** | ** ** |
| Liability  balance, December 31, 2007 |       | $             | 6.1        |         | $          | 0.3            |       | $          | 0.3        |   | $ | 6.7 |   |
| Utilized in 2008                           |       | (1.3          | )          | (0.1         | )          | —         |       | (1.4       | )          |
| Foreign exchange  and other                |       | (1.9          | )          | 1.4          |       | —         |       | (0.5       | )          |
| Liability  balance, March 31, 2008    |       | $             | 2.9        |         | $          | 1.6            |       | $          | 0.3        |   | $ | 4.8 |   |

 

These actions areexpected to be completed during 2008 and 2009.

 

Selected information forthe 2006 restructuring actions follows:

 
| ** **                                 | ** ** | ** **    | ** ** | **Facility** | ** ** | ** **     | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|---------------|------------|--------------|------------|----------------|------------|------------|------------|
| ** **                                 | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Relocation** | ** ** | ** ** | ** ** |
| **($ in millions)**              | ** ** | **Costs**     | ** ** | **Costs**    | ** ** | **Costs**      | ** ** | **Total**  | ** ** |
| **2006**                                   | ** ** | ** **    | ** ** | ** **   | ** ** | ** **     | ** ** | ** ** | ** ** |
| Liability balance,  December 31, 2007 |       | $             | 1.3        |         | $          | 4.1            |       | $          | 0.1        |   | $ | 5.5 |   |
| Utilized in 2008                           |       | (0.7          | )          | (0.9         | )          | —         |       | (1.6       | )          |
| Liability  balance, March 31, 2008    |       | $             | 0.6        |         | $          | 3.2            |       | $          | 0.1        |   | $ | 3.9 |   |

 

The severance andrelocation costs related to the acquisition in the Specialty Compounds segmentare expected to be completed during 2008. The facility closure costs from the2006 restructuring actions primarily relate to the restructuring of the waferreclaim business and the closure of two wafer reclaim facilities. Thefacility closure costs are expected to be completed when the lease expires in2018.

 

18

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Selected information forthe 2005 restructuring actions follows:

 
| ** **                                 | ** ** | ** **    | ** ** | **Facility** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|---------------|------------|--------------|------------|------------|------------|
| ** **                                 | ** ** | **Severance** | ** ** | **Closure**  | ** ** | ** ** | ** ** |
| **($ in millions)**              | ** ** | **Costs**     | ** ** | **Costs**    | ** ** | **Total**  | ** ** |
| **2005**                                   |       |          |       |         |       |       |       |
| Liability  balance, December 31, 2007 |       | $             | 0.2        |         | $          | 0.2        |       | $ | 0.4 |   |
| Foreign exchange  and other                |       | —        |       | (0.2         | )          | (0.2       | )          |
| Liability  balance, March 31, 2008    |       | $             | 0.2        |         | $          | —     |       | $ | 0.2 |   |

 

These actions areexpected to be completed in 2008.

 

Selected information forthe 2004 restructuring actions follows:

 
| ** **                                 | ** ** | ** **    | ** ** | **Facility** | ** ** | ** **     | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|---------------|------------|--------------|------------|----------------|------------|------------|------------|
| ** **                                 | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Relocation** | ** ** | ** ** | ** ** |
| **($ in millions)**              | ** ** | **Costs**     | ** ** | **Costs**    | ** ** | **Costs**      | ** ** | **Total**  | ** ** |
| **2004**                                   | ** ** | ** **    | ** ** | ** **   | ** ** | ** **     | ** ** | ** ** | ** ** |
| Liability  balance, December 31, 2007 |       | $             | 0.8        |         | $          | 0.2            |       | $          | 0.4        |   | $ | 1.4 |   |
| Restructuring  charge in 2008              |       | (0.1          | )          | —       |       | —         |       | (0.1       | )          |
| Utilized in 2008                           |       | (0.1          | )          | (0.1         | )          | —         |       | (0.2       | )          |
| Foreign exchange  and other                |       | 0.1           |       | —       |       | (0.4           | )          | (0.3       | )          |
| Liability  balance, March 31, 2008    |       | $             | 0.7        |         | $          | 0.1            |       | $          | —     |   | $ | 0.8 |   |

 

These actions areexpected to be substantially completed by the end of 2008.

 

Restructuring reserves bysegment are as follows:

 
| ** **                    | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|--------------------|------------|-----------------------|------------|
| **($ in millions)** | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| Specialty  Chemicals          |       | $                  | 2.3        |                  | $          | 3.4 |   |
| Performance  Additives        |       | 3.2                |       | 4.6                   |       |
| Advanced  Ceramics            |       | 0.7                |       | 0.8                   |       |
| Specialty  Compounds          |       | 1.0                |       | 2.4                   |       |
| Corporate and  other          |       | 2.7                |       | 2.8                   |       |
|                          |       | $                  | 9.9        |                  | $          | 14.0 |   |

 

**14.    FAIR VALUE MEASUREMENTS:**

 

As discussed in Note 1, “Descriptionof Business and Summary of Significant Accounting Policies,” SFAS No. 157,*Fair Value Measurements*, was issued in September 2006.This statement defines fair value, establishes a framework for measuring fairvalue in GAAP, and creates a fair value hierarchy in order to increase theconsistency and comparability of fair value measurements and the relateddisclosures. This statement does not require any new fair value measurements,but requires disclosure of how the fair values of any assets and liabilitiesthat are measured at fair value on a recurring basis are determined. Certainprovisions of this standard were effective for the Company as of January 1,2008 and are disclosed below.  However,the FASB has deferred the implementation of SFAS No. 157 by one year fornon-financial assets and liabilities. Under SFAS No. 159, “*The Fair Value Option for Financial Assets andFinancial Liabilities*—*Includingan Amendment of FASB Statement No. 115,”*entities are permitted to choose whether to measuremany financial instruments and certain other items at fair value.  The Company has elected not to measure anyinstruments at fair value under SFAS No. 159.

 

As of March 31,2008, the only assets and liabilities that the Company currently measures atfair value on a recurring basis are derivatives and marketable securities. TheCompany’s financial assets and liabilities are measured using inputs from thethree levels of the fair value hierarchy. The three levels are as follows:

 
| Level 1 – | Inputs are unadjusted  quoted market prices in active markets for identical assets or liabilities  that the Company has the ability to access at the measurement date.                                                                                                                                                                                           |
|----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|           |                                                                                                                                                                                                                                                                                                                                                             |
| Level 2 – | Inputs are directly or  indirectly observable, which include quoted prices for similar assets and  liabilities in active markets, quoted prices for identical or similar assets  or liabilities in markets that are not active, inputs other than quoted  prices that are observable for the asset or liability and inputs that are  derived principally from or |

 

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|           | corroborated by  observable market data by correlation or other means.                                                                                                                                                                                         |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|           |                                                                                                                                                                                                                                                           |
| Level 3 – | Inputs are unobservable  inputs that are used to measure fair value to the extent observable inputs  are not available.  The Company does  not have any financial assets or liabilities that are classified as Level 3  inputs as of March 31, 2008. |

 

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

 
| ** **                                                     | ** ** | **As of**               | ** ** | **Fair Value Measurements** | ** ** |
|----------------------------------------------------------------|------------|------------------------------|------------|---------------------------------------|------------|
| ** **                                                     | ** ** | **March 31, 2008** | ** ** | **Level 1**                      | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Assets                                                         |       |                         |       |                                  |       |   |   |   |   |
| Marketable  securities (a)                                     |       | $                            | 170.3      |                                  | $          | 170.3 |   | $ | — |   | $ | — |   |
| Total assets at  fair value                                    |       | $                            | 170.3      |                                  | $          | 170.3 |   | $ | — |   | $ | — |   |
|                                                           |       |                         |       |                                  |       |   |   |   |   |
| Liabilities                                                    |       |                         |       |                                  |       |   |   |   |   |
| Interest rate  swaps (b)                                       |       | $                            | 40.8       |                                  | $          | — |   | $ | 40.8 |   | $ | — |   |
| Cross-currency  interest rate swaps (c)                        |       | 8.4                          |       | —                                |       | 8.4 |   | — |   |
| Cross-currency  interest rate swaps - net investment hedge (d) |       | 42.8                         |       | —                                |       | 42.8 |   | — |   |
| Raw material  purchase hedge (e)                               |       | 0.2                          |       | —                                |       | 0.2 |   | — |   |
| Total  liabilities at fair value                               |       | $                            | 92.2       |                                  | $          | — |   | $ | 92.2 |   | $ | — |   |

 

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| (a)    |   | These represent money  market funds with an original maturity of three months or less. These are  reported in cash and cash equivalents in the Condensed Consolidated Balance  Sheets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (b)    |   | The Company has historically  entered into interest rate swaps to manage its exposure to changes in  interest rates related to variable rate debt. As of March 31, 2008,  these contracts cover notional amounts of $725.0 million (at a rate of  4.499%) and €405.8 million (at rates ranging from 2.498% to 4.529%). These  derivative contracts effectively convert the senior secured credit  obligations to fixed rate obligations. The maturity date of these hedges is  July 2008. In the third quarter of 2007, the Company entered into interest  rate swaps that become effective in July 2008 and will effectively  replace the swaps that will expire in 2008. These swaps mature between  November 2009 and July 2012. The Company has elected not to apply  hedge accounting for these interest rate swaps and has recorded the  mark-to-market of these derivatives as a component of interest expense in the  Condensed Consolidated Statements of Operations. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (c)    |   | The Company entered  into cross-currency interest rate swaps with current notional amounts of  $19.4 million and €17.1 million that effectively convert U.S. dollar  borrowings into euro-based obligations at an effective interest rate of  EURIBOR plus 4%. These contracts have final maturity dates of July 2010.  The Company has elected not to apply hedge accounting for these interest rate  swaps and has recorded the mark-to-market of these derivatives as a component  of interest expense in the Condensed Consolidated Statements of Operations.                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (d)    |   | In connection with the  offering of the 2014 Notes, the Company entered into a cross-currency  interest rate swap in November 2004 with a notional amount of €155.6  million that effectively converts the U.S. dollar fixed rate debt in respect  of the 2014 dollar-denominated notes sold into euro fixed rate debt. This  swap has a final maturity date of November 2009. The Company designated  this contract as a hedge of the foreign currency exposure of its net  investment in its euro-denominated operations. As a result, any foreign  currency gains and losses resulting from the translation of this  euro-denominated debt is accounted for as a component of accumulated other  comprehensive income for as long as the hedge remains effective.                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (e)    |   | In March 2008, the  Titanium Dioxide Pigments segment entered into a derivative contract to protect  a portion of its exposure to movements in certain raw material prices. The  Company has elected not to apply hedge accounting for this derivative  contract and has recorded the mark-to-market of this derivative in cost of  products sold in the Condensed Consolidated Statements of Operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |

 

The fair values ofmarketable securities are based on unadjusted quoted market prices from variousfinancial information service providers and securities exchanges.  The fair values of derivatives are based onquoted market prices from various banks for similar instruments.

 

**15.    COMMITMENTS AND CONTINGENCIES:**

 

***Legal Proceedings***—The Company isinvolved in various legal proceedings, including commercial, intellectualproperty, product liability and environmental matters of a nature considerednormal to its business. It is the Company’s policy to accrue for amountsrelated to these matters in accordance with SFAS No. 5,*Accounting for Contingencies*, if it isprobable that a liability has been 

 

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incurred and an amountcan be reasonably estimated. It is the Company’s policy to disclose suchmatters when there is at least a reasonable possibility that a material lossmay have been incurred.

