**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM10-Q**

**x****                             ****QUARTERLY REPORT PURSUANT TO SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**Forthe quarterly period ended March 31, 2007**

**Or**

**o****                                ****TRANSITION REPORT PURSUANT TO SECTION13 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 bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.      x Yes      o No

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

| Large accelerated filer     x |   | Accelerated filer    o |   | Non-accelerated filer     o |
|--------------------------------------------------------|--------|--------------------------------------------|--------|--------------------------------------------------------------|

 

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, 2007, therewere 73,794,346 outstanding shares of common stock, par value $0.01 per share,of the Registrant.

 

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**TABLE OFCONTENTS**

**FORM10-Q**
|          | PART  I- FINANCIAL INFORMATION                                                                      | 3      |
|----------|-----------------------------------------------------------------------------------------------------|--------|
| Item 1   | Financial  Statements (Unaudited)                                                                   | 3      |
|     | Condensed Consolidated Statements of Operations for  the three months ended March 31, 2007 and 2006 | 3      |
|     | Condensed Consolidated Balance Sheets as of March 31,  2007 and December 31, 2006                   | 4      |
|     | Condensed Consolidated Statements of Cash Flows for  the three months ended March 31, 2007 and 2006 | 5      |
|     | Notes to  Condensed Consolidated Financial Statements                                               | 6      |
| Item 2   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations         | 24     |
| Item 3   | Quantitative  and Qualitative Disclosures about Market Risk                                         | 40     |
| Item 4   | Controls and  Procedures                                                                            | 40     |
|     |                                                                                                |   |
|     | PART II- OTHER  INFORMATION                                                                         | 41     |
| Item 1   | Legal Proceedings                                                                                   | 41     |
| Item  1A | Risk  Factors                                                                                       | 41     |
| Item 2   | Unregistered  Sales of Equity Securities and Use of Proceeds                                        | 41     |
| Item 3   | Defaults Upon  Senior Securities                                                                    | 41     |
| Item 4   | Submission of  Matters to a Vote of Security Holders                                                | 41     |
| Item 5   | Other Information                                                                                   | 41     |
| Item  6  | Exhibits                                                                                            | 41     |
|     |                                                                                                |   |
|     | Signatures                                                                                          | 42     |

 

2

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**PART I – FINANCIAL INFORMATION**

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

**ROCKWOODHOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

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

**sharesin thousands)**

**(Unaudited)**
| ** **                                                            | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                            | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Net sales                                                             |       | $                                                | 796.1      |   | $ | 724.1 |   |
| Cost of products sold                                                 |       | 539.1                                            |       | 498.3 |   |
| Gross profit                                                          |       | 257.0                                            |       | 225.8 |   |
| Selling, general and  administrative expenses                         |       | 154.8                                            |       | 140.6 |   |
| Restructuring charges,  net                                           |       | 4.5                                              |       | 1.2 |   |
| Gain on sale of assets                                                |       | (4.8                                             | )          | (0.5 | ) |
| Operating income                                                      |       | 102.5                                            |       | 84.5 |   |
| Other income  (expenses):                                             |       |                                             |       |   |   |
| Interest expense                                                      |       | (54.7                                            | )          | (39.8 | ) |
| Interest income                                                       |       | 5.1                                              |       | 1.4 |   |
| Refinancing expenses                                                  |       | (0.9                                             | )          | — |   |
| Foreign exchange gain  (loss), net                                    |       | 0.4                                              |       | (2.9 | ) |
| Other, net                                                            |       | (0.1                                             | )          | 1.6 |   |
| Net                                                                   |       | (50.2                                            | )          | (39.7 | ) |
| Income from continuing  operations before taxes and minority interest |       | 52.3                                             |       | 44.8 |   |
| Income tax provision                                                  |       | 22.0                                             |       | 18.3 |   |
| Income from continuing  operations before minority interest           |       | 30.3                                             |       | 26.5 |   |
| Minority interest in  continuing operations                           |       | (1.1                                             | )          | — |   |
| Net income from  continuing operations                                |       | 29.2                                             |       | 26.5 |   |
| Income from  discontinued operations, net of tax                      |       | 0.5                                              |       | 16.5 |   |
| Gain on sale of  discontinued operations, net of tax                  |       | 115.7                                            |       | — |   |
| Minority interest in  discontinued operations                         |       | (0.1                                             | )          | (3.0 | ) |
| Net income                                                            |       | $                                                | 145.3      |   | $ | 40.0 |   |
|                                                                  |       |                                             |       |   |   |
| Basic earnings per  share:                                            |       |                                             |       |   |   |
| Earnings from  continuing operations                                  |       | $                                                | 0.40       |   | $ | 0.36 |   |
| Earnings from  discontinued operations, net of tax                    |       | 1.57                                             |       | 0.18 |   |
| Basic earnings  per share                                             |       | $                                                | 1.97       |   | $ | 0.54 |   |
|                                                                  |       |                                             |       |   |   |
| Diluted earnings per  share:                                          |       |                                             |       |   |   |
| Earnings from  continuing operations                                  |       | $                                                | 0.39       |   | $ | 0.35 |   |
| Earnings from  discontinued operations, net of tax                    |       | 1.54                                             |       | 0.18 |   |
| Diluted earnings  per share                                           |       | $                                                | 1.93       |   | $ | 0.53 |   |
|                                                                  |       |                                             |       |   |   |
| Weighted average number  of basic shares outstanding                  |       | 73,786                                           |       | 73,779 |   |
| Weighted average number  of diluted shares outstanding                |       | 75,392                                           |       | 74,966 |   |

 

See accompanying notes to condensed consolidatedfinancial statements.

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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,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                             | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| **ASSETS**                                                                                                                                                                                                                             |       |               |       |                  |       |
| Current assets:                                                                                                                                                                                                                        |       |               |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                                             |       | $                  | 491.4      |                  | $          | 27.7 |   |
| Accounts receivable,  net                                                                                                                                                                                                              |       | 519.2              |       | 463.4                 |       |
| Inventories                                                                                                                                                                                                                            |       | 453.0              |       | 445.4                 |       |
| Deferred income taxes                                                                                                                                                                                                                  |       | 8.2                |       | 9.7                   |       |
| Prepaid expenses and  other current assets                                                                                                                                                                                             |       | 39.0               |       | 43.1                  |       |
| Assets of discontinued  operations                                                                                                                                                                                                     |       | —             |       | 490.6                 |       |
| Total current  assets                                                                                                                                                                                                                  |       | 1,510.8            |       | 1,479.9               |       |
| Property, plant and  equipment, net                                                                                                                                                                                                    |       | 1,379.7            |       | 1,374.9               |       |
| Goodwill                                                                                                                                                                                                                               |       | 1,721.8            |       | 1,717.7               |       |
| Other intangible  assets, net                                                                                                                                                                                                          |       | 629.0              |       | 539.6                 |       |
| Deferred debt issuance  costs, net of accumulated amortization of $28.0 and $25.4, respectively                                                                                                                                        |       | 49.6               |       | 51.6                  |       |
| Other assets                                                                                                                                                                                                                           |       | 60.0               |       | 59.1                  |       |
| Total assets                                                                                                                                                                                                                           |       | $                  | 5,350.9    |                  | $          | 5,222.8 |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                                                         |       |               |       |                  |       |
| Current liabilities:                                                                                                                                                                                                                   |       |               |       |                  |       |
| Accounts payable                                                                                                                                                                                                                       |       | $                  | 249.5      |                  | $          | 290.3 |   |
| Income taxes payable                                                                                                                                                                                                                   |       | 8.0                |       | 0.2                   |       |
| Accrued compensation                                                                                                                                                                                                                   |       | 94.1               |       | 85.9                  |       |
| Restructuring liability                                                                                                                                                                                                                |       | 11.7               |       | 8.5                   |       |
| Accrued expenses and  other current liabilities                                                                                                                                                                                        |       | 183.2              |       | 180.7                 |       |
| Senior secured  revolving credit facility                                                                                                                                                                                              |       | —             |       | 37.0                  |       |
| Long-term debt, current  portion                                                                                                                                                                                                       |       | 361.9              |       | 80.8                  |       |
| Liabilities of  discontinued operations                                                                                                                                                                                                |       | —             |       | 171.1                 |       |
| Total current  liabilities                                                                                                                                                                                                             |       | 908.4              |       | 854.5                 |       |
| Long-term debt                                                                                                                                                                                                                         |       | 2,423.6            |       | 2,720.9               |       |
| Pension and related  liabilities                                                                                                                                                                                                       |       | 358.5              |       | 353.0                 |       |
| Deferred income taxes                                                                                                                                                                                                                  |       | 46.8               |       | 43.1                  |       |
| Other liabilities                                                                                                                                                                                                                      |       | 150.1              |       | 97.2                  |       |
| Total  liabilities                                                                                                                                                                                                                     |       | 3,887.4            |       | 4,068.7               |       |
| Minority interest                                                                                                                                                                                                                      |       | 176.1              |       | 33.6                  |       |
|                                                                                                                                                                                                                                   |       |               |       |                  |       |
| Stockholders’ equity:                                                                                                                                                                                                             |       |               |       |                  |       |
| Common stock ($0.01 par  value, 400,000 shares authorized, 73,880 shares issued and 73,786 shares  outstanding at March 31, 2007; 400,000 shares authorized, 73,879 shares  issued and 73,785 shares outstanding at December 31, 2006) |       | 0.7                |       | 0.7                   |       |
| Paid-in capital                                                                                                                                                                                                                        |       | 1,151.8            |       | 1,151.8               |       |
| Accumulated other  comprehensive income                                                                                                                                                                                                |       | 263.0              |       | 234.0                 |       |
| Accumulated deficit                                                                                                                                                                                                                    |       | (126.7             | )          | (264.6                | )          |
| Treasury stock, at cost                                                                                                                                                                                                                |       | (1.4               | )          | (1.4                  | )          |
| Total  stockholders’ equity                                                                                                                                                                                                       |       | 1,287.4            |       | 1,120.5               |       |
| Total liabilities and  stockholders’ equity                                                                                                                                                                                       |       | $                  | 5,350.9    |                  | $          | 5,222.8 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

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**ROCKWOODHOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Dollarsin millions)**

**(Unaudited)**
| ** **                                                                                              | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                              | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                                              |       |                                             |       |   |   |
| Net income                                                                                              |       | $                                                | 145.3      |   | $ | 40.0 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:                      |       |                                             |       |   |   |
| Income from  discontinued operations, net of tax                                                        |       | (0.5                                             | )          | (16.5 | ) |
| Gain on sale of  discontinued operations, net of tax                                                    |       | (115.7                                           | )          | — |   |
| Minority  interest in discontinued operations                                                           |       | 0.1                                              |       | 3.0 |   |
| Depreciation and  amortization                                                                          |       | 53.2                                             |       | 43.7 |   |
| Deferred  financing costs amortization                                                                  |       | 2.4                                              |       | 2.3 |   |
| Foreign exchange  (gain) loss                                                                           |       | (0.4                                             | )          | 2.9 |   |
| Fair value  adjustment of derivatives                                                                   |       | 2.8                                              |       | (10.7 | ) |
| Bad debt  provision                                                                                     |       | 0.6                                              |       | 0.6 |   |
| Deferred income  taxes                                                                                  |       | 9.9                                              |       | 7.4 |   |
| Gain on sale of  assets                                                                                 |       | (4.8                                             | )          | (0.5 | ) |
| Minority  interest in continuing operations                                                             |       | 1.1                                              |       | — |   |
| Changes in assets and liabilities,  net of the effect of foreign currency translation and acquisitions: |       |                                             |       |   |   |
| Accounts  receivable                                                                                    |       | (54.2                                            | )          | (57.4 | ) |
| Inventories,  including inventory write-up reversal                                                     |       | (5.0                                             | )          | 1.3 |   |
| Prepaid expenses  and other assets                                                                      |       | (1.5                                             | )          | 7.0 |   |
| Accounts payable                                                                                        |       | (25.3                                            | )          | (14.2 | ) |
| Income taxes  payable                                                                                   |       | 6.9                                              |       | 8.2 |   |
| Accrued expenses  and other liabilities                                                                 |       | 54.2                                             |       | (22.9 | ) |
| Net cash provided by  (used in) operating activities of continuing operations                           |       | 69.1                                             |       | (5.8 | ) |
| Net cash  provided by operating activities of discontinued operations                                   |       | 1.6                                              |       | 53.4 |   |
| **Net  cash provided by operating activities**                                                          |       | 70.7                                             |       | 47.6 |   |
| ** **                                                                                              |       |                                             |       |   |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                                              |       |                                             |       |   |   |
| Acquisitions, including  transaction fees paid, net of cash acquired                                    |       | (2.1                                             | )          | — |   |
| Capital expenditures,  excluding capital leases                                                         |       | (47.3                                            | )          | (37.2 | ) |
| Proceeds from formation  of Viance joint venture                                                        |       | 76.6                                             |       | — |   |
| Proceeds from sale of  discontinued operations                                                          |       | 426.2                                            |       | — |   |
| Proceeds on sale of  property, plant and equipment                                                      |       | 9.9                                              |       | 2.4 |   |
| Net cash provided by  (used in) investing activities of continuing operations                           |       | 463.3                                            |       | (34.8 | ) |
| Net cash used in  investing activities of discontinued operations                                       |       | —                                           |       | (8.3 | ) |
| **Net  cash provided by (used in) investing activities**                                                |       | 463.3                                            |       | (43.1 | ) |
| ** **                                                                                              |       |                                             |       |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                                              |       |                                             |       |   |   |
| Proceeds from senior  secured credit facilities                                                         |       | —                                           |       | 45.2 |   |
| Repayment of senior  secured credit facilities                                                          |       | (65.0                                            | )          | (70.1 | ) |
| Payments on other  long-term debt                                                                       |       | (1.6                                             | )          | (0.9 | ) |
| Net cash used in  financing activities of continuing operations                                         |       | (66.6                                            | )          | (25.8 | ) |
| Net cash used in  financing activities of discontinued operations                                       |       | —                                           |       | (36.4 | ) |
| **Net  cash used in financing activities**                                                              |       | (66.6                                            | )          | (62.2 | ) |
| ** **                                                                                              |       |                                             |       |   |   |
| Effect of exchange rate  changes on cash and cash equivalents                                           |       | (2.1                                             | )          | (1.1 | ) |
| Net increase (decrease)  in cash and cash equivalents                                                   |       | 465.3                                            |       | (58.8 | ) |
| Cash and cash  equivalents, beginning of period                                                         |       | 27.7                                             |       | 100.5 |   |
| Cash and cash  equivalents, end of period                                                               |       | 493.0                                            |       | 41.7 |   |
| Less cash and cash  equivalents of discontinued operations                                              |       | (1.6                                             | )          | (8.0 | ) |
| Cash and cash  equivalents of continuing operations, end of period                                      |       | $                                                | 491.4      |   | $ | 33.7 |   |
|                                                                                                    |       |                                             |       |   |   |
| Supplemental  disclosures of cash flow information:                                                     |       |                                             |       |   |   |
| Interest paid, net                                                                                      |       | $                                                | 25.1       |   | $ | 17.2 |   |
| Income taxes paid, net  of refunds                                                                      |       | $                                                | 5.2        |   | $ | 2.7 |   |
| Non-cash investing  activities:                                                                         |       |                                             |       |   |   |
| Acquisition of  equipment under capital leases                                                          |       | $                                                | 0.2        |   | $ | — |   |
| Increase in liabilities for property, plant and equipment                                               |       | $                                                | (13.1      | ) | $ | (13.6 | ) |

 

See accompanyingnotes to condensed consolidated financial statements.