 

In April 2005,Hospira Incorporated filed suit in Mecklenburg County, North Carolina SuperiorCourt against one of the Company’s wholly-owned subsidiaries in its SpecialtyCompounds segment alleging claims for negligence, negligent misrepresentation,estoppel, fraud, third party beneficiary breach of contract and unfair tradepractices as a result of the subsidiary providing PVC compound to its customer.Hospira is seeking damages of approximately $16.0 million for costs allegedlyrelated to its recall and destruction of intravenous administration kits thatincorporated components made with this compound, and further seeks trebledamages of approximately $48.0 million, plus attorneys’ fees and interest,under the North Carolina unfair trade practice statute. The Court dismissedHospira’s negligence and estoppel claims, but initially denied the subsidiary’smotion to dismiss the other claims. Following discovery, the Company’ssubsidiary filed a motion for summary judgment to dismiss the remaining claimsand, on November 9, 2007, the trial court granted the Company’s motion forsummary judgment and dismissed all of the plaintiff’s claims. The plaintiff hasappealed this decision and the Company cannot predict how this decision willimpact the ultimate resolution of the case; however, the Company will continueto vigorously defend this matter. While the Company believes its subsidiary hasmeritorious defenses against Hospira’s claims and does not believe thatresolution of this matter will have a material adverse effect on its businessor financial condition, the Company cannot predict the ultimate outcome of thislitigation and resolution of this claim may have a material adverse effect onits results of operations or cash flows in any quarterly or annual reportingperiod.

 

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

 

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

 

Reserves in connectionwith product liability matters do not individually exceed $3.0 million and inthe aggregate $8.0 million as of March 31, 2008. The Company’s reserveestimates are based on available facts, including damage claims and input fromits internal and external legal counsel, past experience, and, in someinstances where defense costs are being paid by its insurer, known insurancerecoveries. The Company is unable to estimate the amount or range of anypotential incremental charges should facts and circumstances change and may inthe future revise its estimates based on new information becoming available.Further, the Company cannot predict the outcome of any litigation or thepotential for future litigation.

 

***Indemnity Matters***—Under the terms ofthe Business and Share Sale and Purchase Agreement, the Deed of Tax Covenantand the Environmental Deed entered into in connection with the KKR Acquisition,Degussa U.K. Holdings Ltd., as successor to Laporte Plc, is obligated toindemnify the Company for certain legal, tax and environmental liabilities andobligations that relate to the period prior to the closing of the KKRAcquisition. Under the terms of the sale and purchase agreement with mgtechnologies ag (now known as GEA Group Aktiengesellschaft (“GEA Group”)) andits subsidiary MG North America Holdings, Inc. (now known as GEA NorthAmerica Inc. (“GEA North America”)) were obligated to indemnify the Company forcertain legal, tax and environmental liabilities and obligations that relate tothe period prior to the closing, subject to certain limits and exclusions.Pursuant to these agreements, the Company has various claims forindemnification with Evonik Degussa and GEA Group. However, in March 2008,the Company entered into an agreement with GEA Group and GEA North America tosettle all existing and future non tax-related indemnities under the sale andpurchase agreement relating to the Dynamit Nobel Acquisition in considerationof payment to the Company of €18.8 million ($29.1 million), which was receivedon March 28, 2008. These indemnities primarily relate to environmentalmatters.

 

In addition, the Companymay be subject to indemnity claims relating to properties or businesses itdivested. For example, as discussed below, the Company is required to indemnifythe buyer of its Electronics business for certain known and unknownenvironmental actions which may arise in the future that relate to the periodprior to the closing. In the opinion of management, and based upon informationcurrently available, the ultimate resolution of any indemnification obligationsowed to the Company or by the Company will not have a material effect on theCompany’s financial condition, results of operations or cash flows.

 

**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 

 

21

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fines, injunctions andpotential criminal sanctions for violations. The products, including the rawmaterials handled, are also subject to rigorous industrial hygiene regulationsand investigation. The nature of the Company’s operations exposes it to risksof liability for breaches of these laws and regulations as a result of theproduction, 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 constantly changing,these SHE management systems are designed to assist the Company in meeting itscompliance goals and minimizing overall risk.

 

***SHE Capital Expenditures***

 

The Company may incurfuture costs for capital improvements and general compliance under SHE laws.For the year ended December 31, 2007, the capital expenditures for SHEmatters totaled $29.6 million, excluding costs to maintain and repair pollutioncontrol equipment. For 2008, the Company estimates capital expenditures forcompliance with SHE laws to be at similar levels; however, because capitalexpenditures for these matters are subject to changes in existing and new SHElaws, the Company cannot provide assurance that its recent expenditures will beindicative of future amounts required to comply with these laws.

 

***Regulatory Developments***

 

In June 2007, theUnited States Department of Homeland Security Agency’s regulation on ChemicalPlant Security became effective. This rule seeks to regulate security atfacilities that store certain listed substances. The Company believes that 12of its facilities in the United States may be required to provide informationnecessary to complete the first step known as the Top Screen. After gatheringinformation during the Top Screen process, Homeland Security will develop fourtiers of risk with Tier 1 being the highest risk sites and Tier 4 representingthe lowest. For national security reasons, the Department will not publishthe ranking criteria. The Company believes that following Top Screen, six ofthe Company’s locations may receive a ranking and be asked to undertake thesecond step of the regulation, which is to prepare a Site VulnerabilityAnalysis (which includes identification of critical assets, threat assessments,identification of potential security vulnerabilities and analysis ofcountermeasures to a terrorist attack) and a Site Security Plan (whichdescribes the security measures that will address each identifiedvulnerability). Each Site Vulnerability Analysis and Site Security Planmust be reviewed and approved by the Department of Homeland Security. Althoughsome security improvements may be required at certain of the Company’sfacilities, the Company does not expect compliance with this regulation to havea material impact on its cash flows or results of operations.

 

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 must bepre-registered by December 31, 2008. Currently, REACH is expected to beimplemented in three phases over the next eleven years based on known producthazards and/or volume of product in commerce. Under REACH, where warranted by arisk assessment, specified uses of some hazardous substances may be restricted.As a specialty 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 might be subject to REACH. The Company is taking steps to complywith REACH and is evaluating the potential costs of compliance, which itbelieves to be approximately $5.0 million per year until 2010 and approximately$3.0 million per year from 2011 through 2018, although we may incur additionalcosts depending on the safety assessments required. In addition, it is possiblethat REACH may affect raw material supply, customer demand for certain productsand the Company’s decision to continue to manufacture and sell certainproducts.

 

Under the European UnionIntegrated Pollution Prevention and Control Directive (“IPPC”), EU membergovernments are to adopt rules and implement a cross-media (air, water andwaste) environmental permitting program for individual facilities. IPPCrequires a consistent application of Best Available Techniques throughout theEU. While the EU countries are at varying stages in their respectiveimplementation of the IPPC permit program, the Company has submitted all necessaryIPPC permit applications required to date, and in some cases received completedpermits from the applicable government agency. The Company expects to submitall other IPPC applications and related documents on a timely basis as thevarious countries implement the IPPC permit program. Although it is not knownwith certainty what each IPPC permit will require, the Company believes, basedupon its experience with the permits received to date, that the costs ofcompliance with the IPPC permit program will not be material to its results ofoperations, financial position or liquidity.

 

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The Kyoto Protocol is anamendment to an international treaty on global warming. The Protocolestablishes significant emission reduction targets for six gases considered tohave global warming potential, referred to as greenhouse gases. The Protocolwas adopted in 1997 and became effective in February 2005 in over 140countries that have ratified it. The EU, including Germany and other countrieswhere the Company has interests, ratified the Kyoto Protocol in 2002 and, indoing so, have enacted regulations that reduce the emission of greenhouse gasesand have established a trading system covering carbon dioxide emissions, whichbecame effective at the start of 2005. The regulations directly affect theCompany’s power plants at the Duisburg and Langelsheim sites in Germany, aswell as the power plant being operated by a third party on one of the Company’ssites. Rockwood and such third party are required to purchase carbon dioxidecredits, which could result in increased operating costs, and may be requiredto develop additional cost-effective methods to reduce carbon dioxideemissions, which could result in increased capital expenditures. The newregulation indirectly affects the Company’s other operations in the EU, whichmay experience higher energy costs from third party providers. The Companycontinues to evaluate options in order to comply with the Protocol. However,the Company does not expect this to have a material impact on its cash flow orresults of operations.

 

***Remediation Liabilities***

 

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

 

The following tableprovides a list of the Company’s present and former facilities withenvironmental contamination for which we have reserved for at March 31,2008:

 
| **Country**     | ** ** | **Location**                     | ** ** | **(a)** | ** ** | **(b)** | ** ** | **(c)** | ** ** | **(d)** | ** ** | **(e)** | ** ** |
|-----------------|------------|----------------------------------|------------|---------|------------|---------|------------|---------|------------|---------|------------|---------|------------|
| Germany         |       | Duisburg                         |       | X       |       |    |       |    |       | X       |       |    |       |
|            |       | Hainhausen                       |       | X       |       |    |       |    |       |    |       |    |       |
|            |       | Ibbenburen                       |       |    |       |    |       |    |       | 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       |       |    |       |    |       |    |       |    |       |
|            |       | Kidsgrove                        |       |    |       |    |       | X       |       |    |       |    |       |
| United States   |       | Beltsville, MD                   |       | X       |       |    |       |    |       |    |       |    |       |
|            |       | Easton, PA                       |       | X       |       |    |       |    |       |    |       |    |       |
|            |       | Gonzales, TX                     |       |    |       |    |       |    |       | X       |       |    |       |
|            |       | Harrisburg, NC                   |       | X       |       |    |       | X       |       |    |       |    |       |
|            |       | La Mirada, CA                    |       |    |       |    |       | X       |       |    |       |    |       |
|            |       | Laurens, SC                      |       |    |       | X       |       |    |       |    |       |    |       |
|            |       | Middletown, NY  (formerly owned) |       |    |       |    |       |    |       |    |       | X       |       |
|            |       | New  Johnsonville, TN            |       |    |       | X       |       |    |       |    |       |    |       |
|            |       | Silver Peak, NV                  |       | X       |       |    |       |    |       | X       |       |    |       |
|            |       | Sunbright, VA (facility  closed) |       | X       |       |    |       |    |       |    |       | X       |       |
|            |       | Valdosta, GA                     |       | X       |       |    |       |    |       |    |       |    |       |

 

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| (a)    |   | The Company is  currently operating groundwater monitoring and/or remediation systems at  these locations.                                                                 |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                       |
| (b)    |   | The Company is  currently operating groundwater monitoring and/or remediation systems at  these locations for which prior owners or insurers have assumed  responsibility. |
|   |   |                                                                                                                                                                       |
| (c)    |   | The Company is  currently conducting investigations into additional possible soil and/or  groundwater contamination at these locations.                                    |
|   |   |                                                                                                                                                                       |
| (d)    |   | The Company has land  restoration obligations relating to landfill activities or surface mining at  these locations.                                                       |
|   |   |                                                                                                                                                                       |
| (e)    |   | The Company is  responsible for liabilities related to environmental matters at these closed  facilities.                                                                  |

 

The Company is also responsiblefor environmental matters at some of its former off-site disposal locationsowned by third parties. These sites are considered Superfund sites as definedby 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;

 

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South Gate, CA; andWhittier, CA and has reserves for these matters totaling $0.2 million at March 31,2008.

 

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

 

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

 

During the course of theCompany’s business, the Company may receive notices of violation, enforcementand other complaints from regulatory agencies alleging non-compliance withapplicable SHE laws. Currently, the Company is a party to a consent order withthe Metropolitan Sewer District (“MSD”) in St. Louis, Missouri to reduceammonia concentrations in wastewater discharge to a city treatment plant. MSD’snew National Pollution Discharge Elimination System (“NPDES”) permit requiresthe Company to reduce the facility’s ammonia discharge by December 31,2008. The Company will be required to make capital expenditures of up to $3.0million in connection with this matter.

 

***Environmental Indemnity Obligations***

 

Pursuant to the sharepurchase agreement entered into in connection with the sale of the GroupeNovasep segment, the Company agreed to indemnify the buyers for certain knownand unknown environmental actions which may arise in the future related toperiods prior to closing of the sale. These obligations expire three yearsafter the closing; however, the Company’s liability for such obligations wasreduced from 90 percent of any qualifying environmental liability claim to 70percent of such claims 15 months after the closing. In addition, the Company isrequired to indemnify the purchaser of the Company’s U.S. wafer reclaimbusiness for six years for any unknown environmental actions attributable tothe conduct of such business prior to the closing of the transaction in February 2007.The business purchase agreement provides that the Company must indemnify thebuyer for 100% of claims related to contamination of the business’ site or themigration of any hazardous substances from such site if notice of any such claimis given within four years of the closing of the transaction and 50% of suchclaims if notice is given after the fourth but before the sixth anniversary ofthe closing.

 

Likewise, pursuant to thestock purchase agreement entered into in connection with the sale of theElectronics business, the Company agreed to indemnify the buyer for certainknown and unknown environmental actions which may arise in the future relatedto periods prior to the closing of the sale. The obligation to indemnify thebuyer for environmental liabilities arising at the former Electronics business’sites expires five years after the closing, while the obligation to indemnifyfor off-site matters survives for a period of seven years following theclosing. The Company also agreed to indemnify the buyer for any environmentalactions at sites formerly owned or operated by the business resulting from thebusiness’ prior activities.

 

***Environmental Indemnities***

 

Pursuant to theenvironmental deed entered into in connection with the KKR Acquisition, EvonikDegussa, as successor to Laporte, is required to indemnify the Company and itssubsidiaries for certain environmental matters that relate to the business asconducted prior to the closing of the KKR Acquisition.  The environmentaldeed provides that Evonik Degussa will indemnify the Company and itssubsidiaries for claims relating to properties that were formerly owned,occupied or used as of November 20, 2000, as well as properties owned bythird parties (inclusive of disposal of waste and certain other identifiedissues prior to November 20, 2000). The environmental deed provides thatin this instance, Evonik Degussa will be responsible for reasonable costs andexpenses incurred.

 

In addition, pursuant tothe sale and purchase agreement entered into in connection with the DynamitNobel Acquisition in April 2004, GEA Group and its subsidiary, GEA NorthAmerica, were required to indemnify the Company and its subsidiaries for 50% ofthe excess amount of losses over the amount of the related reserves (in thecase of known claims) and 50% of claims (in the case of unknown claims) relatedto the contamination of the Company or its subsidiaries’ properties and certainenvironmental damage claims unknown at closing, if notified within ten yearsfrom closing (which occurred on July 31, 2004). GEA Group and GEA NorthAmerica were also obligated to indemnify the Company for 85% of claims relatedto legacy site matters, if notified within ten years from closing, and for 50%of the excess amount of losses over the amount of the related reserves foroperational compliance matters for which the Company provided notice by December 31,2006. However, as discussed above, the Company entered into an agreement withGEA Group and GEA North America in March 2008 to settle all environmentalindemnities under the sale and purchase agreement.

 

Although the Company hasno reason to believe that the financial condition of those parties who may haveindemnification obligations to the Company is other than sound, in the eventthe Company seeks indemnity under any of these agreements or through othermeans, there can be no assurance that Evonik Degussa or any other party who mayhave obligations to indemnify the Company will adhere to their obligations andthe Company may have to resort to legal action to enforce its rights under theindemnities. In cases where the Company’s indemnification claims to thirdparties are uncontested, the Company expects to realize recoveries within theshort term. In addition, the Company may be required to make indemnity paymentsin connection with certain environmental matters. However, the Company does notbelieve that resolution of the known environmental matters subject toindemnification obligations owed to the Company will have a material adverseeffect on its business or financial condition, but may have a material adverseeffect on the 

 

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Company’s results ofoperations or cash flow in any quarterly or annual reporting period.

 

***Environmental Reserves***

 

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

 

The Company’s liabilityestimates are based upon available facts, existing technology, indemnities fromthird parties, past experience and, in some instances, insurance recoverieswhere the remediation costs are being paid directly by its insurers and aregenerated by several means, including State-mandated schedules, environmentalconsultants and internal experts, depending on the circumstances. On aconsolidated basis, the Company has accrued $43.4 million for knownenvironmental liabilities as of March 31, 2008, of which $43.3 million wasclassified as other non-current liabilities in the Consolidated Balance Sheets.As of December 31, 2007, the Company has accrued $40.7 million for knownenvironmental liabilities, all of which was classified as other non-currentliabilities in the Consolidated Balance Sheets. The environmental liabilitiesassumed are subject to change upon the finalization of purchase accounting.Included in the $43.4 million as of March 31, 2008 is $16.7 million thatis discounted using discount rates ranging from 5.0% to 7.0%, with the undiscountedamount of these reserves equaling $25.2 million. Included in the $40.7 millionas of December 31, 2007 is $15.8 million that is discounted using discountrates ranging from 5.0% to 7.0%, with the undiscounted amount of these reservesequaling $22.5 million. In certain cases, the Company’s remediation liabilitiesare payable over periods of up to 30 years. The Company estimates that thepotential range for such environmental matters is from $43.4 million to $69.0million. In the three months ended March 31, 2008, excluding theacquisition of the global color pigments business of Elementis plc, the Companyrecorded charges of $1.0 million to increase its environmental liabilities andmade payments of $0.6 million for clean-up and remediation costs, which reducedits environmental liabilities. For the three months ended March 31, 2008,the recurring cost of managing hazardous substances for ongoing operations is$13.3 million. At a number of the sites described above, the extent ofcontamination has not yet been fully investigated or the final scope ofremediation is not yet determinable and could potentially affect the rangeidentified above.

 

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

 

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

 

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

 

*In2007, we completed the sale of our Groupe Novasep and Electronics segments,excluding our European wafer reclaim business. As a result, our condensedconsolidated financial statements have been reclassified to reflect thesesegments as discontinued operations for all periods presented. See Note 2, “DiscontinuedOperations,” for further details.  The European wafer reclaim businessretained has been reported in the “Corporate and other” category for segmentreporting purposes for all periods presented.*

 

*Thefollowing discussion contains forward-looking statements that involve numerousrisks and uncertainties. Our actual results could differ materially from thosediscussed in the forward-looking statements as a result of these risks anduncertainties, including those set forth in “Forward-Looking Statements” at theend of this Management Discussion and Analysis section and the risk factorssection of the Company’s 2007 Form 10-K. You should read the followingdiscussion and analysis together with our condensed consolidated financialstatements and the notes to those statements that appear elsewhere in thisQuarterly Report. Amounts may not recalculate due to rounding differences.*

 

**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 

 

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through five businesssegments: (1) Specialty Chemicals; (2) Performance Additives; (3) TitaniumDioxide Pigments; (4) Advanced Ceramics; and (5) Specialty Compounds.

 

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

 

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

 

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

 

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

 

·    We have cut costs, reducedoverhead and eliminated duplicative positions in both acquired and existingbusinesses. In 2007, we closed two U.K. facilities acquired in an October 2006acquisition by our Specialty Compounds segment.   We also implementedother restructuring measures in our other segments, including the closure ofour Baulking, U.K. facility in our Clay-based Additives business;

 

·    We acquired the global colorpigments business of Elementis plc in August 2007 which is beingintegrated into our Color Pigments and Service business within our PerformanceAdditives segment;

 

·    We completed the sale of ourGroupe Novasep segment in January 2007 and our United States wafer reclaimbusiness in February 2007.  In December 2007,we completed the sale of our Electronics business, excluding our European waferreclaim business; and

 

·    In March 2008, weimplemented a restructuring plan in our Color Pigments and Services business inconnection with the business acquired from Elementis plc which will include thereorganization and relocation of its North American Finance and IT services andthe closure of three manufacturing facilities by the end of 2008.

 

**FactorsWhich Affect Our Results of Operations**

 

**OurMarkets**

 

Because the businesses inour segments generally serve many unrelated end-use markets, we discuss theprincipal market conditions on a segment basis rather than a consolidatedbasis. The principal market conditions in our segments and regions in which weoperate that impacted our results of operations during the periods presentedinclude the following:

 

***Specialty Chemicals***

 

·    Demand for Surface Treatmentproducts in our Specialty Chemicals segment generally follows the activitylevels of metal processing manufacturers, including the automotive supply,steel and aerospace industries. Sales growth in the Surface Treatment businessoccurred in 2007 and has continued in the first quarter of 2008 in most marketsand regions served, especially in the European automotive, general industrialand aerospace industries, as price and volume increases and the impact of abolt-on acquisition made in December 2007 more than offset raw materialcost increases. We expect the Surface Treatment business to continue to grow in2008.

 

·    Demand for our lithiumproducts in the Fine Chemicals business line of our Specialty Chemicals segmentis generally driven by demand for lithium carbonate in industrial applications,the aluminum business, glass ceramics, cement and the general demand in China.Sales of lithium products specifically used in life science applications dependon the trends in drug development and growth in pharmaceuticals markets as wellas generic competition. Growth in the Fine Chemicals business occurred in2007 and has continued in the first quarter of 2008 in most market segments,driven by price increases in lithium salt applications, and higher demand forlithium applications. Growth in the Fine Chemicals business is expected tocontinue in most lithium applications in 2008.

 

***Performance Additives***

 

·    Generally, a trend towards theincreased use of colored concrete products in the North American constructionmarket has historically had a positive effect on our Color Pigments andServices business line.  However, ageneral slowdown in the 

 

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construction marketnegatively impacted North American construction sales in 2007.  As aresult of this slowdown, North American volumes were lower in the first quarterof 2008 and are expected to continue to decline throughout the year. However, sales in our Color Pigments and Services business in North America areexpected to be favorably impacted in 2008 by higher selling prices implementedto help recover raw material and energy cost increases and the acquisition ofthe global color pigments business of Elementis plc made in August 2007.  Unlike North America, construction volumes inEurope in our Color Pigments and Services business increased slightly in2007.  However, European constructionvolumes were lower in the first quarter of 2008 and are expected to continue todecline throughout the year.

 

·    The change in the market toenvironmentally advanced wood treatment chemical products, such as alkalinecopper quaternary, or ACQ, and the phase out of chromated copper arsenate, orCCA, for residential use previously had a positive impact on the Timber TreatmentChemicals business, which is a leading supplier of these higher marginproducts. However, the market position of ACQ was negatively impacted in 2007and the first quarter of 2008 by customer losses, a general slowdown in theconstruction market and the increasing use of wood substitutes. The expirationof the ACQ patent in May 2007 could also have a negative impact on ourresults of operations, as at least one new competitor has entered the marketand others may follow.  Although we commercialized the next generationtimber treatment preservatives system (*Ecolife*)in the third quarter of 2007 through our joint venture with Rohm and Haas, wedo not expect this to have a significant impact in 2008.

 

·    In the Clay-based Additivesbusiness, sales were up slightly in 2007 and continued to increase in the firstquarter of 2008 as higher oilfield volumes and increased selling prices forcoatings and inks were partially offset by lower carbonless applications. We expect sales growth to continue in 2008 in oilfield applications.

 

·    Raw material costs haveincreased in general in the Performance Additives segment and continue to trendupward. In the Color Pigments and Services and Clay-based Additives business,selling price increases helped offset the increases in raw material and energycosts, specifically iron oxide for Color Pigments and Services and quaternaryamine (“quat”) for Clay-based Additives.  Continuing unfavorable foreignexchange rates are expected to result in substantial cost increases in Chinesemanufactured raw materials used in our Color Pigments and Servicesbusiness.  The Timber Treatment Chemicals business continues to experiencehigh costs for copper, a primary component in ACQ.  Selling price increases were implemented in2007 and were maintained in the first quarter of 2008 to offset higher coppercosts. Our ability to pass on additional selling price increases throughout2008 is uncertain in these businesses.

 

***Titanium Dioxide Pigments***

 

·    Demand for our titaniumdioxide products in anatase grade is driven mainly by demand in the syntheticfiber industry, while demand for titanium dioxide products in rutile grade andour functional additives is driven by demand in the coatings, paper andplastics industries.  Volumes and sellingprices in the fiber anatase business decreased in 2007 and continued to be downin the first quarter of 2008.  We expectsales in the fiber anatase business in 2008 to be comparable to 2007levels.  While sales of titanium dioxideproducts in rutile grade were up slightly in 2007 on increased volumes, salesof these products were down in the first quarter of 2008 due to lower volumesand selling prices.  However, we expectvolumes of these rutile grade products to be up in 2008. Our functionaladditives business increased in 2007 on higher selling prices and volumes, butwas down slightly in the first quarter of 2008 as lower volumes were partiallyoffset by higher selling prices. However, we expect sales in the functional additives business to also beup in 2008 as compared to 2007.