5

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**ROCKWOODHOLDINGS, INC. AND SUBSIDIARIES**

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

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

***Business Description, Background***—Rockwood Holdings, Inc. and Subsidiaries (“Rockwood” or the “Company”) is aglobal developer, manufacturer and marketer of high value-added specialtychemicals and advanced materials used for industrial and commercial purposes.

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”). The businessesacquired focused on specialty compounds, iron-oxide pigments, timber-treatmentchemicals, clay-based additives, pool and spa chemicals, and electronicchemicals in semiconductors and printed circuit boards.

On July 31, 2004, theCompany completed the acquisition of certain businesses of Dynamit Nobel frommg technologies ag, now known as GEA Group Aktiengesellschaft. The businessesacquired are focused on highly specialized markets and consist of: titanium dioxidepigments; surface treatment and lithium chemicals; and advanced ceramics.

On January 9, 2007, theCompany completed the sale of its Groupe Novasep subsidiary which representedone of its reportable segments. As a result, the condensed consolidatedfinancial statements have been reclassified to reflect the former GroupeNovasep segment as a discontinued operation for all periods presented. See Note2, “Discontinued Operations,” for further details.

***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-year balances have been reclassifiedto conform to current year presentation.

The interim financialstatements included herein are unaudited. 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 2006 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 results of operationsfor the interim periods are not necessarily indicative of the results ofoperations for the full year.

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. See Note 3, “Viance, LLC Joint Venture,” for furtherdetails.  In the condensed consolidatedbalance sheet, the minority interest balance as of December 31, 2006 relates tothe former Groupe Novasep segment that was sold in January 2007.

***Nature of Operations/Segment Reporting***—The Company is a global developer, manufacturer and marketer of highvalue-added specialty chemicals and advanced materials. The Company operates invarious business lines within its six reportable segments consisting of: (1)Specialty Chemicals, which includes lithium compounds and chemicals, metalsurface treatment 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, (5)Specialty Compounds, which consists of plastic compounds and (6) Electronics,which consists of electronic chemicals and photomasks.

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 4, “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 theuseful lives of tangible and intangible assets, among others. Actual resultscould differ from those estimates. Such estimates also

6

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include the fair value ofassets acquired and liabilities assumed allocated to the purchase price ofbusiness 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’s reportedresults of operations and financial position. In addition, a significantportion 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 2006 Form 10-K in Item 13, “Certain Relationships and RelatedTransactions, and Director Independence.” There have been no significantchanges to our related party transactions as of March 31, 2007.

***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 revenues in 2006, is realized when the service is performed.

***Foreign Currency Translation***—The functionalcurrency of each of the Company’s foreign subsidiaries is primarily therespective local currency. Balance sheet accounts of the foreign operations aretranslated 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) are included indetermining net income for the period in which exchange rates change, exceptfor gains or losses on certain intercompany transactions that are of a long-terminvestment nature for which settlement is not planned or anticipated in theforeseeable future and gains or losses on euro-denominated debt that isdesignated as a net investment hedge of the Company’s euro-denominatedinvestments which are reported and accumulated in the same manner astranslation adjustments.

***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” sectionof Note 1 for the impact of the Company’s net investment hedges. The Companydoes not 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*  andSFAS 158,*Employers’ Accounting for DefinedBenefit Pension and Other Postretirement Plans, an amendment of FASB StatementsNo. 87, 88, 106 and 132 (R)*. Other postretirement benefit costs andliabilities have been determined in accordance with SFAS 106,*  Employers’Accounting for Postretirement Benefits Other Than Pensions*  and SFAS 158,*  Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans, an amendment of FASB Statements No. 87,88, 106 and 132 (R).* Postemployment benefit costs and liabilitieshave 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*andFinancial Accounting Standards Board (“FASB”) Interpretation (“FIN”)No. 48*, Accounting for Uncertainty inIncome Taxes—An Interpretation of FASB Statement No. 109*.Deferred tax assets and liabilities are recognized for future tax consequencesattributable to differences between the financial statement carrying amountsand the corresponding tax carrying amounts of assets and liabilities. Deferredtax assets are also recognized for tax loss and tax credit carryforwards. Avaluation allowance is recorded to reduce deferred tax assets when it is morelikely than not that a tax benefit will not be realized based on available evidenceweighted toward evidence that is objectively verifiable. Deferred taxes are notprovided on the undistributed earnings of subsidiaries as such amounts areconsidered to be permanently invested or could be distributed to the parentcompany in a tax free manner.

***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 aswell as minimum pension liability adjustments that are recorded directly into aseparate section of stockholders’ equity in the balance sheets. Also includedare the net investment hedges discussed below. Foreign currency translationamounts are not adjusted for income taxes since they relate to indefinitelength investments in non-U.S. subsidiaries and certain intercompany debt.

7

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Comprehensive income issummarized as follows:
|                                             | ** ** | **Three months ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|
| ** **                                  | ** ** | **March 31,**               | ** ** |
| **($ in millions)**               | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Net income                                  |       | $                                | 145.3      |   | $ | 40.0 |   |
| Pension related  adjustments, net of tax    |       | 0.5                              |       | 4.6 |   |
| Foreign currency  translation               |       | 36.8                             |       | 25.4 |   |
| Intercompany  foreign currency transactions |       | 2.1                              |       | 31.6 |   |
| Net investment  hedge, net of tax           |       | (10.4                            | )          | (25.3 | ) |
| Total comprehensive income                  |       | $                                | 174.3      |   | $ | 76.3 |   |

 

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, 2007. The Company does not expectany of the loss on the net investment hedge residing in comprehensive income atMarch 31, 2007 to be reclassified into earnings during the subsequent twelvemonths.

In addition, wedesignated the remaining portion of our euro-denominated debt that is recordedon our U.S. books as a net investment hedge of our euro-denominated investmentsas of October 1, 2005 (euro-denominated debt of €680.9 million or $909.3million based on the Friday, March 30, 2007 exchange rate of €1.00 = $1.3354).As a result, effective October 1, 2005, any foreign currency gains and lossesresulting from the euro-denominated debt discussed above are accounted for as acomponent of accumulated other comprehensive income. There was no ineffectiveportion of the net investment hedge as of March 31, 2007. The Company does notexpect any of the loss on the net investment hedge residing in comprehensiveincome at March 31, 2007 to be reclassified into earnings during the subsequenttwelve months.

***Accounting for Environmental Liabilities***—In the ordinary course of business, Rockwood is subject to extensive andchanging federal, state, local and foreign environmental laws and regulations,and has made provisions for the estimated financial impact of environmentalcleanup related costs. Rockwood’s policy has been to accrue costs of anon-capital nature related to environmental clean-up when those costs arebelieved to be probable and can be reasonably estimated. If the aggregateamount of the obligation and the amount and timing of the cash payments for asite are fixed or reliably determinable, the liability is discounted.Expenditures that extend the life of the related property or mitigate orprevent future environmental contamination are capitalized and expendituresrelated to existing conditions resulting from past or present operations andfrom which no current or future benefit is discernible are immediatelyexpensed. The quantification of environmental exposures requires an assessmentof many factors, including changing laws and regulations, advancements inenvironmental technologies, the quality of information available related tospecific sites, the assessment stage of each site investigation and the lengthof time involved in remediation or settlement. In some matters, Rockwood mayshare costs with other parties. Rockwood does not include anticipatedrecoveries from insurance carriers or other third parties in its accruals forenvironmental 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 ofRockwood Holdings, Inc. and Subsidiaries (the “Plan”). Under the Plan, theCompany may grant stock options, restricted stock and 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 Company adoptedSFAS No. 123R,*Share-Based Payment*,and related interpretations and began expensing the grant-date fair value ofstock options.

The Company adopted SFASNo. 123R using the modified prospective approach and therefore has not restatedprior periods. In accordance with SFAS No. 123R, beginning in the first quarterof 2006, the Company recorded compensation cost for the unvested portion ofawards issued after February 2005, which is the date it first filed itsregistration statement with the Securities and Exchange Commission (“SEC”), andfor any awards modified, repurchased or cancelled after this date.  The compensation cost recorded under the Plancaused income before taxes to decrease by less than $0.1 million for the threemonths ended March 31, 2007 and 2006. There were no options granted in thefirst quarter of 2007.

8

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***Recent Accounting Pronouncements***—TheCompany adopted the following in the first quarter of 2007:

In June 2006, a finalconsensus was reached on Emerging Issues Task Force (“EITF”) Issue No. 06-3,*HowTaxes Collected From Customers and Remitted toGovernmental Authorities Should Be Presented in the Income Statement (That Is,Gross Versus Net Presentation).* The scope of this Issue includes anytax assessed by a governmental authority that is directly imposed on arevenue-producing transaction between a seller and a customer and may include,but is not limited to, sales, use, value added, and some excise taxes. ThisIssue affirms that the presentation of taxes in the income statement should beon either a gross (included in revenues and costs) or a net (excluded fromrevenues) basis and that this is an accounting policy decision that should bedisclosed pursuant to APB Opinion No. 22. In addition, if such taxes aresignificant and reported on a gross basis, the amounts of those taxes should bedisclosed in interim and annual financial statements. The Company adopted thisEITF in the first quarter of 2007 and has adopted an accounting policy thatrequires taxes collected from customers and remitted to governmentalauthorities to be reported on a net basis (excluded from revenues). Theadoption of this EITF did not have a material impact on the Company’s financialstatements.

In July 2006, FIN 48,*Accounting for Uncertainty in Income Taxes*—*An Interpretation of FASB Statement No. 109*,was issued. FIN 48 clarifies the accounting for uncertainty in income taxesrecognized in an enterprise’s financial statements in accordance with FASBStatement No. 109. FIN 48 also prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. The provisionsof FIN 48 are effective for fiscal years beginning after December 15, 2006. TheCompany adopted this interpretation in the first quarter of 2007.  See Note 9, “Income Taxes,” for the impact ofadopting this interpretation. In May 2007, the FASB issued Staff Position (FSP)FIN 48-1, *“Definition of Settlement in FASBInterpretation No. 48.”* This FSP amends FIN 48 to provideguidance on how an enterprise should determine whether a tax provision iseffectively settled for the purpose of recognizing previously unrecognized taxbenefits. The adoption of this FSP did not have an impact on the Company’sfinancial statements.

In September 2006, theFASB issued FASB Staff Position (“FSP”) No. AUG AIR-1,*Accounting for Planned Major Maintenance Activities*.This FSP prohibits the use of the accrue-in-advance method of accounting forplanned major maintenance activities in annual and interim financial reportingperiods. It continues to permit the application of three alternative methods ofaccounting for planned maintenance activities: direct expense,built-in-overhaul and deferral methods. In addition, this FSP requiresdisclosure of the method of accounting for planned maintenance activitiesselected. The Company adopted this FSP in the first quarter of 2007 and hasadopted an accounting policy that requires planned major maintenance activitiesto be accounted for under the direct-expense method. The adoption of this FSPdid not have a material impact on the Company’s financial statements.

The Company will adoptthe following standards on January 1, 2008:

In September 2006, SFASNo. 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. This statement is effective for theCompany as of January 1, 2008. The Company is currently evaluating the impactthis statement will have on its financial statements.

In February 2007, SFASNo. 159,*The Fair Value Option for FinancialAssets and Financial Liabilities*—*Includingan Amendment of FASB Statement No. 115*. This standard permits anentity to choose to measure many financial instruments and certain other itemsat fair value. The fair value option established by this standard 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 is currently evaluating the impact this statement will haveon its financial statements.

**2.DISCONTINUED OPERATIONS:**

On January 9, 2007, theCompany completed the sale of its Groupe Novasep subsidiary. The transactionwas valued at approximately €425 million, which included the repayment of thirdparty and intercompany indebtedness. As of December 31, 2006, the Company metthe criteria for reporting the pending sale of its Groupe Novasep subsidiary asan asset held for sale and discontinued operations pursuant to SFAS No. 144,*“Accounting for the Impairment or Disposal ofLong-Lived Assets.”* The Company’s financial statements reflect theGroupe Novasep subsidiary as a discontinued operation for all periodspresented.