 

***Advanced Ceramics***

 

·    Demand for our ceramic medicaldevices is mainly tied to the aging population in Europe and the UnitedStates.  Although the volume of our products used in medical deviceapplications sold experienced double-digit growth each year from 2001 through2005, in 2006 some customers in the U.S. reduced their demand due to highinventory levels and delayed approvals resulting in lower volumes. However, sales of our medical device applications increased in 2007 on highervolumes and continued to increase in the first quarter of 2008. We expect thistrend to continue throughout 2008.

 

·    Despite the negative impact ofpricing pressure from Asian competitors, sales of ceramic products for use incutting tool products were higher in 2007 and in the first quarter of 2008 dueto volume increases. This growth is expected to continue in 2008. Sales ofmechanical systems were up in 2007, but were lower in the first quarter of 2008and are expected to continue to be down throughout 2008.  Sales in our electronic products businesswere lower in 2007 primarily on decreased volumes and continued to decrease inthe first quarter of 2008 on lower selling prices and volumes. We expect thistrend to continue throughout this year.  Sales of our multi-functionalapplications were higher in 2007 from increased volumes, but were down slightlyin the first quarter of 2008 from lower selling prices.  However, growth in this business is expectedfor the remainder of 2008 on higher volumes.

 

***Specialty Compounds***

 

·    Our largest product line inthe Specialty Compounds segment is wire and cable compounds. Sales within thisproduct line are dependent upon the telecommunications market and relatedsectors, specifically demand for high-end voice and data communication wire andcable, for which our Specialty Compounds segment is a significant provider ofsheathing materials. 

 

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Newly developednon-halogen products for wire and cable data communication, military and otherapplications have expanded business in North America for those applications andcreated opportunities in Europe. Although sales of wire and cable products wereup slightly in 2007, sales growth was due to the acquisition of the Megolondivision of Scapa Group, plc., while the wire and cable business was negativelyimpacted by a general downturn in the wire and cable market.  Despite continued weakness in the wire andcable market and lower sales in the first quarter of 2008, sales of wire andcable products are expected to be up slightly in 2008.

 

·    Most of the other end-usemarkets for which Specialty Compounds’ products are used generally track growthof gross domestic product, but many are also application specific, such asautomotive.  We are focusing more of ourefforts towards increasing high margin specialty products, in particular,thermoplastic elastomers, and less of our efforts in automotive and footwear.Our net sales in consumer/industrial thermoplastic elastomers were up in 2007but were down slightly in the first quarter of 2008, although growth in thesemarkets is still expected this year.  Net sales of regulated packagingwere lower in 2007 and the first quarter of 2008 and are expected to continueto decrease in 2008.

 

·    Raw material prices forammonium octamolybdate (“AOM”) and polyvinyl chloride (“PVC”) resin andplasticizers, key raw materials used in the production of wire and cableproducts, were slightly lower in 2007, but were up in the first quarter of 2008and are expected to be higher throughout the remainder of the year.

 

**GlobalExposure**

 

We operate ageographically diverse business. Of our 2007 net sales, 52% were shipments toEurope, 31% to North America (predominantly the United States) and 17% to therest of the world. For a geographic description of the origin of our net salesand location of our long-lived assets, see Note 4, “Segment Information” in our2007 Form 10-K.

 

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

 

Our sales and productioncosts are mainly denominated in U.S. dollars or euros. Our results ofoperations and financial condition have been historically impacted by thefluctuation of the euro against our reporting currency, the U.S. dollar. Forthe quarter ended March 31, 2008, the average exchange rate of the euroagainst the U.S. dollar was higher compared to the same period in 2007. As aresult, our net sales, gross profit and operating income were positivelyimpacted. Historically, however, our operating margins have not beensignificantly impacted by currency fluctuations because, in general, sales andcosts of products sold are generated or incurred in the same currency, subjectto certain exceptions.

 

**RawMaterials**

 

Raw materials constitutedapproximately 54% of our 2007 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 2007.  Nonetheless, the significantprice fluctuations our raw materials have experienced in the past duringperiods of high demand have had an adverse impact on our results of operations.We cannot accurately predict the impact of any future price increases for rawmaterials or any raw material shortages on our business as a whole or inspecific geographic regions. In addition, we may not be able to pass on rawmaterial price increases to our customers.   See details of our ten most significant rawmaterials (in terms of dollars) in 2007 in Item 1, “Business — Raw Materials”in our 2007 Form 10-K.

 

**EnergyCosts**

 

In 2007, energy purchasesrepresented approximately 5% of our cost of products sold.  However,within certain business lines, such as our Titanium Dioxide Pigments segmentand the Color Pigments and Services and Clay-based Additives businesses of ourPerformance Additives segment, energy costs are more significant. The cost ofproducts sold for certain of our businesses, including Color Pigments andServices and Clay-based Additives, increases when the price of natural gas inNorth America rises. Natural gas prices were relatively stable in 2007 andduring the first three months of 2008. In contrast, natural gas prices inEurope, where our Titanium Dioxide Pigments segment is located, havehistorically been relatively stable, although prices were higher in 2007 andthe first quarter of 2008.

 

**IncomeTaxes**

 

The effective tax ratefor the first quarter of 2008 was 40.9%. This rate is negatively impacted by a valuationallowance related to domestic losses and foreign tax rates. In the firstquarter of 2008, the worldwide valuation allowance increased by $44.5 million.The increase in the valuation allowance was primarily due to an increase of$6.1 million in deferred tax assets associated with the Company’s domesticlosses and $38.4 million in other comprehensive income. Of the $44.5 millionincrease in the valuation allowance for the first quarter of 2008, $6.1 millionimpacted the tax provision.

 

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**Acquisitions**

 

During the periodspresented, we made acquisitions pursuant to our business strategy of achievingprofitable growth. See Note 4, “Acquisitions,” for further details.

 

**SpecialCharges and Credits**

 

During the periodspresented, we incurred certain special charges that includesystems/organization establishment expenses, restructuring and related charges,foreign exchange gains and losses and inventory write-up reversals. See “Itemsexcluded from Adjusted EBITDA” section in Note 3, “Segment Information,” for adiscussion of special charges and credits recorded in the three months ended March 31,2008 and 2007.

 

**SpecialNote Regarding Non-GAAP Financial Measures**

 

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

 

**Definitionof Adjusted EBITDA**

 

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

 

·    interest expense;

·    depreciation expense;

·    amortization expense,including amortization of deferred financing fees;

·    extraordinary losses andnon-recurring charges;

·    non-cash charges;

·    losses on asset sales;

·    restructuring charges orreserves (including severance, relocation costs and one-time compensationcharges and costs relating to the closure of facilities);

·    expenses paid by us or any ofour subsidiaries in connection with the Dynamit Nobel Acquisition, the seniorsecured credit agreement, the granting of liens under the security documents(as such term is defined in the senior secured credit agreement), the indenturegoverning the 2014 Notes and the offering of the 2014 Notes and any otherrelated transactions;

·    any expenses or chargesincurred in connection with any issuance of debt or equity securities;

·    any fees and expenses relatedto permitted acquisitions;

·    any deduction for minorityinterest expense; and

·    items arising in connectionwith CCA litigation related to our Timber Treatment Chemicals business of ourPerformance Additives segment;

 

less:

 

·    extraordinary gains andnon-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, calculation of AdjustedEBITDA according to the indenture underlying our 2014 Notes 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.

 

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**Management’sUses**

 

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

 

We also use AdjustedEBITDA on a consolidated basis as a liquidity measure. We believe thisfinancial measure on a consolidated basis is important in analyzing ourliquidity because our senior secured credit agreement and indenture governingthe 2014 Notes contain financial covenants that are determined based onAdjusted EBITDA. These covenants are material terms of these agreements,because they govern substantially all of our long-term debt, which in turnrepresents a substantial portion of our capitalization. Non-compliance withthese financial covenants under our senior secured credit facilities—ourmaximum total leverage ratio and our minimum interest coverage ratio, inparticular—could result in the lenders requiring us to immediately repay allamounts borrowed. Any such acceleration could also lead to the noteholdersaccelerating the maturity of the 2014 Notes. In addition, if we cannot satisfythese financial covenants in the indenture governing the 2014 Notes, we cannotengage in certain activities, such as incurring additional indebtedness ormaking certain payments. Consequently, Adjusted EBITDA is critical to our assessmentof 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 haslimitations as an analytical tool, and should not be viewed in isolation and isnot a substitute for U.S. GAAP measures of earnings and cash flows. Materiallimitations associated with making the adjustments to our earnings and cashflows to calculate Adjusted EBITDA, and using this non-GAAP financial measureas compared to the most directly comparable U.S. GAAP financial measures,include:

 

·    the cash portion of interestexpense, net, income tax provision (benefit), and restructuring as well asnon-recurring charges related to securities issuance, acquisition activities,and systems/organization establishment, generally represent charges (gains)which may significantly affect funds available to use in our operating,investing and financing activities;

 

·    non-operating foreign exchangegains (losses), although not immediately affecting cash used in investingactivities, may affect the amount of funds needed to service our debt if thosecurrency impacts remain in place as we meet our future principal repaymentobligations; and

 

·    depreciation, amortization,non-cash (gains) charges and impairment charges, though not directly affectingour current cash position, represent the wear and tear and/or reduction invalue of the plant, equipment and intangible assets which permit us tomanufacture and/or market our products; these items may be indicative of futureneeds for capital expenditures, for development or acquisition of intangibleassets or relevant trends causing asset value changes.

 

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

 

Adjusted EBITDA is not analternative to net income (loss) or income (loss) from continuing operationsbefore taxes and minority interest or operating income or cash flows fromoperating activities as calculated and presented in accordance with U.S. GAAP.You should not rely on Adjusted EBITDA as a substitute for any such U.S. GAAPfinancial measures. We strongly urge you to review the reconciliations ofAdjusted EBITDA to U.S. GAAP financial measures and other financialinformation, in each case included elsewhere in this Annual Report. We alsostrongly urge you not to rely on any single financial measure to evaluate ourbusiness. Our measure of Adjusted EBITDA may not be comparable to those of othercompanies.

 

**Resultsof Operations**

 

**ActualResults of Operations**

 

The following tablepresents the major components of our operations on an actual basis and AdjustedEBITDA (the reconciliation to net income is set forth in—Reconciliation of NetIncome to Adjusted EBITDA for the three months ended March 31, 2008 and2007), including as a percentage of net sales, for the periods presented. SeeNote 3, “Segment Information,” for segment information and a reconciliation toincome from continuing operations before taxes and minority interest toAdjusted EBITDA on a segment basis.

 

30

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| ** **                                                                | ** ** | **Three months ended** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                | ** ** | **March 31,**               | ** ** |
| **($ in millions)**                                             | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| **Statement  of operations data:**                                        |       |                             |       |   |   |
| **Net  sales:**                                                           |       |                             |       |   |   |
| Specialty  Chemicals                                                      |       | $                                | 311.7      |   | $ | 267.9 |   |
| Performance  Additives                                                    |       | 211.6                            |       | 184.8 |   |
| Titanium Dioxide Pigments                                                 |       | 125.8                            |       | 116.1 |   |
| Advanced  Ceramics                                                        |       | 133.2                            |       | 105.5 |   |
| Specialty  Compounds                                                      |       | 69.0                             |       | 69.6 |   |
| Corporate and  other                                                      |       | 2.7                              |       | 3.8 |   |
| Total net sales                                                           |       | 854.0                            |       | 747.7 |   |
|                                                                      |       |                             |       |   |   |
| Gross profit                                                              |       | 274.9                            |       | 244.1 |   |
|                                                                      |       | 32.2                             | %          | 32.6 | % |
| Selling, general  and administrative expenses                             |       | 170.1                            |       | 147.2 |   |
|                                                                      |       | 19.9                             | %          | 19.7 | % |
| Restructuring  charges, net                                               |       | 0.8                              |       | 4.0 |   |
| Loss (gain) on  sale of assets                                            |       | 0.1                              |       | (4.8 | ) |
| **Operating  income (loss):**                                             |       |                             |       |   |   |
| Specialty  Chemicals                                                      |       | 63.6                             |       | 55.6 |   |
|                                                                      |       | 20.4                             | %          | 20.8 | % |
| Performance  Additives                                                    |       | 13.3                             |       | 19.3 |   |
|                                                                      |       | 6.3                              | %          | 10.4 | % |
| Titanium Dioxide  Pigments                                                |       | 11.0                             |       | 12.1 |   |
|                                                                      |       | 8.7                              | %          | 10.4 | % |
| Advanced  Ceramics                                                        |       | 26.3                             |       | 18.9 |   |
|                                                                      |       | 19.7                             | %          | 17.9 | % |
| Specialty  Compounds                                                      |       | 5.7                              |       | 5.1 |   |
|                                                                      |       | 8.3                              | %          | 7.3 | % |
| Corporate and  other                                                      |       | (16.0                            | )          | (13.3 | ) |
| Total operating  income                                                   |       | 103.9                            |       | 97.7 |   |
| **Other  income (expenses):**                                             |       |                             |       |   |   |
| Interest expense                                                          |       | (73.7                            | )          | (54.7 | ) |
| Interest income                                                           |       | 2.2                              |       | 4.8 |   |
| Refinancing  expenses                                                     |       | —                           |       | (0.9 | ) |
| Foreign exchange  gain, net                                               |       | 15.1                             |       | 0.1 |   |
| Other, net                                                                |       | 0.4                              |       | (0.1 | ) |
| **Income  from continuing operations before taxes and minority interest** |       | 47.9                             |       | 46.9 |   |
| Income tax  provision                                                     |       | 19.6                             |       | 20.8 |   |
| Income from  continuing operations before minority interest               |       | 28.3                             |       | 26.1 |   |
| Minority  interest in continuing operations                               |       | (0.6                             | )          | (1.1 | ) |
| Net income from  continuing operations                                    |       | 27.7                             |       | 25.0 |   |
| Income from  discontinued operations, net of tax                          |       | —                           |       | 4.7 |   |
| Gain on sale of  discontinued operations, net of tax                      |       | —                           |       | 115.7 |   |
| Minority  interest in discontinued operations                             |       | —                           |       | (0.1 | ) |
| Net income                                                                |       | $                                | 27.7       |   | $ | 145.3 |   |
| **Adjusted  EBITDA:**                                                     |       |                             |       |   |   |
| Specialty  Chemicals                                                      |       | $                                | 80.5       |   | $ | 68.3 |   |
|                                                                      |       | 25.8                             | %          | 25.5 | % |
| Performance  Additives                                                    |       | 31.2                             |       | 32.6 |   |
|                                                                      |       | 14.7                             | %          | 17.6 | % |
| Titanium Dioxide  Pigments                                                |       | 23.9                             |       | 22.4 |   |
|                                                                      |       | 19.0                             | %          | 19.3 | % |
| Advanced Ceramics                                                         |       | 38.5                             |       | 28.8 |   |
|                                                                      |       | 28.9                             | %          | 27.3 | % |
| Specialty  Compounds                                                      |       | 8.7                              |       | 8.1 |   |
|                                                                      |       | 12.6                             | %          | 11.6 | % |
| Corporate and  other                                                      |       | (14.4                            | )          | (13.2 | ) |
| Total Adjusted  EBITDA (a)                                                |       | $                                | 168.4      |   | $ | 147.0 |   |

 

----

(a)     This amount does not include$9.2 million of Adjusted EBITDA for the three months ended March 31, 2007from the Electronics business sold on December 31, 2007 and $1.8 millionof Adjusted EBITDA for the three months ended March 31, 2007 from theformer Groupe Novasep segment sold on January 9, 2007.

 

31

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The following tablepresents the changes in the major components of our operations on a historicalbasis in dollars and percentages:

 
| ** **                                                                | ** ** | **Change: Three months ended March 31, 2008 versus 2007** | ** ** |
|---------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| ** **                                                                | ** ** | ** **                                                                                        | ** ** | ** ** | ** ** | **Constant** | ** ** | **Constant** | ** ** |
| ** **                                                                | ** ** | ** **                                                                                        | ** ** | **%** | ** ** | **Currency** | ** ** | **Currency** | ** ** |
| **($ in millions)**                                             | ** ** | **Total**                                                                                         | ** ** | **Change** | ** ** | **Effect (a)** | ** ** | **Basis** | ** ** |
| **Statement  of operations data:**                                        |       |                                                                                              |       |   |   |   |   |   |   |
| **Net  sales:**                                                           |       |                                                                                              |       |   |   |   |   |   |   |
| Specialty  Chemicals                                                      |       | $                                                                                                 | 43.8       |   | 16.3 | % | $ | 27.7 |   | $ | 16.1 |   |
| Performance  Additives                                                    |       | 26.8                                                                                              |       | 14.5 |   | 4.7 |   | 22.1 |   |
| Titanium Dioxide  Pigments                                                |       | 9.7                                                                                               |       | 8.4 |   | 15.8 |   | (6.1 | ) |
| Advanced  Ceramics                                                        |       | 27.7                                                                                              |       | 26.3 |   | 15.6 |   | 12.1 |   |
| Specialty  Compounds                                                      |       | (0.6                                                                                              | )          | (0.9 | ) | 1.4 |   | (2.0 | ) |
| Corporate and  other                                                      |       | (1.1                                                                                              | )          | (28.9 | ) | 0.3 |   | (1.4 | ) |
| Total net sales                                                           |       | 106.3                                                                                             |       | 14.2 |   | 65.5 |   | 40.8 |   |
|                                                                      |       |                                                                                              |       |   |   |   |   |   |   |
| Gross profit                                                              |       | 30.8                                                                                              |       | 12.6 |   | 22.7 |   | 8.1 |   |
| Selling, general  and administrative expenses                             |       | 22.9                                                                                              |       | 15.6 |   | 13.4 |   | 9.5 |   |
| Restructuring  charges                                                    |       | (3.2                                                                                              | )          |   |   |   |   | (3.2 | ) |
| Loss (gain) on  sale of assets                                            |       | 4.9                                                                                               |       |   |   |   |   | 4.9 |   |
| Total operating  expenses                                                 |       | 24.6                                                                                              |       | 16.3 |   | 13.4 |   | 11.2 |   |
| **Operating  income (loss):**                                             |       |                                                                                              |       |   |   |   |   |   |   |
| Specialty  Chemicals                                                      |       | 8.0                                                                                               |       | 14.4 |   | 4.6 |   | 3.4 |   |
| Performance  Additives                                                    |       | (6.0                                                                                              | )          | (31.1 | ) | — |   | (6.0 | ) |
| Titanium Dioxide  Pigments                                                |       | (1.1                                                                                              | )          | (9.1 | ) | 1.4 |   | (2.5 | ) |
| Advanced  Ceramics                                                        |       | 7.4                                                                                               |       | 39.2 |   | 3.5 |   | 3.9 |   |
| Specialty Compounds                                                       |       | 0.6                                                                                               |       | 11.8 |   | 0.1 |   | 0.5 |   |
| Corporate and  other                                                      |       | (2.7                                                                                              | )          | (20.3 | ) | (0.3 | ) | (2.4 | ) |
| Total                                                                     |       | 6.2                                                                                               |       | 6.3 |   | 9.3 |   | (3.1 | ) |
| **Other  income (expenses):**                                             |       |                                                                                              |       |   |   |   |   |   |   |
| Interest expense                                                          |       | (19.0                                                                                             | )          | 34.7 |   | (0.4 | ) | (18.6 | ) |
| Interest income                                                           |       | (2.6                                                                                              | )          | (54.2 | ) | — |   | (2.6 | ) |
| Refinancing  expenses                                                     |       | 0.9                                                                                               |       |   |   |   |   |   |   |
| Foreign exchange  gain, net                                               |       | 15.0                                                                                              |       |   |   |   |   |   |   |
| Other, net                                                                |       | 0.5                                                                                               |       |   |   |   |   |   |   |
| **Income  from continuing operations before taxes and minority interest** |       |                                                                                              |       |   |   |   |   |   |   |
| Specialty  Chemicals                                                      |       | 5.9                                                                                               |       |   |   |   |   |   |   |
| Performance  Additives                                                    |       | (10.8                                                                                             | )          |   |   |   |   |   |   |
| Titanium Dioxide  Pigments                                                |       | (2.1                                                                                              | )          |   |   |   |   |   |   |
| Advanced  Ceramics                                                        |       | 7.3                                                                                               |       |   |   |   |   |   |   |
| Specialty  Compounds                                                      |       | 0.6                                                                                               |       |   |   |   |   |   |   |
| Corporate and  other                                                      |       | 0.1                                                                                               |       |   |   |   |   |   |   |
| Total                                                                     |       | 1.0                                                                                               |       |   |   |   |   |   |   |
| Income tax  provision                                                     |       | (1.2                                                                                              | )          |   |   |   |   |   |   |
| Income from  continuing operations before minority interest               |       | 2.2                                                                                               |       |   |   |   |   |   |   |
| Minority  interest in continuing operations                               |       | 0.5                                                                                               |       |   |   |   |   |   |   |
| Net income from  continuing operations                                    |       | 2.7                                                                                               |       |   |   |   |   |   |   |
| Income from  discontinued operations, net of tax                          |       | (4.7                                                                                              | )          |   |   |   |   |   |   |
| Gain on sale of  discontinued operations, net of tax                      |       | (115.7                                                                                            | )          |   |   |   |   |   |   |
| Minority  interest in discontinued operations                             |       | 0.1                                                                                               |       |   |   |   |   |   |   |
| Net income                                                                |       | $                                                                                                 | (117.6     | ) |   |   |   |   |   |   |
| **Adjusted  EBITDA:**                                                     |       |                                                                                              |       |   |   |   |   |   |   |
| Specialty  Chemicals                                                      |       | $                                                                                                 | 12.2       |   | 17.9 | % | $ | 6.0 |   | $ | 6.2 |   |
| Performance  Additives                                                    |       | (1.4                                                                                              | )          | (4.3 | ) | 0.8 |   | (2.2 | ) |
| Titanium Dioxide  Pigments                                                |       | 1.5                                                                                               |       | 6.7 |   | 3.0 |   | (1.5 | ) |
| Advanced  Ceramics                                                        |       | 9.7                                                                                               |       | 33.7 |   | 4.9 |   | 4.8 |   |
| Specialty  Compounds                                                      |       | 0.6                                                                                               |       | 7.4 |   | 0.2 |   | 0.4 |   |
| Corporate and  other                                                      |       | (1.2                                                                                              | )          | (9.1 | ) | (0.3 | ) | (0.9 | ) |
| Total Adjusted  EBITDA                                                    |       | $                                                                                                 | 21.4       |   | 14.6 | % | $ | 14.6 |   | $ | 6.8 |   |

 

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(a)     The constant currency effectis the translation impact calculated based on the change in the applicablerate, primarily the euro, to the U.S. dollar exchange rate for the applicableperiod.

 

32

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***Three months ended March 31, 2008 compared to threemonths ended March 31, 2007***

 

**Overview**

 

Net sales increased$106.3 million in the first quarter of 2008 compared with the same period inthe prior year primarily due to increased selling prices of $18.5 million andthe positive impact of currency changes of $65.5 million.  Higher volumes,particularly in our Specialty Chemicals and Advanced Ceramics segments, alsohad a favorable impact on net sales.  Seefurther discussion by segment below.

 

Operating income andAdjusted EBITDA also increased in the first quarter of 2008 compared with thesame period in the prior year due to the positive impact of currency changesand the sales increases noted above. Operating income and Adjusted EBITDA werenegatively impacted by higher raw material costs in most businesses.

 

Net income fromcontinuing operations of $27.7 million in the first quarter of 2008 increased$2.7 million compared with the same period in the prior year primarily due tothe reasons noted above. This was partially offset by higher interest expenserecorded in the first quarter of 2008 compared to the same period in the prioryear due to higher mark-to-market losses on our interest rate hedginginstruments.