9

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Operating results of thediscontinued operations are as follows:
|                                                   | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------|------------|
| **($ in millions)**                     | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Net sales                                         |       | $                                                | 8.9        |   | $ | 88.5 |   |
| Cost of products  sold                            |       | 7.0                                              |       | 64.6 |   |
| Gross profit                                      |       | 1.9                                              |       | 23.9 |   |
| Selling, general  and administrative expenses     |       | 1.0                                              |       | 16.4 |   |
| (Gain) loss on  sale of business/assets           |       | (117.7                                           | )          | 12.0 |   |
| Operating income (loss)                           |       | 118.6                                            |       | (4.5 | ) |
| Other income  (expenses):                         |       |                                             |       |   |   |
| Interest expense,  net                            |       | (0.3                                             | )          | (0.7 | ) |
| Foreign exchange  gain, net                       |       | —                                           |       | 0.3 |   |
| Net                                               |       | (0.3                                             | )          | (0.4 | ) |
| Income (loss)  before taxes and minority interest |       | 118.3                                            |       | (4.9 | ) |
| Income tax  provision (benefit)                   |       | 2.1                                              |       | (21.4 | ) |
| Net income before minority interest               |       | 116.2                                            |       | 16.5 |   |
| Minority  interest                                |       | (0.1                                             | )          | (3.0 | ) |
| Net income                                        |       | $                                                | 116.1      |   | $ | 13.5 |   |

 

The Company received netcash proceeds of $426.2 million in the first quarter of 2007 from the sale ofGroupe Novasep.  The Company expects toincur additional professional fees of approximately $2.9 million related tothis sale.  The net gain on the salerecorded in the first quarter of 2007 is $115.7 million (net of$2.0 million of German taxes).

In connection with thesale of Rohner AG, a subsidiary in the Company’s former Groupe Novasep segment,the Company recorded a pre-tax loss of $12.1 million in the first quarter of2006, representing consideration given less the remaining net liabilities ofRohner, which were transferred to the purchaser.

**3.****                  VIANCE, LLCJOINT VENTURE:**

On January 2, 2007,Chemical Specialties, Inc. (“CSI”), a wholly-owned subsidiary of the Companywithin the Timber Treatment Chemicals business of the Performance Additives segment,and Rohm and Haas Company completed the formation of Viance, LLC, a joint venturecompany that provides an extensive range of advanced wood treatmenttechnologies and services to the global wood treatment industry. Viance isjointly-owned by CSI and Rohm and Haas and was formed through the contributionby CSI and its related subsidiaries of their wood protection chemicals businessand the contribution by Rohm and Haas of its wood biocides business and cash of$76.6 million. The assets contributed by Rohm and Haas were recorded at fairvalues whereas the assets contributed by CSI were recorded at book value.  The Company was assisted in determining fairvalue by independent appraisers.  Inaccordance with the consolidation principles of FIN 46 (R),*Consolidation of Variable Interest Entities—AnInterpretation of ARB No. 51,* the Company has concluded thatRockwood is the primary beneficiary of the joint venture and as such hasconsolidated the joint venture.

At March 31, 2007, thenet assets of the joint venture included in the condensed consolidated balancesheet of the Company were $186.7 million excluding minority interest of $176.1million.

All intercompanyaccounts, balances and transactions have been eliminated. The minority interestin the consolidated subsidiary reflected in the Company’s condensedconsolidated balance sheet reflects Rohm and Haas’ share of the estimated fairvalue of the net assets of the joint venture.

At March 31, 2007, thejoint venture had no third party debt outstanding, no consolidated assets ofthe Company were pledged as collateral for any joint venture obligations andthe general creditors of the joint venture had no recourse to the generalcredit of the Company.

**4.****                  SEGMENTINFORMATION:**

Rockwood operates in sixreportable 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, the Company’s Chief ExecutiveOfficer. The six segments are: (1) Specialty Chemicals, which consists of thesurface treatment and fine chemicals business lines; (2) PerformanceAdditives, which consists of color pigments and services, timber treatmentchemicals (including Viance, LLC), clay-based additives and water treatmentchemicals business lines; (3) Titanium Dioxide Pigments; (4) Advanced Ceramics;(5) Specialty Compounds; and (6) Electronics, which consists of electronicchemicals and photomasks business lines.

Items that cannot bereadily attributed to individual segments have been classified as “Corporate.”The corporate operating loss

10

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primarily representspayroll, professional fees and other operating expenses of centralizedfunctions such as treasury, legal, internal audit and consolidation accountingas well as the cost of operating our central offices (including some costsmaintained based on legal or tax considerations). The primary components ofcorporate loss, in addition to operating loss, are interest expense on externaldebt (including the amortization of deferred financing costs), foreign exchangelosses or gains, and mark-to-market gains or losses on derivatives.

Major corporatecomponents within the reconciliation of income (loss) from continuingoperations before taxes and minority interest (described more fully below)include systems/organization establishment expenses such as outside consultingcosts for Sarbanes-Oxley initial documentation and fees relating to theimplementation of a new consolidation software system, interest expense onexternal debt, interest income, foreign exchange losses or gains andrefinancing expenses related to external debt. Corporate identifiable assetsprimarily represent deferred financing costs that have been capitalized inconnection with corporate external debt financing, deferred income tax assetsand cash balances maintained in accordance with centralized cash managementtechniques. The corporate classification also includes the results ofoperations, assets (primarily real estate) and liabilities (including pensionand environmental) of legacy businesses formerly belonging to Dynamit Nobel.These operations are substantially unrelated by nature to businesses currentlywithin the Company’s operating segments.

Summarized financialinformation for each of the reportable segments is provided in the followingtable:
| **($ in millions)**          | ** ** | **Specialty  Chemicals** | ** ** | **Performance  Additives** | ** ** | **Titanium  Dioxide  Pigments** | ** ** | **Advanced  Ceramics** | ** ** | **Specialty  Compounds** | ** ** | **Electronics** | ** ** | **Corporate** | ** ** | **Consolidated (a)** | ** ** |
|----------------------------------------|------------|--------------------------|------------|----------------------------|------------|---------------------------------|------------|------------------------|------------|--------------------------|------------|-----------------|------------|---------------|------------|---------------------------|------------|
| **Three  months ended March 31, 2007** |       |                     |       |                       |       |                            |       |                   |       |                     |       |            |       |          |       |                      |       |
| Net sales                              |       | $                        | 267.9      |                       | $          | 184.8                           |       | $                      | 116.1      |                     | $          | 105.5           |       | $             | 69.6       |                      | $          | 52.2 |   | $ | — |   | $ | 796.1 |   |
| Total Adjusted EBITDA                  |       | 68.3                     |       | 32.6                       |       | 22.4                            |       | 28.8                   |       | 8.1                      |       | 9.4             |       | (13.4         | )          | 156.2                     |       |
| **Three  months ended March 31, 2006** |       |                     |       |                       |       |                            |       |                   |       |                     |       |            |       |          |       |                      |       |
| Net sales                              |       | $                        | 228.1      |                       | $          | 182.5                           |       | $                      | 108.2      |                     | $          | 92.7            |       | $             | 63.2       |                      | $          | 49.4 |   | $ | — |   | $ | 724.1 |   |
| Total Adjusted  EBITDA                 |       | 51.4                     |       | 33.3                       |       | 20.9                            |       | 23.6                   |       | 7.3                      |       | 8.6             |       | (12.3         | )          | 132.8                     |       |

 
| ** **                  | ** ** | **Specialty  Chemicals** | ** ** | **Performance  Additives** | ** ** | **Titanium  Dioxide  Pigments** | ** ** | **Advanced  Ceramics** | ** ** | **Specialty  Compounds** | ** ** | **Electronics** | ** ** | **Corporate (b)** | ** ** | **Eliminations (c)** | ** ** | **Consolidated (d)** | ** ** |
|-----------------------------|------------|--------------------------|------------|----------------------------|------------|---------------------------------|------------|------------------------|------------|--------------------------|------------|-----------------|------------|------------------------|------------|---------------------------|------------|---------------------------|------------|
| Identifiable  assets as of: |       |                     |       |                       |       |                            |       |                   |       |                     |       |            |       |                   |       |                      |       |                      |       |
| March 31, 2007              |       | $                        | 1,670.2    |                       | $          | 1,193.0                         |       | $                      | 726.7      |                     | $          | 757.2           |       | $                      | 280.2      |                      | $          | 306.2                     |       | $ | 589.8 |   | $ | (172.4 | ) | $ | 5,350.9 |   |
| December 31, 2006           |       | 1,624.8                  |       | 1,041.8                    |       | 738.2                           |       | 749.5                  |       | 272.2                    |       | 306.3           |       | 136.0                  |       | (136.6                    | )          | 4,732.2                   |       |
|                             |            |                          |            |                            |            |                                 |            |                        |            |                          |            |                 |            |                        |            |                           |            |                           |            |  |  |  |  |  |  |  |  |  |

 

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(a)   This amount does not include $1.8 million and$15.9 million for the three months ended March 31, 2007 and 2006, respectively,of Adjusted EBITDA from the former Groupe Novasep segment which was sold onJanuary 9, 2007. Total Adjusted EBITDA including these amounts was $158.0million and $148.7 million for the three months ended March 31, 2007 and 2006,respectively.

(b)   This amount includes $43.8 million and $41.0million of assets from the legacy businesses formerly belonging to DynamitNobel at March 31, 2007 and December 31, 2006, respectively.

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

(d)   This amount does not include $490.6 millionof identifiable assets at December 31, 2006 from the former Groupe Novasepsegment which was sold on January 9, 2007. Total identifiable assets includingthis amount were $5,222.8 million at December 31, 2006.

Geographic informationregarding net sales based on seller’s location and long-lived assets aredescribed in Note 4, “Segment Information,” in the Company’s 2006 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 our senior management to be non-recurring gains andcharges and certain items deemed by senior management to have little or nobearing on the day-to-day operating performance of its 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. The indentures governing the2011 Notes and the 2014 Notes exclude certain adjustments permitted under thesenior credit agreement. Senior management uses Adjusted EBITDA on a segmentbasis as the primary measure to evaluate the ongoing performance of the Company’sbusiness segments and 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:
| **($ in millions)**                                                | ** ** | **Specialty  Chemicals** | ** ** | **Performance  Additives** | ** ** | **Titanium  Dioxide  Pigments** | ** ** | **Advanced  Ceramics** | ** ** | **Specialty  Compounds** | ** ** | **Electronics** | ** ** | **Corporate** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------|------------|----------------------------|------------|---------------------------------|------------|------------------------|------------|--------------------------|------------|-----------------|------------|---------------|------------|------------------|------------|
| **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        |             | $     | 7.0 |   | $  | (35.5 | ) | $  | 52.3 |   |
| Interest expense (a)                                                         |       | 9.4                      |       | 3.3                        |       | 7.9                             |       | 7.9                    |       | 2.4                      |       | 0.1             |       | 23.7          |       | 54.7             |       |
| Interest income                                                              |       | (0.8                     | )          | (0.2                       | )          | —                          |       | 0.2                    |       | (0.2                     | )          | (0.3            | )          | (3.8          | )          | (5.1             | )          |
| Depreciation and amortization                                                |       | 12.8                     |       | 12.6                       |       | 10.3                            |       | 9.6                    |       | 2.7                      |       | 4.0             |       | 1.2           |       | 53.2             |       |
| Restructuring and related charges                                            |       | 0.2                      |       | —                     |       | —                          |       | 0.1                    |       | —                   |       | 3.7             |       | 0.5           |       | 4.5              |       |
| CCA litigation defense costs                                                 |       | —                   |       | 0.1                        |       | —                          |       | —                 |       | —                   |       | —          |       | —        |       | 0.1              |       |
| Systems/organization establishment expenses                                  |       | —                   |       | 0.5                        |       | —                          |       | 0.2                    |       | 0.2                      |       | —          |       | —        |       | 0.9              |       |
| Cancelled acquisition and disposal costs                                     |       | —                   |       | —                     |       | —                          |       | —                 |       | —                   |       | —          |       | 0.1           |       | 0.1              |       |
| Cost incurred related to debt modifications                                  |       | —                   |       | —                     |       | —                          |       | —                 |       | —                   |       | —          |       | 0.9           |       | 0.9              |       |
| Loss (gain) on sale of assets                                                |       | —                   |       | 0.1                        |       | —                          |       | —                 |       | —                   |       | (4.8            | )          | (0.1          | )          | (4.8             | )          |
| Foreign exchange loss (gain)                                                 |       | 0.2                      |       | 0.1                        |       | —                          |       | —                 |       | —                   |       | (0.3            | )          | (0.4          | )          | (0.4             | )          |
| Other                                                                        |       | (0.3                     | )          | 0.1                        |       | —                          |       | —                 |       | —                   |       | —          |       | —        |       | (0.2             | )          |
| Total Adjusted EBITDA (b)                                                    |       | $                        | 68.3       |                       | $          | 32.6                            |       | $                      | 22.4       |                     | $          | 28.8            |       | $             | 8.1        |             | $          | 9.4 |   | $ | (13.4 | ) | $ | 156.2 |   |
| **Three  months ended March 31, 2006**                                       |       |                     |       |                       |       |                            |       |                   |       |                     |       |            |       |          |       |             |       |
| Income (loss) from continuing operations before taxes  and minority interest |       | $                   | 30.1       |                       | $     | 20.0                            |       | $                 | 6.5        |                     | $     | 7.6             |       | $        | 5.4        |             | $     | 2.4 |   | $  | (27.2 | ) | $  | 44.8 |   |
| Interest expense (a)                                                         |       | 10.6                     |       | 4.0                        |       | 7.0                             |       | 7.4                    |       | —                   |       | 1.2             |       | 9.6           |       | 39.8             |       |
| Interest income                                                              |       | (1.4                     | )          | —                     |       | —                          |       | —                 |       | (0.1                     | )          | (0.4            | )          | 0.5           |       | (1.4             | )          |
| Depreciation and amortization                                                |       | 11.4                     |       | 8.1                        |       | 9.0                             |       | 8.2                    |       | 2.0                      |       | 4.2             |       | 0.8           |       | 43.7             |       |
| Restructuring and related charges                                            |       | 0.2                      |       | 0.2                        |       | —                          |       | —                 |       | —                   |       | 0.8             |       | —        |       | 1.2              |       |
| CCA litigation defense costs                                                 |       | —                   |       | 0.3                        |       | —                          |       | —                 |       | —                   |       | —          |       | —        |       | 0.3              |       |
| Systems/organization establishment expenses                                  |       | —                   |       | —                     |       | —                          |       | —                 |       | —                   |       | —          |       | 1.9           |       | 1.9              |       |
| Cancelled acquisition and disposal costs                                     |       | 0.6                      |       | —                     |       | —                          |       | —                 |       | —                   |       | —          |       | —        |       | 0.6              |       |
| Inventory write-up reversal                                                  |       | —                   |       | 0.8                        |       | —                          |       | —                 |       | —                   |       | —          |       | —        |       | 0.8              |       |
| Gain on sale of assets                                                       |       | —                   |       | (0.1                       | )          | —                          |       | —                 |       | —                   |       | —          |       | (0.4          | )          | (0.5             | )          |
| Foreign exchange (gain) loss                                                 |       | (0.1                     | )          | 0.1                        |       | —                          |       | —                 |       | —                   |       | 0.4             |       | 2.5           |       | 2.9              |       |
| Other                                                                        |       | —                   |       | (0.1                       | )          | (1.6                            | )          | 0.4                    |       | —                   |       | —          |       | —        |       | (1.3             | )          |
| Total Adjusted  EBITDA (b)                                                   |       | $                        | 51.4       |                       | $          | 33.3                            |       | $                      | 20.9       |                     | $          | 23.6            |       | $             | 7.3        |             | $          | 8.6 |   | $ | (12.3 | ) | $ | 132.8 |   |