 

Income from discontinuedoperations, net of tax was $4.7 million in the first quarter of 2007 and wasprimarily comprised of income from operating the Electronics business,excluding the European wafer reclaim business, in the first quarter of 2007.

 

The gain on sale ofdiscontinued operations, net of tax, of $115.7 million recorded in the firstquarter of 2007 is related to the sale of Groupe Novasep in January 2007.

 

Net income decreased$117.6 million in the first quarter of 2008 compared with the same period inthe prior year due to the reasons noted above.

 

**Netsales**

 

*SpecialtyChemicals*.  Net sales increased $43.8 million over the prior year on higher selling prices,as well as increased volumes and the positive impact of currency changes of$27.7 million. In the Fine Chemicals business, higher selling prices of lithiumproducts, as well as increased volumes, had a favorable impact on net sales.Net sales in the Surface Treatment business were favorably impacted by higherselling prices, increased volumes in most markets, particularly in Europeanautomotive applications, and the impact of a bolt-on acquisition made in December 2007.

 

*PerformanceAdditives*.  Net sales increased $26.8 million over the prior year due to the acquisition ofthe global color pigments business of Elementis plc completed on August 31,2007, as well as increased selling prices in our Color Pigments and Services andClay-based Additives businesses and the positive impact of currency changes of$4.7 million. This was partially offset by lower volumes of construction-relatedproducts in our Color Pigments and Services and Timber Treatment Chemicalsbusinesses.

 

*TitaniumDioxide Pigments*.  Net sales increased $9.7 million over the prior year due to the positive impactof currency changes of $15.8 million, partially offset by lower volumesand selling prices of titanium dioxide products.  Lower volumes of functional additives alsohad an unfavorable impact on net sales.

 

*AdvancedCeramics*.  Net sales increased $27.7 million over the prior year primarily due to thepositive impact of currency changes of $15.6 million, increased volumes ofmedical and cutting tool applications and the impact of a bolt-on acquisitionmade in April 2007.  This waspartially offset by lower selling prices and volume declines in mechanicalsystems and mechanical applications.

 

*SpecialtyCompounds*.  Net sales decreased $0.6 million over the prior year due to lower volumes inwire and cable and medical applications, partially offset by increased sellingprices and the positive impact of currency changes of $1.4 million.

 

*Corporateand other*.  Net sales decreased $1.1 million over the prior year primarily due to the saleof our U.S. wafer reclaim business in the first quarter of 2007.

 

**Grossprofit**

 

Gross profit increased$30.8 million over the prior year primarily due to the positive impact ofcurrency changes of $22.7 million and the sales increases noted above, inparticular selling price increases. This was partially offset by raw materialcost increases, particularly from the impact of higher lithium chloride andother raw material costs in our Specialty Chemicals segment, higher iron-oxidecosts in our Color Pigments and Services business and higher PVC resin costs inour Specialty Compounds segment. Gross profit as a percentage of net sales was 32.2%in the first quarter of 2008 versus 32.6% in the first quarter of 2007.  Gross profit in the first quarter of 2008includes a reduction of $0.4 million due to the inventory write-up reversalrelated to a bolt-on acquisition made in our Specialty Chemicals segment in December 2007.

 

33

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**Selling,general and administrative expenses**

 

Selling, general andadministrative expenses, or SG&A, increased $22.9 million over the prioryear primarily due to the impact of currency changes of $13.4 million. HigherSG&A costs were also recorded in a few segments, particularly in AdvancedCeramics, related to increased sales volumes. SG&A expenses as a percentageof net sales was 19.9% in the first quarter of 2008 versus 19.7% in the firstquarter of 2007.

 

**Restructuringcharges, net**

 

We recorded $0.8 millionof restructuring charges in the first quarter of 2008 for restructuring actionsin the Performance Additives and Advanced Ceramics segments for miscellaneousheadcount reductions.  We recorded $4.0million of restructuring charges in the first quarter of 2007 primarily relatedto facility closures in the Corporate and other segment related to therestructuring of the wafer reclaim business. See Note 13, “Restructuring Liability,” for further details.

 

**Loss (gain) on sale of assets**

 

We recorded a loss of$0.1 million in the first quarter of 2008 and a gain of $4.8 million in thefirst quarter of 2007 related to the sale of assets.  The gain recorded in the first quarter of2007 primarily relates to the sale of our U.S. wafer reclaim business.

 

**Operatingincome**

 

*SpecialtyChemicals*.  Operating income increased $8.0 million over the prior year primarily due tothe impact of higher sales in both the Surface Treatment and Fine Chemicalsbusinesses and the positive impact of currency changes of $4.6 million. Thisincrease was partially offset by higher raw material costs of $4.7 million,primarily for lithium chloride and other raw material costs, and increaseddepreciation and amortization costs of $3.3 million.

 

*PerformanceAdditives*.  Operating income decreased $6.0 million over the prior year due to the lowersales volumes discussed above, and higher raw material costs of $4.7 million,particularly iron-oxide costs in the Color Pigments and Services business andhigher quat costs in our Clay-based Additives business.  Higher depreciation and amortization costs of$3.9 million primarily due to the acquisition of the global color pigmentsbusiness of Elementis plc also had an unfavorable impact on operatingincome.  These decreases were partially offset by the selling priceincreases noted above.

 

*TitaniumDioxide Pigments*.  Operating income decreased $1.1 million over the prior year primarily due tothe lower sales volumes and selling prices noted above, increased depreciationand amortization costs of $2.6 million and higher energy costs of $0.9million.  This decrease was partiallyoffset by the positive impact of currency changes of $1.4 million.

 

*AdvancedCeramics*.  Operating income increased $7.4 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 $3.5 million. Theimpact of a bolt-on acquisition made in April 2007 also had a favorableimpact on operating income. This increase was partially offset by lower sellingprices and increased depreciation and amortization costs of $2.3 millionrelated to the acquisition discussed above.

 

*SpecialtyCompounds*.  Operating income increased $0.6 million over the prior year due to loweroperating costs relating to the closure of a U.K. facility in December 2007.  This was partially offset by higher rawmaterial costs of $2.6 million, particularly PVC resin costs, and lower salesvolumes.

 

*Corporateand other.*  Operating loss increased $2.7 million over the prior year primarily dueto additional stock compensation expense related to stock-based awards made in2007 and 2008.

 

**Otherincome (expenses)**

 

*Interestexpense*.  Interestexpense increased $19.0 million in the first quarter of 2008 compared to thesame period in the prior year. The first quarters of 2008 and 2007 includedlosses of $30.8 million and $2.8 million, respectively, representing the movementin the mark-to-market valuation of our interest rate hedging instruments. Theremaining interest expense decrease of $9.0 million is primarily due to lowerdebt levels, including the redemption in 2007 of the 2011 Notes in theaggregate amount of $273.4 million.

 

*Interestincome*.  Interestincome decreased $2.6 million in the first quarter of 2008 compared to the sameperiod in the prior year primarily related to lower average cash balances inthe first quarter of 2008 compared to the first quarter of 2007 and lowershort-term interest rates.

 

*Refinancing expenses. *In March 2007, we expensed $0.9 million relatedto the fourth amendment of the senior secured credit agreement resulting in a50 basis point reduction on our new tranche G term loans.

 

*Foreignexchange gain, net*.  In the first quarter of 2008, we had foreign exchange gains of $15.1 millioncompared to foreign exchange gains of $0.1 million recorded in the same periodin the prior year. The increase from the prior year is primarily due tothe impact of the stronger euro as of March 31, 2008 versus December 31,2007 related to intercompany financing arrangements.

 

34

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*Other, net. *In the first quarter of 2008, we recorded $0.4 millionof income primarily related to the sale of an investment in the SurfaceTreatment business of our Specialty Chemicals segment.

 

**Provisionfor income taxes**

 

The effective income taxrate for the first quarter of 2008 was 40.9% and an income tax provision of$19.6 million was recorded for the first quarter of 2008. The effective incometax rate compared to the federal statutory rate was negatively impacted by anincrease in the valuation allowance related to domestic losses offset by lower foreigntax rates.  The effective income tax ratewas 44.3% for the first quarter of 2007 and was negatively impacted by anincrease in the valuation allowance related to U.S. operations.  The decrease in the effective income tax ratein the first quarter of 2008 was due to lower average statutory rates relatedto favorable European rate changes during 2007, as well as geographic earningsmix.

 

**Minorityinterest in continuing operations**

 

Minority interestrepresents the minority interest portion of the Viance, LLC joint venturecompleted in January 2007 between our Timber Treatment Chemicals businessand Rohm and Haas Company.

 

**Netincome from continuing operations**

 

Net income fromcontinuing operations for the first quarter of 2008 was $27.7 million ascompared to net income from continuing operations of $25.0 million for thefirst quarter of 2007 for the reasons described above.

 

**Incomefrom discontinued operations, net of tax**

 

Income from discontinuedoperations, net of tax was $4.7 million in the first quarter of 2007 and wasprimarily due to income from operating the Electronics business in the firstquarter of 2007.

 

**Gain on sale of discontinuedoperations, net of tax**

 

The gain on sale ofdiscontinued operations, net of tax, of $115.7 million recorded in the firstquarter of 2007 is related to the sale of Groupe Novasep in January 2007.

 

**Minorityinterest in discontinued operations**

 

Minority interest indiscontinued operations represents the minority interest portion of GroupeNovasep’s net income for the first quarter of 2007.

 

**Netincome**

 

Net income for the firstquarter of 2008 was $27.7 million as compared to net income of $145.3 millionfor the first quarter of 2007 for the reasons described above.

 

**AdjustedEBITDA**

 

*SpecialtyChemicals*.  Adjusted EBITDA increased $12.2 million over the prior year primarily due tothe impact of higher sales in both the Surface Treatment and Fine Chemicalsbusinesses and the positive impact of currency changes of $6.0 million. Thisincrease was partially offset by higher raw material costs of $4.7 million asdiscussed above.

 

*PerformanceAdditives*.  Adjusted EBITDA decreased $1.4 million over the prior year due to the lowersales volumes discussed above and higher raw material costs of $4.7 million,particularly iron-oxide costs in the Color Pigments and Services business andhigher quat costs in our Clay-based Additives business.  These decreases were partially offset by theselling price increases noted above.

 

*TitaniumDioxide Pigments*.  Adjusted EBITDA increased $1.5 million over the prior year due to the positiveimpact of currency changes of $3.0 million. This was partially offset by higher energy costs of $0.9 million andlower volumes and selling prices.

 

*AdvancedCeramics*.  Adjusted EBITDA increased $9.7 million over the prior year primarily due to theimpact of the increased sales volumes noted above, productivity improvementsand the positive impact of currency changes of $4.9 million. The impact of abolt-on acquisition made in April 2007 also had a favorable impact onAdjusted EBITDA. This increase was partially offset by lower selling prices.

 

*SpecialtyCompounds*.  Adjusted EBITDA increased $0.6 million primarily due to lower operating costsrelating to the closure of a U.K. facility in December 2007.  This was partially offset by higher rawmaterial costs of $2.6 million, particularly PVC resin costs, and lower salesvolumes.

 

*Corporateand other*.  Adjusted EBITDA loss at Corporate increased $1.2 million over the prior yeardue to the recording of 

 

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additional stockcompensation expense related to stock-based awards made in 2007 and 2008.