 

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(a)   Includes losses of $2.8 million and gains of$10.7 million for the three months ended March 31, 2007 and 2006, respectively,representing the movement in the mark-to-market valuation of the Company’sinterest rate and cross-currency hedging instruments.

(b)   This amount does not include $1.8 million and$15.9 million for the three months ended March 31, 2007 and 2006, respectively,of Adjusted EBITDA from the former Groupe Novasep segment which was sold onJanuary 9, 2007. Total Adjusted EBITDA including these amounts was $158.0million and $148.7 million for the three months ended March 31, 2007 and 2006,respectively.

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.

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*Itemsexcluded from Adjusted EBITDA*

The process of refocusingand restructuring the businesses acquired in the KKR Acquisition and establishingthe post-acquisition corporate entity, along with the impact of the DynamitNobel Acquisition and the Company’s initial public offering, resulted in anumber of charges that have affected Rockwood’s historical results. Thesecharges, along with certain other items, are added to or subtracted from income(loss) from continuing operations before taxes and minority interest to deriveAdjusted EBITDA, as defined below. These items include the following:

·                  *Restructuring and related charges*: Restructuring charges of $4.5 million and $1.2 million were recorded in thethree months ended March 31, 2007 and 2006, respectively, for miscellaneousrestructuring activities, including headcount reductions and facility closures(see Note 12, “Restructuring Liability,” for further details).

·                  *Chromated copper arsenate* (*CCA) litigation defense costs*:  Costs of $0.1 million and $0.3 million wererecorded in the three months ended March 31, 2007 and 2006, respectively,primarily for attorney fees related to the Company’s Timber Treatment Chemicalsbusiness line of the Performance Additives segment.

13

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·                  *Systems/organization establishment expenses*: For the three months ended March 31, 2007, expenses of $0.9 million wererecorded. In the Performance Additives segment, $0.5 million was incurredprimarily related to the integration of the Viance, LLC joint venture. In theAdvanced Ceramics and Specialty Compounds segments, expenses of $0.2 millionand $0.2 million, respectively, were incurred related to the integration ofbusinesses acquired in 2006. For the three months ended March 31, 2006,expenses of $1.9 million were recorded related to professional fees incurredregarding systems and internal control documentation in connection with theSarbanes-Oxley Act of 2002 and fees relating to the implementation of a newconsolidation software system.

·                  *Cancelled acquisition and disposal costs*: Costs of $0.1 million and $0.6 million were recorded for the three months endedMarch 31, 2007 and 2006, respectively, in connection with non-consummatedacquisitions and dispositions.

·                  *Cost incurred related to debt modifications*: In March 2007, the Company expensed $0.9 million related to the fourthamendment of the senior secured credit agreement to refinance all outstandingborrowings under the tranche F term loans with new tranche G term loans (seeNote 8, “Long-Term Debt,” for further details).

·                  *Inventory write-up reversal*:  UnderSFAS 141,*Business Combinations*,all inventories acquired in an acquisition must be revalued to “fair value.” Inconnection with the acquisition of the Süd-Chemie businesses in 2005, theCompany allocated a portion of the total purchase price to inventory to reflectmanufacturing profit in inventory at the date of the acquisition. This resultedin a consequential reduction in gross profit, including currency effects, of$0.8 million for the three months ended March 31, 2006 as the inventory wassold in the normal course of business.

·                  *Gain on sale of assets*:  In the threemonths ended March 31, 2007, the Company recorded gains of $4.8 millionprimarily related to the sale of the assets of the U.S. Wafer Reclaim businessin the Electronics segment.

·                  *Foreign exchange gain (loss), net*: During the periods presented, the Company recorded foreign exchange gains and(losses) related to our long-term debt and other non-operating transactions.These amounts primarily reflect the non-cash translation impact on oureuro-denominated debt resulting from the strengthening or weakening of the euroagainst the U.S. dollar and/or the British pound. For the three monthsended March 31, 2007 and 2006, gains of $0.4 million and losses of $2.9million, respectively, were recorded.

·                  *Other*:  In the three monthsended March 31, 2006, the Company recorded $1.6 million of income related tothe correction of an immaterial error reported in the first quarter of 2006related to a previously unrecorded asset in the Titanium Dioxide Pigmentssegment.

·                  *Discontinued operations*: As noted above, the Company completed the sale of its Groupe Novasepsubsidiary on January 9, 2007. As a result, the Company’s financial statementshave been reclassified to reflect the Groupe Novasep subsidiary as adiscontinued operation for all periods presented. In connection with the saleof Rohner AG in March 2006, the Company recorded a pre-tax loss of $12.1million in the first quarter of 2006.

**5.      INVENTORIES:**

Inventories are comprisedof the following:
| ($ in millions) | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Raw materials             |       | $                        | 151.5      |                        | $          | 160.1 |   |
| Work-in-process           |       | 54.6                     |       | 53.3                        |       |
| Finished goods            |       | 240.2                    |       | 226.4                       |       |
| Packaging  materials      |       | 6.7                      |       | 5.6                         |       |
|                      |       | $                        | 453.0      |                        | $          | 445.4 |   |

 

**6.      GOODWILL:**

Below are goodwillbalances and activity by segment:
| ** **                      | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **      | ** ** | ** ** | ** ** |
|---------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|-----------------|------------|------------|------------|
| ** **                      | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | ** **      | ** ** | ** ** | ** ** |
| **($ in millions)**   | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **Electronics** | ** ** | **Total**  | ** ** |
| Balance,  December 31, 2006     |       | 597.6         |       | 480.8           |       | 172.6        |       | 223.2        |       | 118.5         |       | 125.0           |       | 1,717.7    |       |
| FIN 48 tax  adjustments (a)     |       | (6.1          | )          | —          |       | (1.6         | )          | (2.2         | )          | —        |       | —          |       | (9.9       | )          |
| Other tax  adjustments          |       | (1.5          | )          | —          |       | —       |       | —       |       | —        |       | —          |       | (1.5       | )          |
| Foreign exchange  and other (b) |       | 7.4           |       | 2.8             |       | 2.0          |       | 2.8          |       | 0.5           |       | —          |       | 15.5       |       |
| Balance, March 31, 2007         |       | $             | 597.4      |            | $          | 483.6        |       | $            | 173.0      |          | $          | 223.8           |       | $          | 119.0      |   | $ | 125.0 |   | $ | 1,721.8 |   |
|                                 |            |               |            |                 |            |              |            |              |            |               |            |                 |            |            |            |  |  |  |  |  |  |  |

 

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(a)   See Note 9, “Income Taxes,” for detailsregarding the adoption of FIN 48.

(b)   Consists primarily of foreign currencychanges. In the Performance Additives segment, the amount includes goodwillrelated to the Viance, LLC joint venture formed in January 2007.

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**7.      OTHER INTANGIBLE ASSETS:**

Other intangible assets,net consist of:
| ** **                               | ** ** | **As of March 31, 2007** | ** ** | **As of December 31, 2006** | ** ** |
|------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------------|------------|
| **($ in millions)**            | ** ** | **Gross  Carrying  Amount (a)**         | ** ** | **Accumulated  Amortization**                   | ** ** | **Net** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Patents and  other intellectual property |       | $                                            | 356.5      |                                            | $          | (88.2 | ) | $ | 268.3 |   | $ | 311.1 |   | $ | (82.0 | ) | $ | 229.1 |   |
| Trade names and  trademarks              |       | 134.0                                        |       | (16.8                                           | )          | 117.2 |   | 132.7 |   | (15.2 | ) | 117.5 |   |
| Customer  relationships                  |       | 227.8                                        |       | (38.6                                           | )          | 189.2 |   | 191.3 |   | (32.6 | ) | 158.7 |   |
| Supply  agreements                       |       | 28.5                                         |       | (1.5                                            | )          | 27.0 |   | 6.5 |   | (0.6 | ) | 5.9 |   |
| Other                                    |       | 46.1                                         |       | (18.8                                           | )          | 27.3 |   | 46.4 |   | (18.0 | ) | 28.4 |   |
| Total                                    |       | $                                            | 792.9      |                                            | $          | (163.9 | ) | $ | 629.0 |   | $ | 688.0 |   | $ | (148.4 | ) | $ | 539.6 |   |

 

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(a)   The increase since December 31, 2006 isprimarily related to other intangible assets acquired in the Viance, LLC jointventure completed in January 2007.  SeeNote 3, “Viance, LLC Joint Venture,” for further details.

Amortization of otherintangible assets was $15.2 million and $10.6 million for the three months endedMarch 31, 2007 and 2006, respectively. As of March 31, 2007, the estimatedaggregate amortization expense for each of the five succeeding years is asfollows:
| ($ in millions) | ** ** | **Amortization** | ** ** |
|---------------------------|------------|------------------|------------|
| **Year ended**       | ** ** | **Expense**      | ** ** |
| 2007                      |       | $                | 62.4       |   |
| 2008                      |       | 60.9             |       |
| 2009                      |       | 53.5             |       |
| 2010                      |       | 52.0             |       |
| 2011                      |       | 50.5             |       |
|                           |            |                  |            |  |

 

**8.      LONG-TERM DEBT**

Long-term debt and loanspayable are summarized as follows:
|                                                                                       | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **($, € and £ in millions)**                       | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| Senior secured  credit facilities:                                                    |       |               |       |                  |       |
| Tranche A-1 term loans (€32.3 and €35.2,  respectively)                     |       | $                  | 43.1       |                  | $          | 46.5 |   |
| Tranche A-2 term loans (€140.6 and €153.4,  respectively)                   |       | 187.7              |       | 202.4                 |       |
| Tranche E term loans                                                                  |       | 1,122.1            |       | 1,127.8               |       |
| Tranche F term loans (€270.7 as of December 31,  2006) (repaid March 23, 2007)   |       | —             |       | 357.3                 |       |
| Tranche G term loans (€269.3 as of March 31, 2007)                               |       | 359.6              |       | —                |       |
| Revolving short-term loans                                                            |       | —             |       | 37.0                  |       |
| 2011 Notes                                                                            |       | 273.4              |       | 273.4                 |       |
| 2014 Notes  (€375.0 and $200.0 as of March 31, 2007 and December 31, 2006)       |       | 700.8              |       | 695.0                 |       |
| Other term loan  facilities                                                           |       | 12.2               |       | 12.9                  |       |
| Capitalized  lease obligations (€34.8 and €35.3, respectively)              |       | 46.5               |       | 46.6                  |       |
| Preferred stock  of subsidiary (£12.0 as of March 31 2007 and December 31, 2006) |       | 23.6               |       | 23.5                  |       |
| Other (€12.4 as  of March 31, 2007 and December 31, 2006)                        |       | 16.5               |       | 16.3                  |       |
|                                                                                  |       | 2,785.5            |       | 2,838.7               |       |
| Less current  maturities                                                              |       | (361.9             | )          | (117.8                | )          |
|                                                                                  |       | $                  | 2,423.6    |                  | $          | 2,720.9 |   |

 

In the first quarter of2007, the Company entered into the fourth amendment (the “Fourth CreditAmendment”) to the senior secured credit agreement, dated as of July 30, 2004(as amended by the First Amendment, dated as of October 8, 2004, by the SecondAmendment dated as of December 10, 2004, and by the Third Amendment, dated asof December 13, 2005, the “Credit Agreement”). The Fourth Credit Amendment, amongother things, (i) provides for approximately €269.3 million of new tranche Gloans, the proceeds of which were used to repay in full the outstandingborrowings under the tranche F term loans, (ii) permits the Company to repayits outstanding 105/8%Senior Subordinated Notes due 2011 (“2011 Notes”) any time on or after May 15,2007 without a corresponding

15

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repayment of term loansunder the Credit Agreement, and (iii) resets substantially all of the basketscontained in the restrictive covenants and elsewhere in the Credit Agreement.The refinancing of the tranche F loans with the new tranche G loans effectivelyreduced the interest rate on the tranche G term loans by 50 basis points. TheCompany did not incur any additional borrowings under the Fourth CreditAmendment.