 

***Reconciliation of Net Income to Adjusted EBITDA***

 

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

 
| ** **                                                            | ** ** | **Three months ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                            | ** ** | **March 31,**               | ** ** |
| **($ in millions)**                                         | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Net income                                                            |       | $                                | 27.7       |   | $ | 145.3 |   |
| Income from  discontinued operations, net of tax                      |       | —                           |       | (4.7 | ) |
| Gain on sale of  discontinued operations, net of tax                  |       | —                           |       | (115.7 | ) |
| Minority  interest in discontinued operations                         |       | —                           |       | 0.1 |   |
| Net income from  continuing operations                                |       | 27.7                             |       | 25.0 |   |
| Income tax  provision                                                 |       | 19.6                             |       | 20.8 |   |
| Minority  interest in continuing operations                           |       | 0.6                              |       | 1.1 |   |
| Income from  continuing operations before taxes and minority interest |       | 47.9                             |       | 46.9 |   |
| Interest expense  (a)                                                 |       | 73.7                             |       | 54.7 |   |
| Interest income                                                       |       | (2.2                             | )          | (4.8 | ) |
| Depreciation and  amortization                                        |       | 61.8                             |       | 49.3 |   |
| Restructuring  and related charges                                    |       | 0.8                              |       | 4.0 |   |
| Systems/organization  establishment expenses                          |       | 1.2                              |       | 0.9 |   |
| Inventory  write-up reversal                                          |       | 0.4                              |       | — |   |
| Cancelled  acquisition and disposal costs                             |       | —                           |       | 0.1 |   |
| Refinancing  expenses                                                 |       | —                           |       | 0.9 |   |
| Loss (gain) on  sale of assets                                        |       | 0.1                              |       | (4.8 | ) |
| Foreign exchange  gain                                                |       | (15.1                            | )          | (0.1 | ) |
| Other                                                                 |       | (0.2                             | )          | (0.1 | ) |
| Total Adjusted  EBITDA (b)                                            |       | $                                | 168.4      |   | $ | 147.0 |   |

 

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(a)                Includes losses of $30.8 million and $2.8 million forthe three months ended March 31, 2008 and 2007, respectively, representingthe movement in the mark-to-market valuation of the Company’s interest rate andcross-currency hedging instruments.

 

(b)               This amount does not include $9.2 million of AdjustedEBITDA for the three months ended March 31, 2007 from the Electronicsbusiness sold on December 31, 2007 and $1.8 million of Adjusted EBITDA forthe three months ended March 31, 2007 from the former Groupe Novasepsegment sold on January 9, 2007.

 

**Liquidityand Capital Resources**

 

**CashFlows**

 

*Unlessotherwise noted, all amounts below which are denominated in currencies otherthan the U.S. dollar are converted at the March 31, 2008  exchange rate of €1.00 = $1.5788.*

 

*OperatingActivities*.  Net cash provided by operating activities was $27.2 million and $70.7 millionfor the three months ended March 31, 2008 and 2007, respectively. Net cashfrom operating activities decreased primarily from higher use of operating cashfrom working capital changes and the lack of operating cash flows due to thedivestiture of the Electronics business, partially offset by higher operatingincome and lower cash interest expense.

 

*InvestingActivities*.  Netcash (used in) provided by investing activities was $(40.1) million and $463.3million for the three months ended March 31, 2008 and 2007, respectively.Net cash used in investing activities decreased primarily due to the proceedsreceived in the first quarter of 2007 from the sale of the Groupe Novasepsegment and from the formation of the Viance, LLC joint venture. This waspartially offset by funds received related to the claim settlement between theCompany and the GEA Group in the first quarter of 2008. See Note 6, “Goodwill,”for further details.

 

*FinancingActivities*.  Net cash used in financing activities was $38.6 million and $66.6 million forthe three months ended March 31, 2008 and 2007, respectively, and wascomprised of scheduled payments for long-term debt and revolver payments.

 

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**Liquidity**

 

Our primary source ofliquidity has been and will continue to be cash generated from the operationsof our subsidiaries. Events that have had an impact on our liquidity include:

 

·            On January 2, 2007, CSI, our wholly-ownedsubsidiary and Rohm and Haas Company formed Viance, LLC, a joint venturecompany. We received net cash proceeds of $73.0 million. We also paidapproximately $1.0 million in fees and expenses associated with this transactionand the remainder was used for general corporate purposes.

 

·            On January 9, 2007, we sold our Groupe Novasep segmentand received net cash proceeds of $420.7 million.  The proceeds were usedto redeem our outstanding 2011 Notes (see below) and for general corporatepurposes.

 

·            On February 12, 2007, we completed the sale ofour U.S. wafer reclaim business for approximately $11.0 million in cash and along-term notes receivable. The proceeds were used for general corporatepurposes.

 

·            On May 15, 2007, we redeemed our outstanding 105/8% Senior Subordinated Notes that were due in 2011 in the aggregate principalamount of $273.4 million. In connection with this repayment, we paid redemptionpremiums of $14.5 million.

 

·            On August 31, 2007, we completed the acquisitionof the global color pigments business of Elementis plc for a purchase price of$140.0 million.

 

·            On December 31, 2007, we completed the sale ofour Electronics business, excluding our European wafer reclaim business, andreceived net cash proceeds of $311.0 million. The proceeds will be used forgeneral corporate purposes.

 

·            On March 28, 2008, we received €18.8 million ($29.1 million) fromGEA Group and GEA North America for the settlement of all existing and futurenon-tax related claims resulting from the sale and purchase agreement enteredinto in connection with the Dynamit Nobel Acquisition in April 2004.

 

Our primary liquidityrequirements are working capital, debt service, capital expenditures andacquisitions. Our debt service requirements and other contractual obligationsand commitments over the next several years are significant and aresubstantially higher than historical amounts. We believe that our currentlyavailable sources of liquidity will be sufficient for these needs. Furthermore,any future major acquisitions, business combinations or similar transactionswill likely require additional capital resources. If our present operatingperformance and current market conditions continue, we believe that suchresources will be available to us for certain transactions. We would needaccess to alternative sources of liquidity for larger acquisitions such asthrough additional borrowings, equity issuances or other sources, and we maynot have access to these sources for a variety of reasons. See Item 1, “Business,”and Item 1A, “Risk Factors” in our 2007 Form 10-K.

 

We believe that based oncurrent and anticipated levels of operations and conditions in our industry andmarkets, cash flows from operations and borrowings available under ourrevolving credit facility will be adequate for 2008 and the foreseeable futureto make required payments of principal and interest on our debt and fund ourworking capital and capital expenditure requirements. We continue to takeactions to reduce costs and exit unprofitable businesses, in part to improveour long-term liquidity. We expect this to further improve our short andlong-term liquidity. If our cash flow from operations and borrowings under ourrevolving credit facility are insufficient to fund our currently existingliquidity requirements, we may be forced to use other means available to us,such as to reduce or delay capital expenditures and seek additional capital. Wemay not have adequate capital for future acquisitions, business combinations orsimilar transactions.

 

As of March 31,2008, we had actual total indebtedness of $2,644.2 million. As of March 31,2008, the revolving credit facility under the senior secured credit facilitiesprovided for additional borrowings of up to $250.0 million. As of March 31,2008, there were no outstanding borrowings under the revolving credit facility.

 

As of March 31,2008, we had cash and cash equivalents of $298.1 million primarily from cashfrom operations and the net cash proceeds received from the sale of theElectronics business in December 2007, less cash used for certainselective acquisitions.

 

*Seniorsecured credit facilities.*   The senior secured credit facilities, asamended, consist of:

 

·            tranche A-1 term loans in an aggregate principal amountof €26.1 million (or $41.2 million at March 31, 2008) and tranche A-2 termloans in an aggregate principal amount of €113.6 million (or $179.4 million at March 31,2008), each maturing on July 30, 2011 and bearing interest at AdjustedEURIBOR plus 1.75%;

 

·            tranche E term loans in an aggregate principal amountof $1,110.7 million at March 31, 2008, maturing on July 30, 2012 andbearing interest at the Company’s option of either (i) Adjusted LIBOR plus1.50% or (ii) ABR plus 0.75%. For the three months ended March 31,2008, we have elected to use option (i) Adjusted LIBOR plus 1.50%;

 

·            tranche G term loans in an aggregate principal amountof €266.6 million (or $420.9 million at March 31, 2008) maturing on 

 

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July 30, 2012 andbearing interest of Adjusted LIBOR plus 1.75%; and

 

·            a revolving credit facility in an aggregate principalamount of $250.0 million maturing on July 30, 2010, bearing interestat the Company’s option of either (i) Adjusted LIBOR plus 1.75% or (ii) ABRplus 1.00%. As of March 31, 2008, we had no borrowings outstanding underthis facility and had outstanding letters of credit of $25.7 million thatreduced our availability under the credit facility.

 

The U.S. dollarequivalents of term loans denominated in euros are shown based on the exchangerate on March 31, 2008 of €1.00 = $1.5788. In each case, the interestrates are subject to step-downs determined by reference to a performance test.Adjusted LIBOR is the London inter-bank offered rate adjusted for statutoryreserves. ABR is the alternate base rate, which is the highest of Credit Suisse’sprime rate and the federal funds effective rate plus 0.5%. Tranche A-1 andA-2 term loans are payable in January and July of each year atescalating percentages of the original principal amount. Tranche E andtranche G term loans are payable in January and July of eachyear at amounts equal to 0.5% of the principal amount of the formertranche D term loans and tranche F term loans, respectively, with theremainder due at the final maturity date.

 

The borrowings of ourindirect, wholly-owned subsidiaries, Rockwood Specialties Group, Inc. andRockwood Specialties Limited under the senior secured credit facilities areguaranteed and secured by assets and pledges of capital stock.

 

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

 

*2014Notes.*  The 2014 Notes have an aggregate principal amount of €375.0 million ($592.0million at March 31, 2008) in the case of the Euro notes and $200.0million in the case of the U.S. Dollar notes, and mature on November 15,2014. Interest on the 2014 Notes is payable semi-annually on May 15 and November 15.Interest on the 2014 Notes accrues at the rate of 7.625% in the case of theEuro notes and 7.500% in the case of the U.S. Dollar notes. Certain of ourdomestic subsidiaries guarantee the 2014 Notes on a senior subordinatedunsecured basis.

 

The 2014 Notes containvarious affirmative and restrictive covenants. The restrictive covenants limitour ability, and the ability of our restricted subsidiaries, to, among otherthings, incur or guarantee additional indebtedness (as described below under “CovenantCompliance”), pay dividends or make other equity distributions or repurchasecapital stock, make investments or other restricted payments, create liens,transfer or sell assets, restrict dividends or other payments to us, engage intransactions with affiliates, and merge or consolidate with other companies orsell substantially all of our assets.

 

*Covenantcompliance.*  In addition to the affirmative and restrictive covenants, the senior securedcredit agreement contains the following financial covenants that are determinedbased on our Adjusted EBITDA, which reflects management’s interpretationsthereof:

 

·            a leverage ratio: for the twelve-month period ended March 31,2008, net debt (total debt plus capital lease obligations, minus cash up to amaximum of $100.0 million) to Adjusted EBITDA must be less than 5.00 to 1; forsuch period, our ratio equaled 3.81 to 1; and

 

·            an interest coverage ratio: for the twelve-monthperiod ended March 31, 2008, 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 1.85 to 1; for suchperiod, our ratio equaled 3.97 to 1.

 

Please see Item 7,Management’s Discussion and Analysis of Financial Condition and Results ofOperations—“Definitions of Adjusted EBITDA,” for a discussion of the definitionof Adjusted EBITDA used in calculating our financial covenants.

 

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. Because theindenture governing the 2014 Notes defines an event of default to include,among other things, a default under any other debt obligation in excess of$35.0 million that could cause the acceleration of such obligation, anyacceleration under the senior secured credit agreement would also result in adefault under the indenture governing these notes, which could lead to the noteholders electing to declare the principal, premium, if any, and interest on thethen outstanding notes immediately due and payable. The senior secured creditagreement contains a similar cross default provision for indebtedness in excessof $30.0 million; therefore, a default under the indenture governing the 2014Notes or other indebtedness may likewise cause the lenders to declare theprincipal and interest on the then outstanding senior secured credit facilitiesimmediately due and payable.