On April 13, 2007, theCompany provided notice that it has elected to redeem its outstanding 10 5/8%Senior Subordinated Notes due 2011 in the aggregate principal amount of $273.4million on May 15, 2007. As a result, this amount has been classified as acurrent liability as of March 31, 2007. In connection with this debt repayment,redemption premiums of $14.5 million are expected to be paid.

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, 2007, the Companyhad approximately $55.9 million of letters of credit and other bank guarantees,of which $9.8 million will expire in less than one year, $6.8 million willexpire in 2-3 years, $10.8 million will expire in 4-5 years and $28.5 millionwill expire after five years. This amount includes outstanding letters ofcredit of $27.3 million that reduced our availability under the senior securedcredit facility. In the opinion of management, such obligations will notsignificantly affect the Company’s financial position, results of operations orcash flows as the Company anticipates fulfilling its performance obligations.

**9.      INCOME TAXES:**

Income tax expense hasbeen computed based on the projected effective tax rate for the year. Theeffective tax rate for the first three months of 2007 and 2006 was 42.1% and40.8%, respectively. The 2007 effective tax rate is primarily a function offoreign rate differentials and the impact of the valuation allowance ondomestic earnings. During the first quarter of 2007, a tax provision of $22.0million was recorded related to pre-tax book income of $52.3 million. TheCompany recorded an income tax provision of $18.3 million in the first quarterof 2006 on pre-tax book income of $44.8 million.

In the three months endedMarch 31, 2007, the Company increased its worldwide valuation allowances by$7.3 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 2007 impacted the effective tax rate by $3.7million. The following table reflects the activity in the valuation allowancefor worldwide net operating losses and other deferred income tax assets:
|                                                      | ** ** | **Valuation** | ** ** |
|------------------------------------------------------|------------|---------------|------------|
| **($ in millions)**                        | ** ** | **Allowance** | ** ** |
| Balance as of  December 31, 2006                     |       | $             | 100.1      |   |
| Increase as  reflected in income tax expense         |       | 3.7           |       |
| Increase as  reflected in other comprehensive income |       | 3.6           |       |
| Balance as of  March 31, 2007                        |       | $             | 107.4      |   |

 

In the first quarter of2007, based on the Company’s policy and steady-state analysis, it wasdetermined that there was not sufficient positive evidence of future taxableincome in order to release the U.S. valuation allowance that has been recorded.During the first three months of 2007, the Company’s net deferred tax assetsand liabilities were maintained at a zero level, other than a noncurrentdeferred tax liability relating to goodwill with an indefinite reversal period.It is the Company’s policy that the valuation allowance is reversed in the yearmanagement determines it is more likely than not that the deferred tax assetswill be realized.

On July 13, 2006, theFASB issued FIN No. 48, *Accounting for Uncertaintyin Income Taxes*–*An Interpretation of FASBStatement No. 109*. FIN 48 clarifies the accounting for uncertaintyin income taxes recognized in an entity’s financial statements in accordancewith FASB Statement No. 109, *Accounting for IncomeTaxes,* and prescribes a recognition threshold and measurementattribute for financial statement disclosure of tax positions taken or expectedto be taken on a tax return. Under FIN 48, the impact of an uncertain incometax position on the income tax return must be recognized at the largest amountthat is more-likely-than-not to not be sustained upon audit by the relevantauthority. An uncertain income tax position will not be recognized if it hasless than a 50% likelihood of being sustained. Additionally, FIN 48 providesguidance on derecognizing, classification, interest and penalties, accountingin interim periods, disclosure and transition. FIN 48 is effective for fiscalyears beginning after December 15, 2006.

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The Company adopted theprovisions of FIN 48 on January 1, 2007. The total amount of unrecognized taxbenefits as of the date of adoption was $44.1 million. In conjunction with theadoption of FIN 48, we have classified uncertain tax positions as non-currentincome tax liabilities (other liabilities) unless expected to be paid in oneyear. Previously, accrued income tax liabilities were classified as currentliabilities. As of March 31, 2007, the total amount of unrecognized taxbenefits was $44.7 million. As a result of the implementation of FIN 48, theCompany recognized a $1.0 million increase in the liability for unrecognizedtax benefits which was accounted for as follows:

 
| ($ in millions)                            | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|------------|------------|
| Increase in  accumulated deficit (cumulative effect) |       | $          | 7.4        |   |
| Additional  deferred tax assets                      |       | 3.5        |       |
| Reduction in  goodwill                               |       | (9.9       | )          |
| Increase in liability                                |       | $          | 1.0        |   |

 

Included in the balanceof unrecognized tax benefits at January 1, 2007 are $27.7 million of taxbenefits that, if recognized, would affect the effective tax rate. Alsoincluded in the balance of unrecognized tax benefits at January 1, 2007, are$13.1 million of tax benefits that if recognized, would result in a decrease togoodwill recorded in purchase business combinations, and $3.5 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 $2.4 million for interest and penalties atDecember 31, 2006. Upon adoption of FIN 48 on January 1, 2007, the Companyincreased its accrual for interest and penalties by $0.9 million. For thethree months ended March 31, 2007, the accrual for interest and penalties wasincreased by $0.1 million. As of March 31, 2007, the Company had accrued atotal of $3.4 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 $5.0million. 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 jurisdictions are open to investigation by taxauthorities; in the U.S. from 2000, in the U.K. from 2003, and in Germany from2000.

**10     EMPLOYEE BENEFIT PLANS:**

The following tablerepresents the net periodic benefit costs and related components in accordancewith SFAS 158,*Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans, an amendment of FASBStatements No. 87, 88, 106 and 132 (R)*:
|                                       | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------|------------|--------------------------------------------------|------------|
| **($ in millions)**         | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Service cost                          |       | $                                                | 2.1        |   | $ | 2.2 |   |
| Interest cost                         |       | 6.0                                              |       | 5.2 |   |
| Expected return  on assets            |       | (2.4                                             | )          | (1.9 | ) |
| Net amortization  of actuarial losses |       | 0.2                                              |       | 0.6 |   |
| Total pension  cost                   |       | $                                                | 5.9        |   | $ | 6.1 |   |

 

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**11.    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)** | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| **EPS  Numerator - Basic:**                                                                                     |       |                                             |       |   |   |
| Net income from continuing operations applicable to  common shareholders                                        |       | $                                                | 29.2       |   | $ | 26.5 |   |
| Income from discontinued operations, net of tax                                                                 |       | 116.2                                            |       | 16.5 |   |
| Minority interest in discontinued operations, net of  tax                                                       |       | (0.1                                             | )          | (3.0 | ) |
| Net income applicable to common shareholders                                                                    |       | $                                                | 145.3      |   | $ | 40.0 |   |
|                                                                                                            |       |                                             |       |   |   |
| **EPS  Denominator - Basic:**                                                                                   |       |                                             |       |   |   |
| Weighted average number of common shares outstanding                                                            |       | 73,786                                           |       | 73,779 |   |
|                                                                                                            |       |                                             |       |   |   |
| **Basic  earnings per common share:**                                                                           |       |                                             |       |   |   |
| Earnings from continuing operations                                                                             |       | $                                                | 0.40       |   | $ | 0.36 |   |
| Earnings from discontinued operations, net of tax                                                               |       | 1.57                                             |       | 0.18 |   |
| Basic earnings per common share                                                                                 |       | $                                                | 1.97       |   | $ | 0.54 |   |
|                                                                                                            |       |                                             |       |   |   |
| **EPS  Numerator - Diluted:**                                                                                   |       |                                             |       |   |   |
| Net income from continuing operations                                                                           |       | $                                                | 29.2       |   | $ | 26.5 |   |
| Income from discontinued operations, net of tax                                                                 |       | 116.2                                            |       | 16.5 |   |
| Minority interest in discontinued operations, net of  tax                                                       |       | (0.1                                             | )          | (3.0 | ) |
| Net income applicable to common shareholders                                                                    |       | $                                                | 145.3      |   | $ | 40.0 |   |
|                                                                                                            |       |                                             |       |   |   |
| **EPS  Denominator - Diluted:**                                                                                 |       |                                             |       |   |   |
| Weighted average number of common shares outstanding                                                            |       | 73,786                                           |       | 73,779 |   |
| Effect of dilutive stock options and other  incentives                                                          |       | 1,606                                            |       | 1,187 |   |
| Weighted average number of common shares outstanding  and common stock equivalents                              |       | 75,392                                           |       | 74,966 |   |
|                                                                                                            |       |                                             |       |   |   |
| **Diluted  earnings per common share:**                                                                         |       |                                             |       |   |   |
| Earnings from continuing operations                                                                             |       | $                                                | 0.39       |   | $ | 0.35 |   |
| Earnings from discontinued operations, net of tax                                                               |       | 1.54                                             |       | 0.18 |   |
| Diluted earnings  per common share                                                                              |       | $                                                | 1.93       |   | $ | 0.53 |   |

 

**12.    RESTRUCTURING LIABILITY:**

The Company recordedrestructuring charges of $4.5 million and $1.2 million for the three monthsended March 31, 2007 and 2006, respectively. The Company records restructuring liabilities from time to time thatrepresent charges incurred in connection with consolidations and cessations ofcertain of its operations, including operations from acquisitions, as well asheadcount reduction programs. These charges consist primarily of write-offs ofassets and severance costs. Severance charges are based on various factorsincluding the employee’s length of service, contract provisions, salary levelsand local governmental legislation. At the time a related charge is recorded,the Company calculates its best estimate based upon detailed analysis. Althoughsignificant changes are not expected, actual costs may differ from theseestimates.

During the three monthsended March 31, 2007, the Company expensed $4.5 million of restructuringcharges.  In the Electronics segment,facility closure and severance costs of $3.7 million were recorded related tothe restructuring of the Wafer Reclaim business.  In addition, $0.5 million was recorded inCorporate, $0.2 million was recorded in the Specialty Chemicals segment and$0.1 million was recorded in the Advanced Ceramics segment for miscellaneousheadcount reductions.

During the three monthsended March 31, 2006, the Company expensed $1.2 million of restructuringcharges for miscellaneous restructuring actions, including $0.8 million for theannounced restructuring of the Wafer Reclaim business in the Electronics segment.The Company recorded severance and related costs for employees in connectionwith the closure of two Wafer Reclaim facilities (one each in the U.K. andU.S.). The Wafer Reclaim operating facility in the U.K. was closed inJanuary 2006 and one of the facilities in the U.S. was closed inMarch 2006. In addition, $0.2 million was recorded in the SpecialtyChemicals segment and $0.2 million was recorded in the Performance Additivessegment for miscellaneous headcount reductions and the announced closure of theBaulking, United Kingdom facility for the Clay-based Additives business in thePerformance Additives segment.

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 WaferReclaim

18

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business. The Companyrecorded severance and related costs for employees in connection with theclosure of the Wafer Reclaim facilities (one each in the U.K. and U.S.). Inaddition, miscellaneous headcount reductions were recorded in the SpecialtyChemicals, Performance Additives and Advanced Ceramics segments. Costs werealso incurred in the Advanced Ceramics segment related to the closure of a facilityin Italy.

The Company began toassess and formulate specific plans to involuntarily terminate or relocatecertain employees and/or exit certain activities of the Dynamit Nobelbusinesses as of the Dynamit Nobel acquisition date. As a result, the Companyclosed the former corporate office of Dynamit Nobel located in Troisdorf,Germany in the fourth quarter of 2004. The Company recorded restructuringcharges related to this closure including severance costs for general andadministrative personnel of the former Dynamit Nobel company, the closure costson this building and the relocation costs for the remaining employees who wererelocated to the Company’s new Frankfurt, Germany location. Also in 2004, aspart of the acquisition of the Pigments and Dispersions business of JohnsonMatthey, the Company enacted a restructuring program and severance costs wereincurred for selling, general and administrative personnel.

Selected information forthe 2007 restructuring actions follows:
| ($ in millions)             | ** ** | **Severance  Costs** | ** ** | **Facility  Closure  Costs** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|----------------------|------------|------------------------------|------------|-----------|------------|
| **2007**                              |       |                 |       |                         |       |      |       |
| Liability  balance, December 31, 2006 |       | $                    | —     |                         | $          | —    |       | $ | — |   |
| Restructuring  charge in 2007         |       | 1.2                  |       | 0.1                          |       | 1.3       |       |
| Utilized in 2007                      |       | (0.3                 | )          | —                       |       | (0.3      | )          |
| Foreign exchange  and other           |       | —               |       | —                       |       | —    |       |
| Liability  balance, March 31, 2007    |       | $                    | 0.9        |                         | $          | 0.1       |       | $ | 1.0 |   |

 

Selected information forthe 2006 restructuring actions follows:
| ($ in millions)             | ** ** | **Severance  Costs** | ** ** | **Facility  Closure  Costs** | ** ** | **Relocation  Costs** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|----------------------|------------|------------------------------|------------|-----------------------|------------|-----------|------------|
| **2006**                              |       |                 |       |                         |       |                  |       |      |       |
| Liability balance,  December 31, 2006 |       | $                    | 4.4        |                         | $          | 0.7                   |       | $         | 0.7        |   | $ | 5.8 |   |
| Restructuring  charge in 2007         |       | 0.3                  |       | 2.9                          |       | —                |       | 3.2       |       |
| Utilized in 2007                      |       | (0.6                 | )          | (0.1                         | )          | —                |       | (0.7      | )          |
| Foreign exchange  and other           |       | —               |       | 0.1                          |       | —                |       | 0.1       |       |
| Liability  balance, March 31, 2007    |       | $                    | 4.1        |                         | $          | 3.6                   |       | $         | 0.7        |   | $ | 8.4 |   |

 

Selected information forthe 2005 restructuring actions follows:
| ($ in millions)             | ** ** | **Severance  Costs** | ** ** | **Facility  Closure  Costs** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|----------------------|------------|------------------------------|------------|-----------|------------|
| **2005**                              |       |                 |       |                         |       |      |       |
| Liability  balance, December 31, 2006 |       | $                    | 0.2        |                         | $          | 0.5       |       | $ | 0.7 |   |
| Utilized in 2007                      |       | —               |       | (0.1                         | )          | (0.1      | )          |
| Foreign exchange  and other           |       | —               |       | (0.1                         | )          | (0.1      | )          |
| Liability balance,  March 31, 2007    |       | $                    | 0.2        |                         | $          | 0.3       |       | $ | 0.5 |   |

 

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Selected information for the 2004 restructuring actions follows:

 
| ($ in millions)             | ** ** | **Severance  Costs** | ** ** | **Facility  Closure  Costs** | ** ** | **Relocation  Costs** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|----------------------|------------|------------------------------|------------|-----------------------|------------|-----------|------------|
| **2004**                              |       |                 |       |                         |       |                  |       |      |       |
| Liability  balance, December 31, 2006 |       | $                    | 1.6        |                         | $          | 0.1                   |       | $         | 0.3        |   | $ | 2.0 |   |
| Utilized in 2007                      |       | (0.3                 | )          | (0.1                         | )          | —                |       | (0.4      | )          |
| Foreign exchange  and other           |       | 0.1                  |       | 0.1                          |       | —                |       | 0.2       |       |
| Liability balance,  March 31, 2007    |       | $                    | 1.4        |                         | $          | 0.1                   |       | $         | 0.3        |   | $ | 1.8 |   |

 

Restructuring reserves bysegment are as follows:
|                               | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|--------------------|------------|-----------------------|------------|
| **($ in millions)** | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| Specialty  Chemicals          |       | $                  | 1.8        |                  | $          | 1.9 |   |
| Performance  Additives        |       | 0.6                |       | 0.6                   |       |
| Advanced  Ceramics            |       | 0.3                |       | 0.7                   |       |
| Specialty Compounds           |       | 4.9                |       | 4.9                   |       |
| Electronics                   |       | 3.4                |       | 0.1                   |       |
| Corporate                     |       | 0.7                |       | 0.3                   |       |
|                          |       | $                  | 11.7       |                  | $          | 8.5 |   |

 

**13.    COMMITMENTS AND CONTINGENCIES:**

***Legal Proceedings***—The Company isinvolved in various legal proceedings, including commercial, intellectualproperty, product liability and environmental matters of a nature considerednormal to its business. It is the Company’s policy to accrue for amountsrelated to these matters in accordance with SFAS No. 5,*Accounting for Contingencies*, if it isprobable that a liability has been incurred and an amount can be reasonablyestimated. It is the Company’s policy to disclose such matters when there is atleast a reasonable possibility that a material loss may have been incurred.Although the Company expects to continue to pay legal fees in connection withcertain 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 inconnection with such product liability matters do not individually exceed $0.5million and in the aggregate $3.0 million. The Company’s reserve estimates arebased on available facts, including damage claims and input from its internaland external legal counsel, past experience, and, in some instances wheredefense costs are being paid by its insurer’s insurance coverage, knowninsurance recoveries. The Company is unable to estimate the amount or range ofany potential incremental charges should facts and circumstances change and mayin the future revise its estimates based on new information becoming available.In addition, the Company does not believe that there is any other individuallegal proceeding that is likely to have a material adverse effect on itsbusiness or financial condition. However, the Company cannot predict theoutcome of any litigation or the potential 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 North AmericaInc. (“GEA North America”)), GEA Group is obligated to indemnify the Companyfor certain legal, tax and environmental liabilities and obligations thatrelate to the period prior to the closing, subject to certain limits andexclusions. Pursuant to these agreements, the Company has various claims forindemnification with Degussa and GEA Group. In addition, the Company may besubject to indemnity claims relating to properties or businesses it divested.In the opinion of management, and based upon information currently available,the ultimate resolution of any indemnification obligations owed to the Companyor by the Company will not have a material effect on the Company’s financialcondition, 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 fines, injunctionsand potential criminal sanctions for violations. The products, including theraw materials handled, are also subject to rigorous industrial hygieneregulations and investigation. The nature of the Company’s operations exposesit to risks of liability for

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breaches of these lawsand regulations as a result of the production, storage, transportation and saleof materials that can cause contamination or personal injury when released intothe environment. Environmental laws are subject to change and have tended to becomestricter over 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 Systems***

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

***SHE Capital Expenditures***

The Company may incurfuture costs for capital improvements and general compliance under SHE laws.For the year ended December 31, 2006, the capital expenditures for SHE matterstotaled approximately $35.3 million, excluding costs to maintain and repairpollution control equipment. For 2007, the Company estimates capital expendituresfor compliance 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 December 2006, theEuropean Parliament and Counsel of the EU adopted legislation for a new EUframework for chemicals known as the Registration, Evaluation and Authorizationof Chemicals, or REACH, which will significantly expand the EU’s regulation ofchemicals. REACH includes requirements that certain manufacturers and importersof chemicals register those chemicals, perform health and environmental riskanalyses of those chemicals, and in certain instances, obtain authorizationsfor the use of the chemicals. Substances that are not registered within theprescribed deadlines will not be permitted to be manufactured or marketedwithin the EU. As a specialty chemicals company, it is possible that theCompany is the only manufacturer of one or more substances to be regulatedunder REACH and thus could potentially bear the full cost of compliance withREACH for some or all of the Company’s products. The Company estimates it hasapproximately 350 products that might be subject to REACH, compliance withwhich is required starting in June 2007. The Company is taking steps to complywith REACH and is evaluating the potential costs of compliance.

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 allnecessary IPPC permit applications required to date, and in some cases receivedcompleted permits from the applicable government agency. The Company expects tosubmit all other IPPC applications and related documents on a timely basis asthe various countries implement the IPPC permit program. Although it is notknown with certainty what each IPPC permit will require, the Company believes,based upon 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.

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 140 countriesthat have ratified it. The EU, including Germany and other countries where theCompany has interests, ratified the Kyoto Protocol in 2002 and, in doing so,have enacted regulations that reduce the emission of greenhouse gases and haveestablished a trading system covering carbon dioxide emissions. Such a tradingsystem became effective at the start of 2005. The new regulation directlyaffects the Company’s power plants at the Duisburg and Langelsheim sites inGermany, as well as the power plant being operated by a third party on one ofthe Company’s sites. Rockwood and such third party will be required to purchasecarbon dioxide credits, which could result in increased operating costs, andmay be required to develop additional cost-effective methods to reduce carbondioxide emissions, which could result in increased capital expenditures. Thenew regulation indirectly affects the Company’s other operations in the EU,which may experience higher energy costs from third party providers. TheCompany continues to evaluate options in order to comply with the Protocol.However, the Company does not expect this to have a material impact on its cashflow or results 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 the

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past and present ownersand operators of contaminated sites. All responsible parties may be required tobear some or all clean-up costs regardless of fault, legality of the originaldisposal or ownership of the disposal site.

Environmentalcontamination is known to exist at certain of the Company’s present and formerfacilities, including its facilities located in Turin, Italy; St. Fromond, St.Cheron and Sens, France; Hainhausen, Troisdorf, Stadeln, Duisburg, Plochingen,Marktredwitz, Ronnenberg-Empelde and Langelsheim, Germany; Oss, TheNetherlands; Kidsgrove, Sudbury and Barrow, U.K.; Boksburg East, South Africaand in the United States, in Valdosta, Georgia, Beltsville, Maryland,Louisville, Kentucky, New Johnsonville, Tennessee, Harrisburg, North Carolina,Laurens, South Carolina, Silver Peak, Nevada and La Mirada, California. Soilcontamination is also known to exist at the Company’s facilities at Freeport,Texas, Sudbury, U.K. and Sumperk in Czech Republic; however, no furtherregulatory remedial actions are currently required for these facilities and anyliabilities arising from such contamination is covered by indemnity obligationsor the previous owners of these facilities with the exception of Freeport. TheCompany is currently operating groundwater remediation systems at itsHainhausen, Stadeln, Valdosta, and Silver Peak facilities. The Company alsooperates groundwater remediation and/or monitoring systems at its Plochingen,Marktredwitz, Stadeln, Troisdorf, New Johnsonville and Laurens facilities, forwhich prior owners or insurers have assumed responsibility. The Company alsocontinues to monitor groundwater at the Beltsville and St. Cheron facilities,which were previously the subject of a soil removal action. Groundwater is alsomonitored at the St. Fromond and Barrow facilities due to prior spills and atthe Harrisburg facility due to a landfill closure. The Company believes thatadditional environmental studies, and possibly environmental remediations, willbe required at the Harrisburg and Louisville facilities. The Company is also inthe process of determining appropriate remedial actions with the regulatoryauthorities at the following locations: Duisburg, Langelsheim, Troisdorf, Turinand La Mirada. Furthermore, as a result of facility closings, divestitures andoffsite disposal activities, the Company is responsible for the following othermatters: contamination beneath divested portions of the manufacturing facilityin Troisdorf; a former disposal site in Laurel, Maryland; contamination at aclosed Specialty Chemicals facility in Houston, Texas; contamination at aformer Specialty Chemicals facility in Sunbright, Virginia; groundwaterremediation at Stadeln; and former sites operated by Dynamit Nobel’s previouslydivested explosives business. The Company is also a*de minimis* participant in several Superfund matters.

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 and the Company’s predecessor’s former andpresent properties and/or at sites 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 Saint 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 an average of 50% byDecember 31, 2008. The Company is evaluating various options to reduce theamount of ammonia discharge. Although the Company will be required to makecapital expenditures in connection with this matter, it does not believe thatthis issue will have a material adverse effect on its business or financialcondition.

***Environmental Indemnity Obligations***

Pursuant to the sharepurchase agreement entered into in connection with the sale of the GroupeNovasep subsidiary, the Company agreed to indemnify the buyers for certainknown and unknown environmental actions which may arise in the future relatedto periods prior to closing. These obligations expire three years after theclosing; however, the Company’s liability for such obligations is reduced from90 percent of any qualifying environmental liability claim to 70 percent ofsuch claims 15 months after the closing. In addition, the Company is requiredto indemnify the purchaser of the Company’s U.S. Wafer Reclaim business for sixyears for any unknown environmental actions attributable to the conduct of suchbusiness prior to the closing of the disposition. The business purchaseagreement provides that the Company must indemnify the buyer for 100% of claimsrelated to contamination of the business’ site or the migration of anyhazardous substances from such site if notice of any such claim is given withinfour years of the closing of the disposition, and 50% of such claims if noticeis given after the fourth but before the sixth anniversary of the closing.

***Environmental Indemnities***

Pursuant to theenvironmental deed entered into in connection with the KKR Acquisition,Degussa, as successor to Laporte, is required to indemnify us and oursubsidiaries for certain environmental matters that relate to the business asconducted prior to the closing of the KKR Acquisition. The environmental deedprovides that Degussa will indemnify the Company and its subsidiaries forclaims for which notice is given within a period of two years for breaches ofrepresentations and warranties, which expired in 2002, and five years, whichexpired in September 2005, for claims related to the contamination of theCompany’s properties or the Company’s subsidiaries’ properties (inclusive ofcontamination which leaks or escapes from the Company’s properties or theCompany’s subsidiaries’ properties). These indemnity obligations are subject toa minimum per matter loss of $0.2 million and are further subject to a $5.0million deductible for the indemnity to be available. In addition, theenvironmental deed provides that Degussa will indemnify the Company and itssubsidiaries for claims relating to properties that were formerly owned,occupied or used

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as of November 20, 2000,as well as properties owned by third parties (inclusive of disposal of wasteand certain other identified issues prior to November 20, 2000). Theenvironmental deed provides that in this instance, Degussa will be responsiblefor reasonable costs and expenses 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, are 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, ifnotified within ten years. If GEA Group’s and GEA North America’sresponsibility for contamination matters cannot be proven, a sliding scalereduces the percentage further for each year during the five-year period fromyear six to ten. GEA Group and GEA North America are also obligated toindemnify us for 85% of claims related to legacy site matters, such asenvironmental matters relating to properties or businesses owned or operated byDynamit Nobel prior to, but not on, the closing of Dynamit Nobel Acquisition,if notified within ten years from closing (which occurred on July 31, 2004). Inaddition, GEA Group and GEA North America are obligated to indemnify theCompany for 50% of the excess amount of losses over the amount of the relatedreserves for operational compliance matters, if notified by December 31, 2006,and 50% of the excess amount of losses over the amount of the related reserves(in the case of known claims) and 50% of claims (in the case of unknown claims)related to certain environmental damage claims unknown at the time of theclosing of the Dynamit Nobel Acquisition, if notified within ten years. All ofthese indemnity obligations are subject to different minimum per claimthresholds depending on whether the matter was disclosed or not, and on thesubject matter, ranging between €100,000 and €750,000 ($133,540 and $1,001,550using the Friday, March 30, 2007 exchange rate of €1.00=$1.3354) depending onthe type of claim. The indemnity obligations are further subject to certaindeductibles, exclusions and limitations. Furthermore, GEA Group and GEA NorthAmerica are obligated to indemnify the Company for certain environmental risksarising from certain “shared site” structures for a duration of ten years fromclosing. This indemnity obligation is not subject to the percentages,*de minimis* exclusions, deductibles andthresholds described above, and it is not subject to most of the generallimitations.