 

The indenture governingthe 2014 Notes prohibits us from incurring additional debt, subject to certainpermitted incurrences, unless

 

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the fixed charge coverageratio, which is the ratio of Adjusted EBITDA (as defined therein excludingcertain adjustments permitted under the senior secured credit agreement) tofixed charges (as defined therein), for the most recently ended four fiscal quartersis at least 2.00 to 1. In addition, the indenture prohibits us from makingrestricted payments (such as dividends or other equity distributions,repurchases of capital stock or restricted investments), subject to certainpermitted payments, unless, among other things, the fixed charge coverage ratiofor the most recently ended four fiscal quarters is at least 2.00 to 1. For thefour-fiscal quarter period ended March 31, 2008, the fixed charge coverageratio equaled 3.97 to 1. This covenant is a material term of the indenturegoverning the 2014 Notes.

 

We were in compliancewith all of the above covenants as of March 31, 2008 and December 31,2007.

 

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

 
| ** **                                                                                                             | ** ** | **Three months ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                             | ** ** | **March 31,**               | ** ** |
| **($in millions)**                                                                                                | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Net cash  provided by operating activities from continuing operations                                                  |       | $                                | 27.2       |   | $ | 64.4 |   |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions                |       | 88.5                             |       | 21.6 |   |
| Current portion  of income tax provision                                                                               |       | 12.3                             |       | 11.0 |   |
| Interest  expense, net, excluding amortization of deferred financing costs and  unrealized losses/gains on derivatives |       | 38.4                             |       | 44.7 |   |
| Restructuring  and related charges                                                                                     |       | 0.8                              |       | 4.0 |   |
| Systems/organization  establishment expenses                                                                           |       | 1.2                              |       | 0.9 |   |
| Cancelled  acquisition and disposal costs                                                                              |       | —                           |       | 0.1 |   |
| Cost incurred  related to debt modifications                                                                           |       | —                           |       | 0.9 |   |
| Inventory  write-up reversal                                                                                           |       | 0.4                              |       | — |   |
| Bad debt  provision                                                                                                    |       | (0.3                             | )          | (0.4 | ) |
| Loss (gain) on  sale of assets                                                                                         |       | 0.1                              |       | (0.1 | ) |
| Other                                                                                                                  |       | (0.2                             | )          | (0.1 | ) |
| Total Adjusted  EBITDA                                                                                                 |       | $                                | 168.4      |   | $ | 147.0 |   |

 

***Contractual Obligations***

 

The Company is obligatedto make future payments under various contracts such as debt agreements(including scheduled cash interest payments), operating lease agreements, and unconditionalpurchase obligations. A discussion of these contractual obligations is includedin the Company’s 2007 Form 10-K. Liabilities for unrecognized tax benefitsin the amount of $26.7 million as of December 31, 2007 related toFinancial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 48,*Accounting for Uncertainty in Income Taxes — AnInterpretation of FASB Statement No. 109,* were excluded fromthe Contractual Obligations table as we were unable to make a reasonablyreliable estimate of the period of cash settlement with the respective taxingauthorities. Liabilities for these unrecognized tax benefits are classified asnon-current income tax liabilities (other liabilities) unless expected to bepaid in one year.  There have not been significantchanges to these contractual obligations as of March 31, 2008.

 

***Capital Expenditures***

 

Rockwood’s capitalexpenditures in the first quarter of 2008 consisted primarily of replacementsof worn, obsolete or damaged equipment as well as investments in new equipment.

 

For the three monthsended March 31, 2008 and 2007, our capital expenditures, excluding capitalleases, were $56.1 million and $45.6 million, respectively. Capitalexpenditures for each of our reporting segments are provided in the followingtable:

 
| ** **                    | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **         | ** ** | ** **       | ** ** |
|-------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|--------------------|------------|------------------|------------|
| ** **                    | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | **Corporate**      | ** ** | ** **       | ** ** |
| **($ in millions)** | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **and other** | ** ** | **Consolidated** | ** ** |
| Three months  ended           |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| March 31, 2008           |       | $             | 17.1       |            | $          | 8.8          |       | $            | 11.5       |          | $          | 13.0               |       | $                | 3.5        |   | $ | 2.2 |   | $ | 56.1 |   |
| Three months  ended           |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| March 31,  2007          |       | 15.4          |       | 7.1             |       | 12.3         |       | 8.7          |       | 1.4           |       | 0.7                |       | 45.6             |       |
|                               |            |               |            |                 |            |              |            |              |            |               |            |                    |            |                  |            |  |  |  |  |  |  |  |

 

We may incur future costsfor capital improvements and general compliance under Safety, Health andEnvironmental (“SHE”) laws. 

 

39

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For the year ended December 31,2007, our capital expenditures for SHE matters totaled $29.6 million, excludingcosts to maintain and repair pollution control equipment. For 2008, we estimatecapital expenditures for compliance with SHE laws to be at similar levels;however, because capital expenditures for these matters are subject to changesin and new SHE laws, we cannot provide assurance that our recent expenditureswill be indicative of future amounts required to comply with these laws,including the EU’s Registration, Evaluation and Authorization of Chemicals (“REACH”)legislation.  See Note 15, “Commitments and Contingencies,” “RegulatoryDevelopments” for a discussion of REACH.

 

***Foreign currency related transactions***

 

As of March 31,2008, based on the March 31, 2008 exchange rate of €1.00 = $1.5788,$1,296.7 million of the debt outstanding is denominated in euros.

 

**RecentAccounting Pronouncements**

 

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

 

**Off-BalanceSheet Arrangements**

 

In the normal course ofbusiness, the Company incurs obligations which include guarantees related tocontract completion, regulatory compliance and product performance. Undercertain circumstances, these obligations are supported through the issuance ofletters of credit and other bank guarantees. As of March 31, 2008, theCompany had approximately $30.8 million of letters of credit and other bankguarantees, of which $25.9 million will expire in 2008 through 2012. Theremaining guarantees have no specified expiration date. This amount includesoutstanding letters of credit of $25.7 million that reduced our availabilityunder the senior secured credit facility. In the opinion of management, such obligationswill not significantly affect the Company’s financial position, results ofoperations or cash flows as the Company anticipates fulfilling its performanceobligations.

 

**Commitmentsand Contingencies**

 

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

 

**CriticalAccounting Policies and Estimates**

 

Our discussion andanalysis of our financial condition and results of operations are based uponour condensed consolidated financial statements, which have been prepared inaccordance with U.S. GAAP. The preparation of these financial statementsrequires us to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and the related disclosure 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 in accordancewith FIN 48;

 

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

 

·            the useful lives of tangible and intangible assets.

 

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

 

The significantaccounting policies of the Company are described in Note 1,”Description ofBusiness and Summary of Significant Accounting Policies,” to the unauditedcondensed consolidated financial statements and the critical accountingpolicies and estimates are described in the “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” section in the Company’s2007 Form 10-K. There have been no significant changes to these criticalaccounting policies and estimates as of March 31, 2008.

 

**Forward-LookingStatements**

 

This document containsforward-looking statements. Forward-looking statements 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,” 

 

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“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;

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

·            fluctuations in interest rates, exchange rates andcurrency values;

·            availability and pricing of raw materials;

·            fluctuations in energy prices;

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

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

·            technological changes affecting production of our materials;

·            governmental and environmental regulations and changesin those regulations;

·            hazards associated with chemicals manufacturing;

·            our high level of indebtedness;

·            risks associated with negotiating, consummating andintegrating acquisitions;

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

·            risks associated with international sales andoperations.

 

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

 

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

 

We are exposed to marketrisk from changes in interest rates, foreign currency exchange rates andcommodity prices. We manage our exposure to these market risks through regularoperating and financing activities and through the use of derivatives. Whenused, derivatives are employed as risk management tools and not for tradingpurposes. A discussion and analysis of the Company’s market risk isincluded in the Company’s 2007 Form 10-K. There have been no significantchanges to these market risks as of March 31, 2008.

 

**Item4.  Controls and Procedures**

 

Our management, with theparticipation of our Chief Executive Officer and Chief Financial Officer,evaluated the effectiveness of the design and operation of our disclosurecontrols and procedures as of March 31, 2008 and concluded that ourdisclosure controls and procedures are effective. In connection with thisevaluation, our management did not identify any change in our internal controlover financial reporting that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting during thefirst quarter of 2008.

 

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**PART II — OTHER INFORMATION**

 

**Item1.  Legal Proceedings.**

 

We are involved in legalproceedings from time to time in the ordinary course of our business, includingwith respect to product liability, intellectual property and environmentalmatters. In addition, we may be required to make indemnity payments inconnection with certain product liability and environmental claims. See Item 1,“Business,” and Item 1A, “Risk Factors,” “Environmental Indemnities—We maybe subject to environmental indemnity claims relating to properties we havedivested”; “Product Liability— Due to the nature of our business and products,we may be liable for damages arising out of product liability claims”; and “ProductLiability—Due to the nature of our business and products, we may be liable fordamages arising out of certain indemnity claims” in our 2007 Form 10-K.  However, we do not believe that there is anyother individual, governmental, legal proceeding or arbitration that is likelyto have a material adverse effect on our business, results of operations, cashflows or financial condition.  We cannot predict the outcome of anylitigation or the potential for future litigation.

 

In April 2005, HospiraIncorporated filed suit in Mecklenburg County, North Carolina Superior Courtagainst one of our wholly-owned subsidiaries in our Specialty Compounds segmentalleging claims for negligence, negligent misrepresentation, estoppel, fraud,third party beneficiary breach of contract and unfair trade practices as aresult of our subsidiary providing PVC compound to its customer. Hospira isseeking 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 seeks 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 has appealed this decision and wecannot predict how this decision will impact the ultimate resolution of thecase; however, we will continue to vigorously defend this matter. While webelieve our subsidiary has meritorious defenses against Hospira’s claims and donot believe that resolution of this matter will have a material adverse effecton our business or financial condition, we cannot predict the ultimate outcomeof this litigation and resolution of this claim may have a material adverseeffect on our results of operations or cash flows in any quarterly or annualreporting period.

 

In addition, a subsidiaryin our Specialty Chemicals segment that formerly manufactured sealants forinsulating glass and resins for laminated glass has been named as a defendantin several lawsuits relating to alleged negligent manufacturing of thoseproducts. Pursuant to the sale and purchase agreement with respect to the divested“glass” business, this subsidiary may be required to pay indemnity claimsrelated to these lawsuits. Although we expect our subsidiary to have coverageunder its product liability insurance policies should damages ultimately beawarded or agreed to, in such an event, its insurance may not cover such claimsand, if not, our subsidiary may not have sufficient cash flow to pay theseclaims. Although we do not believe that resolution of this matter will have amaterial adverse effect on our business or financial condition, we cannotpredict the ultimate outcome of this litigation, and the resolution of one ormore of these claims may have a material adverse effect on our results ofoperations or cash flows in any quarterly or annual reporting period.

 

Further, a customer ofour Advanced Ceramics business has been named in a class action lawsuit in NewJersey relating to a prosthesis hip replacement system using ceramiccomponents. The lawsuit alleges a violation of the Consumer Fraud Act, designdefect, breach of warranty and negligence based on the customer’s design andmanufacture of hip implant systems. While our subsidiary has not been named inthis litigation, we cannot predict whether this action will affect our cashflows or results of operations.

 

**Item1A. Risk Factors.**

 

A discussion of theCompany’s risk factors is included in the Company’s Form 10-K for the yearended December 31, 2007. There have been no significant changes to theserisk factors.

 

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

 

None.

 

**Item3.  Defaults upon Senior Securities.**

 

None.

 

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

 

None.

 

**Item5.  Other Information.**

 

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None.

 

**Item6.  Exhibits.**

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

 

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**SIGNATURES**

 

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

 

 
|   | ROCKWOOD  HOLDINGS, INC. |
|--------|-------------------------------|
|   |                          |
|   |                          |
|   | By:                           | /s/ SEIFI GHASEMI |
|   |                          | Seifi Ghasemi |
|   |                          | Chairman of the Board  and Chief Executive Officer |
|   |                          | Date: May 6, 2008 |
|   |                          |   |
|   |                          |
|   | ROCKWOOD  HOLDINGS, INC. |
|   |                          |
|   |                          |
|   | By:                           | /s/ ROBERT J. ZATTA |
|   |                          | Robert J. Zatta |
|   |                          | Senior Vice President  and Chief Financial Officer |
|   |                          | Date: May 6, 2008 |

 

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