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 GEA Group, GEA North America, Degussa orany other party who may have obligations to indemnify the Company will adhereto their obligations and the Company may have to resort to legal action toenforce its rights under the indemnities. In cases where the Company’sindemnification claims to third parties are uncontested, the Company expects torealize recoveries within a short period of time. In addition, the Company maybe required to make indemnity payments in connection with certain environmentalmatters. However, the Company does not believe that resolution of the knownenvironmental matters subject to indemnification obligations owed to theCompany will have a material adverse effect on its business or financialcondition, but may have a material adverse effect on the 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 are reviewedat least quarterly based on currently available information. Liabilities arerecorded when potential liabilities are either known or believed to be probableand can be reasonably estimated. In the event that the Company establishes a financialreserve in connection with site remediation costs, the Company records areserve for the estimated cost of the remediation, even though the costs of theremediation will likely be spread out over many years. The Company does notinclude unasserted claims in its reserves.

The Company’s liabilityestimates are based upon available facts, existing technology, past experienceand, in some instances, insurance recoveries where the remediation costs arebeing paid directly by its insurers and are generated by several means,including State-mandated schedules, environmental consultants and internalexperts, depending on the circumstances. On a consolidated basis, the Companyhas accrued $35.1 million and $34.9 million for known environmental liabilitiesas of March 31, 2007 and December 31, 2006, respectively, all of which areclassified as other non-current liabilities on our consolidated balance sheetsfor such periods. Included in the $35.1 million as of March 31, 2007 is €6.7million ($9.0 million using the Friday, March 30, 2007 exchange rate of€1.00=$1.3354) that is discounted using a 5.0% discount rate (undiscountedamount equals $13.5 million), and €1.9 million ($2.5 million) that isdiscounted using a 5.5% discount rate (undiscounted amount equals $3.2million). Included in the $34.9 million as of December 31, 2006 is €6.7 million($8.8 million using the December 31, 2006 exchange rate of €1.00=$1.3199) thatis discounted using a 5.0% discount rate (undiscounted amount equals $13.2million), and €1.9 million ($2.5 million) that is discounted using a 5.5%discount rate (undiscounted amount equals $3.2 million).  In certain cases, the Company’s remediationliabilities are payable over periods of up to 30 years.

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 it’s obligations. Consequently, the Company cannot employa present value technique to estimate fair value and, accordingly, has notaccrued for any environmental related costs to remediate soil at thesefacilities.

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

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**Item2.    Management’s Discussion and Analysisof Financial Condition and Results of Operations.**

*The following discussion containsforward-looking statements that involve numerous risks and uncertainties. Ouractual results could differ materially from those discussed in theforward-looking statements as a result of these risks and uncertainties,including those set forth in “Forward-Looking Statements” at the end of thisManagement Discussion and Analysis section and the risk factors section of theCompany’s 2006 Form 10-K. You should read the following discussion andanalysis together with our condensed consolidated financial statements and thenotes to those statements that appear elsewhere in this Quarterly Report.Amounts may not recalculate due to rounding differences.*

*OnJanuary 9, 2007, we completed the sale of our Groupe Novasep segment.  As a result, our condensed consolidatedfinancial statements have been reclassified to reflect the Groupe Novasepsegment as a discontinued operation for all periods presented.  See Note 2, “Discontinued Operations,” forfurther details.*

**General**

We are a globaldeveloper, manufacturer and marketer of technologically advanced, highvalue-added specialty chemicals and advanced materials. We serve more than60,000 customers across a wide variety of industries and geographic areas. Weoperate through six business segments: (1) Specialty Chemicals; (2) PerformanceAdditives; (3) Titanium Dioxide Pigments; (4) Advanced Ceramics; (5) SpecialtyCompounds; and (6) Electronics. Of these six segments, we acquired SpecialtyChemicals, Titanium Dioxide Pigments and Advanced Ceramics in the Dynamit NobelAcquisition.

Our net sales consist ofsales of our products, net of sales discounts, product returns and allowances.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, divestment of non-corebusinesses and debt reduction. In connection with this focus, among otherthings:

·                  We have cutcosts, reduced overhead and eliminated duplicative positions in both acquiredand existing businesses. For example, during the first quarter of 2006, weclosed facilities in the United States and the U.K. in our Wafer Reclaimbusiness in our Electronics segment. We have also announced the consolidationin 2007 of several U.K. facilities resulting from an acquisition in October2006 by our Specialty Compounds segment. We also implemented otherrestructuring measures in our other segments, including the closure of ourBaulking, U.K. facility in our Clay-based Additives business; and

·                  We completed thesale of our Groupe Novasep subsidiary in January 2007 and our United StatesWafer Reclaim business in February 2007.

**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 forSurface Treatment products in our Specialty Chemicals segment generally followsthe activity levels of metal processing manufacturers, including the automotivesupply, steel and aerospace industries. Growth in the Surface Treatment business occurred in 2006 and continuedin the first quarter of 2007 in most markets and regions served, especially inthe European automotive, general industrial and aerospace industries, as priceand volume increases offset raw material cost increases. We expect the SurfaceTreatment business to grow throughout 2007 in all markets as price and

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volume increases are expected to offset raw material cost increases andhigher personnel costs to support the continuing growth of the business.

·                  Demand for ourlithium products in the Fine Chemicals business line of our Specialty Chemicalssegment is generally driven by demand for lithium carbonate in industrialapplications, the aluminum business, glass ceramics, cement and the generaldemand in China. Sales of lithium products specifically used in life scienceapplications depend on the trends in drug development and growth in pharmaceuticalsmarkets as well as generic competition. Market conditions for lithium productsin the industries served provided increasing price trends for lithium salts in2006. Growth in the Fine Chemicals business occurred in 2006 and continued inthe first quarter of 2007 in most market segments, especially driven by lithiumsalt applications through price increases and strong demand for lithiumapplications, particularly sales of lithium specialty products to thepharmaceutical industry and lithium compounds. Tight supplies in the globalmarket and unfavorable weather conditions at the lithium ponds in Chile inearly 2006 led to shortages in lithium salts as a raw material and customerdemand for lithium carbonate was not completely satisfied. Although we expectshortages for lithium carbonate to continue, growth in the Fine Chemicalsbusiness is expected in all market segments, particularly driven by lithiumsalt applications through price increases and higher demand for lithiumspecialties.

***Performance Additives***

·                  Sales in ourColor Pigments and Services business in North America increased in 2006 onhigher construction volumes and selling price increases that were necessary torecover raw material and energy cost increases. Generally, a continuing trendtowards the increased use of colored concrete products in the North Americanconstruction market has had a positive effect on our Color Pigments andServices business line.  However,construction sales in North America were down on lower volumes and sellingprices in the first quarter of 2007 due to the general slowdown in theconstruction market.

·                  Demand incertain European end-use markets over the last few years has slowed. Thisaffected sales of Color Pigments and Services in the construction market and,as a result, we experienced a decrease in European construction volumes in ourColor Pigments and Services business in 2006. However, European construction sales in our Color Pigments and Servicesbusiness increased in the first quarter of 2007 on higher volumes and areexpected to continue to improve throughout 2007 on increased volumes resultingfrom a stronger European economy and higher selling prices.

·                  The change inthe market to environmentally advanced wood treatment chemical products, suchas alkaline copper quaternary, or ACQ, and the phase out of chromated copperarsenate, or CCA, for residential use previously had a positive impact on theTimber Treatment Chemicals business, which is a leading supplier of thesehigher margin products. However, the market position of ACQ was negativelyimpacted in 2006 and the first quarter of 2007 by customer losses andcompetitive pricing pressure. In addition, demand for treated wood continues tobe negatively impacted by the increasing use of wood substitutes.  The expiration of the ACQ patent in May 2007could also have a negative impact on the market position of ACQ’s sales andmargins.

·                  For 2006, themajor drivers of growth in the Clay-based Additives business, which suppliesspecialty rheology modifiers and additives, both clay-based and synthetic, to avariety of end-use markets, were the acquisition of Süd-Chemie’s rheologicaladditives and carbonless clay businesses, continued strength in oilfield salesand growth in additives for water-based coatings.  Growth in 2007 is expected from strength inoilfield, coatings and inks sales.

·                  Raw materialcosts have increased in general in the Performance Additives segment since 2004and continue to trend upward. In the Color Pigments and Services business,selling price increases were initiated to partially offset the increases in rawmaterial and energy costs and we have implemented further price increases inthe beginning of 2007 to offset these costs. In 2006, the Timber TreatmentChemicals business experienced record high costs for copper, a primarycomponent in ACQ, and was unable to pass on these increased material costs tocustomers in 2006.  However, in the firstquarter of 2007, selling price increases were implemented to partially offsetraw material cost increases. In the Clay-based Additives business, priceincreases were implemented in 2006 and have continued in the first quarter of2007 in a majority of product lines to partially offset raw material costincreases. Further price increases are expected in 2007 as needed to offset anyadditional increases in raw material and energy costs.

***Titanium Dioxide Pigments***

·                  Demand for ourtitanium dioxide products in anatase grade is driven mainly by demand in thesynthetic fiber industry, while demand for titanium dioxide products in rutilegrade and our functional additives is driven by demand in the coatings, paperand plastics industries.  While volumesand selling prices in the fiber anatase business increased in 2006, volumes andselling prices were lower in the first quarter of 2007 and are expected to bedown slightly throughout 2007.  Ourfunctional additives business increased in 2006 on higher selling prices andvolumes.  In the first quarter of 2007,our functional additives business was down on lower volumes, partially offsetby higher selling prices.  Growth in thisbusiness is expected in 2007 on higher selling prices.

·                  Throughout 2006,we experienced pricing pressure from global suppliers in Asia, specificallyChinese suppliers related to

25

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titanium dioxide products in anatase grade. We also experienced pricingpressures on our titanium products in rutile grade. Sales of titanium dioxideproducts in rutile grade were down slightly in 2006 as lower volumes werepartially offset by higher selling prices. Although sales of titanium dioxide products in rutile grade were lowerin the first quarter of 2007 on decreased selling prices and slightly lowervolumes, we expect sales of these products to be up in 2007 on higher volumes.

***Advanced Ceramics***

·                  Demand for ourceramic medical devices is mainly tied to the aging population in Europe andthe United States.  Although the volumeof our products used in medical device applications sold experienceddouble-digit growth each year from 2001 through 2005, in 2006 some customers inthe U.S. reduced their demand due to high inventory levels and delayedapprovals resulting in lower volumes. However, growth of our medical device applications increased slightly inthe first quarter of 2007 on higher volumes and is expected to continue toincrease throughout the year.

·                  Sales of ceramicproducts for use in cutting tool products and mechanical systems were higher in2006 as volume increases were partially offset by the negative impact ofpricing pressure from Asian competitors. Growth of ceramic products for use incutting tool products and mechanical systems increased in the first quarter of2007 and is expected to continue to increase throughout the year on highervolumes and increased market share. Selling prices in our electronic productsbusiness as well as for some Piezo applications were lower in 2006. In thefirst quarter of 2007, sales of our electronics products business were lowerprimarily on lower volumes and this is expected to continue throughout theyear.  Sales of our Piezo applicationswere higher in the first quarter of 2007 from increased volumes and areexpected to continue to increase throughout 2007.

***Specialty Compounds***

·                  Our largestproduct line in the Specialty Compounds segment is wire and cable compounds.Sales within this product line are dependent upon the telecommunications marketand related sectors, specifically demand for high-end voice and datacommunication wire and cable, for which our Specialty Compounds segment is asignificant provider of sheathing materials. Sales for these wire and cableproducts were up slightly in 2006 and were higher in the first quarter of 2007due to the acquisition of the Megolon division of Scapa Group, plc.  Growth is expected to continue throughout2007 primarily due to the acquisition of Megolon.  Newly developed non-halogen products for wireand cable data communication, military and other applications have expandedbusiness in North America and created opportunities in Europe.

·                  Most of theother end-use markets for which Specialty Compounds’ products are usedgenerally track growth of gross domestic product, but many are also applicationspecific, such as automotive. Our net sales in medical, regulated packaging andconsumer/industrial thermoplastic elastomers were up in 2006 and the firstquarter of 2007 and we expect continued growth in these markets for 2007. Weare focusing more of our efforts towards increasing high margin specialtyproducts, in particular, thermoplastic elastomers, and less of our efforts in automotiveand footwear.

·                  The price ofammonium octamolybdate (“AOM”) and polyvinyl chloride (“PVC”) resin andplasticizers, key raw materials used in the production of wire and cableproducts, has increased since 2004. Selling price increases were successfullyinitiated in 2005 and 2006 to help offset the raw materials price increase. Rawmaterial prices were lower in the first quarter of 2007 and are not expected tobe as volatile this year.

***Electronics***

·                  Demand for ourElectronics products generally follows the activity levels of semiconductor andprinted circuit board manufacturers. The global semiconductor and printedcircuit board (“PCB”) markets are cyclical in nature. Worldwide sales ofsemiconductors increased in 2006 and in the first quarter of 2007 and areexpected to continue to rise in 2007 driven by strong demand for consumerelectronics, including cell phones and PC’s. The printed circuit board industryin the United States and Europe improved in 2006, while the market in Asiaexperienced significant growth during this period.  Volumes in our electronic chemicals businessincreased in 2006 and the first quarter of 2007, particularly in Asia, whichprovides nearly half of the global market. We expect this trend to continue in2007.

·                  The price ofcertain of our products is insulated to some degree from the effect of changesin the price of semiconductors and printed circuit boards due to the fact thatthe cost of these products is generally a small component of the cost of theend product. Despite this, we have experienced pricing pressure in certainbusinesses, particularly with respect to photomasks in Europe due to veryaggressive competition. We expect that this pricing pressure will continueduring 2007.

**GlobalExposure**

We operate a geographicallydiverse business. Of our 2006 net sales, 49% were shipments to Europe, 34% toNorth America (predominantly the United States) and 17% to the rest of theworld. For a geographic description of the origin of our net sales and locationof our long-lived assets, see Note 4, “Segment Information” in our 2006 Form10-K.

We estimate that we soldto customers in more than 60 countries during this period. Currently, we serveour diverse and extensive customer base with 88 manufacturing facilities in 25countries. Consequently, we are exposed to global economic and political

26

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changes, particularlycurrency fluctuations that could impact our profitability.

Our sales and productioncosts are mainly denominated in U.S. dollars or euros. Our results ofoperations and financial condition have been historically impacted by thefluctuation of the euro against our reporting currency, the U.S. dollar. Forthe three month period ended March 31, 2007, the average exchange rate of theeuro against the U.S. dollar was higher compared to the same period in 2006. Asa result, 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 53% of our 2006 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 2006. Nonetheless, the significant pricefluctuations our raw materials have experienced in the past during periods ofhigh demand have had an adverse impact on our results of operations. Inparticular, higher prices for copper used in the Timber Treatment Chemicalsbusiness of our Performance Additives segment had a negative impact on resultsin 2006 and the first quarter of 2007. We cannot accurately predict the impactof any future price increases for raw materials or any raw material shortageson our business as a whole or in specific geographic regions. In addition, wemay not be able to pass on raw material price increases to our customers.

**EnergyCosts**

In 2006, energy purchasesrepresented approximately 5% of our cost of products sold. However, withincertain business lines, such as our Titanium Dioxide Pigments segment and theColor Pigments and Services and Clay-based Additives businesses of ourPerformance Additives segment, energy costs are more significant. The cost ofproducts sold for certain of our businesses, including Color Pigments andServices and Clay-based Additives, increases when the price of natural gas inNorth America rises. Natural gas prices were volatile and continued to increasein North America in 2006, but were relatively stable in the first quarter of2007. In contrast, natural gas prices in Europe, where our Titanium DioxidePigments segment is located, have historically been relatively stable, althoughprices were higher in 2006 and in the first quarter of 2007.

**IncomeTaxes**

The effective tax ratefor the first quarter of 2007 was 42.1% which is primarily a function offoreign rate differentials and the valuation allowance related to domesticearnings and their impact on the effective rate.  In the first quarter of2007, the worldwide valuation allowance increased by $7.3 million. The increasein the valuation allowance was primarily due to an increase of $3.7 million indeferred tax assets associated with the Company’s losses and $3.6 million inother comprehensive income. The $3.7 million increase in the valuationallowance for the first quarter of 2007 impacted the effective tax rate.

**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 4, “Segment Information,” for adiscussion of special charges and credits recorded in the three months endedMarch 31, 2007 and 2006.

**SpecialNote Regarding Non-GAAP Financial Measures**

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

**Definitionof Adjusted EBITDA**

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

·                  interestexpense;

·                  depreciationexpense;

·                  amortizationexpense, including amortization of deferred financing fees;

·                  extraordinarylosses and non-recurring charges;

27

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·                  non-cashcharges;

·                  losseson asset sales;

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

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

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

·                  anyfees and expenses related to permitted acquisitions;

·                  anydeduction for minority interest expense; and

·                  items arising inconnection with CCA litigation related to our Timber Treatment Chemicalsbusiness of our Performance Additives segment;

less:

·                  extraordinarygains and non-recurring gains;

·                  non-cashgains; and

·                  gains on assetsales,

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. Specifically, calculation of Adjusted EBITDA according to theindentures underlying our 2011 Notes and 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.

**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 vest, both of which are tied toAdjusted 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 indentures governingthe 2011 Notes and 2014 Notes contain financial covenants that are determinedbased on Adjusted EBITDA. These covenants are material terms of theseagreements, because they govern substantially all of our long-term debt, whichin turn represents a substantial portion of our capitalization. Non-compliancewith these 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 2011 Notes and the 2014 Notes. In addition, ifwe cannot satisfy these financial covenants in the indentures governing the2011 Notes and 2014 Notes, we cannot engage in certain activities, such asincurring additional indebtedness or making certain payments. Consequently,Adjusted EBITDA is critical to our assessment of our liquidity.

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

**Limitations**

Adjusted EBITDA 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 portionof interest expense, net, income tax provision (benefit), and restructuring aswell as non-recurring charges related to securities issuance, acquisitionactivities, and systems/organization establishment, generally represent charges(gains) which may significantly affect funds available to use in our operating,investing and financing activities;

28

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

·                  depreciation,amortization, non-cash (gains) charges and impairment charges, though notdirectly affecting our current cash position, represent the wear and tearand/or reduction in value of the plant, equipment and intangible assets whichpermit us to manufacture and/or market our products; these items may beindicative of future needs for capital expenditures, for development oracquisition of intangible assets or relevant trends causing asset 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. Youshould 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 GAAP financial measures and other financial information, ineach case included elsewhere in this Annual Report. We also strongly urge younot to rely on any single financial measure to evaluate our business. Ourmeasure of Adjusted EBITDA may not be comparable to those of other companies.

**Resultsof Operations**

**ActualResults of Operations**

The following tablepresents the major components of our operations on an actual basis and AdjustedEBITDA (the reconciliation to net income is set forth in—Reconciliation of NetIncome to Adjusted EBITDA for the three months ended March 31, 2007 and 2006,including as a percentage of net sales, for the periods presented. See Note 4, “SegmentInformation,” for segment information and a reconciliation to income (loss)from continuing operations before taxes and minority interest on a segmentbasis.

29

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| ** **                                                            | ** ** | **Three months ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                            | ** ** | **March 31,**               | ** ** |
| **($ in millions)**                                         | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| **Statement of operations data:**                                     | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Net sales:**                                                        | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Specialty Chemicals                                                   |       | $                                | 267.9      |   | $ | 228.1 |   |
| Performance Additives                                                 |       | 184.8                            |       | 182.5 |   |
| Titanium Dioxide  Pigments                                            |       | 116.1                            |       | 108.2 |   |
| Advanced Ceramics                                                     |       | 105.5                            |       | 92.7 |   |
| Specialty Compounds                                                   |       | 69.6                             |       | 63.2 |   |
| Electronics                                                           |       | 52.2                             |       | 49.4 |   |
| Total net sales                                                       |       | 796.1                            |       | 724.1 |   |
|                                                                  |       |                             |       |   |   |
| Gross profit                                                          |       | 257.0                            |       | 225.8 |   |
|                                                                  |       | 32.3                             | %          | 31.2 | % |
| Selling, general and  administrative expenses                         |       | 154.8                            |       | 140.6 |   |
|                                                                  |       | 19.4                             | %          | 19.4 | % |
| Restructuring charges,  net                                           |       | 4.5                              |       | 1.2 |   |
| Gain on sale of assets                                                |       | (4.8                             | )          | (0.5 | ) |
| **Operating income (loss):**                                          | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Specialty Chemicals                                                   |       | 55.6                             |       | 39.2 |   |
|                                                                  |       | 20.8                             | %          | 17.2 | % |
| Performance Additives                                                 |       | 19.3                             |       | 24.1 |   |
|                                                                  |       | 10.4                             | %          | 13.2 | % |
| Titanium Dioxide  Pigments                                            |       | 12.1                             |       | 11.9 |   |
|                                                                  |       | 10.4                             | %          | 11.0 | % |
| Advanced Ceramics                                                     |       | 18.9                             |       | 15.1 |   |
|                                                                  |       | 17.9                             | %          | 16.3 | % |
| Specialty Compounds                                                   |       | 5.1                              |       | 5.3 |   |
|                                                                  |       | 7.3                              | %          | 8.4 | % |
| Electronics                                                           |       | 6.5                              |       | 3.5 |   |
|                                                                  |       | 12.5                             | %          | 7.1 | % |
| Corporate costs                                                       |       | (15.0                            | )          | (14.6 | ) |
| Total operating income                                                |       | 102.5                            |       | 84.5 |   |
| **Other income (expenses):**                                          | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Interest expense                                                      |       | (54.7                            | )          | (39.8 | ) |
| Interest income                                                       |       | 5.1                              |       | 1.4 |   |
| Refinancing expenses                                                  |       | (0.9                             | )          | — |   |
| Foreign exchange gain  (loss), net                                    |       | 0.4                              |       | (2.9 | ) |
| Other, net                                                            |       | (0.1                             | )          | 1.6 |   |
| Income from continuing  operations before taxes and minority interest | ** ** | 52.3                             | ** ** | 44.8 | ** ** |
| Income tax provision                                                  |       | 22.0                             |       | 18.3 |   |
| Income from continuing  operations before minority interest           |       | 30.3                             |       | 26.5 |   |
| Minority  interest in continuing operations                           |       | (1.1                             | )          | — |   |
| Net income from  continuing operations                                |       | 29.2                             |       | 26.5 |   |
| Income from  discontinued operations, net of tax                      |       | 0.5                              |       | 16.5 |   |
| Gain on sale of  discontinued operations, net of tax                  |       | 115.7                            |       | — |   |
| Minority interest in  discontinued operations                         |       | (0.1                             | )          | (3.0 | ) |
| Net income                                                            |       | $                                | 145.3      |   | $ | 40.0 |   |
| **Adjusted EBITDA:**                                                  | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Specialty Chemicals                                                   |       | $                                | 68.3       |   | $ | 51.4 |   |
|                                                                  |       | 25.5                             | %          | 22.5 | % |
| Performance Additives                                                 |       | 32.6                             |       | 33.3 |   |
|                                                                  |       | 17.6                             | %          | 18.2 | % |
| Titanium Dioxide  Pigments                                            |       | 22.4                             |       | 20.9 |   |
|                                                                  |       | 19.3                             | %          | 19.3 | % |
| Advanced Ceramics                                                     |       | 28.8                             |       | 23.6 |   |
|                                                                  |       | 27.3                             | %          | 25.5 | % |
| Specialty Compounds                                                   |       | 8.1                              |       | 7.3 |   |
|                                                                  |       | 11.6                             | %          | 11.6 | % |
| Electronics                                                           |       | 9.4                              |       | 8.6 |   |
|                                                                  |       | 18.0                             | %          | 17.4 | % |
| Corporate costs                                                       |       | (13.4                            | )          | (12.3 | ) |
| Total Adjusted EBITDA (a)                                             |       | $                                | 156.2      |   | $ | 132.8 |   |

 

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(a)   This amount does not include $1.8 million and$15.9 million for the three months ended March 31, 2007 and 2006, respectively,of Adjusted EBITDA from the former Groupe Novasep segment which was sold onJanuary 9, 2007.  Total Adjusted EBITDAincluding these amounts was $158.0 million and $148.7 million for the threemonths ended March 31, 2007 and 2006, respectively.

30

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The followingtable presents the changes in the major components of our operations on ahistorical basis in dollars and percentages:
| ** **                                                                | ** ** | **Change: Three months ended March 31, 2007 versus 2006** | ** ** |
|---------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| ** **                                                                | ** ** | ** **                                                                                        | ** ** | **%** | ** ** | **FX** | ** ** | ** ** | ** ** |
| **($in millions)**                                                   | ** ** | **Total**                                                                                         | ** ** | **Change** | ** ** | **Effect (a)** | ** ** | **Organic** | ** ** |
| **Statement  of operations data:**                                        | ** ** | ** **                                                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  sales:**                                                           | ** ** | ** **                                                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Specialty  Chemicals                                                      |       | $                                                                                                 | 39.8       |   | 17.4 | % | $ | 13.6 |   | $ | 26.2 |   |
| Performance  Additives                                                    |       | 2.3                                                                                               |       | 1.3 |   | 5.7 |   | (3.4 | ) |
| Titanium Dioxide  Pigments                                                |       | 7.9                                                                                               |       | 7.3 |   | 9.6 |   | (1.7 | ) |
| Advanced  Ceramics                                                        |       | 12.8                                                                                              |       | 13.8 |   | 7.9 |   | 4.9 |   |
| Specialty  Compounds                                                      |       | 6.4                                                                                               |       | 10.1 |   | 2.5 |   | 3.9 |   |
| Electronics                                                               |       | 2.8                                                                                               |       | 5.7 |   | 1.9 |   | 0.9 |   |
| Total net sales                                                           |       | 72.0                                                                                              |       | 9.9 |   | 41.2 |   | 30.8 |   |
|                                                                      |       |                                                                                              |       |   |   |   |   |   |   |
| Gross profit                                                              |       | 31.2                                                                                              |       | 13.8 |   | 13.4 |   | 17.8 |   |
|                                                                      |       |                                                                                              |       |   |   |   |   |   |   |
| Selling, general  and administrative expenses                             |       | 14.2                                                                                              |       | 10.1 |   | 8.0 |   | 6.2 |   |
| Restructuring  charges                                                    |       | 3.3                                                                                               |       |   |   |   |   | 3.3 |   |
| Gain on sale of  assets                                                   |       | (4.3                                                                                              | )          |   |   |   |   | (4.3 | ) |
| Total operating  expenses                                                 |       | 13.2                                                                                              |       | 9.3 |   | 8.0 |   | 5.2 |   |
| **Operating  income (loss):**                                             | ** ** | ** **                                                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Specialty  Chemicals                                                      |       | 16.4                                                                                              |       | 41.8 |   | 2.6 |   | 13.8 |   |
| Performance  Additives                                                    |       | (4.8                                                                                              | )          | (19.9 | ) | 0.4 |   | (5.2 | ) |
| Titanium Dioxide  Pigments                                                |       | 0.2                                                                                               |       | 1.7 |   | 1.0 |   | (0.8 | ) |
| Advanced  Ceramics                                                        |       | 3.8                                                                                               |       | 25.2 |   | 1.6 |   | 2.2 |   |
| Specialty  Compounds                                                      |       | (0.2                                                                                              | )          | (3.8 | ) | — |   | (0.2 | ) |
| Electronics                                                               |       | 3.0                                                                                               |       | 85.7 |   | 0.1 |   | 2.9 |   |
| Corporate costs                                                           |       | (0.4                                                                                              | )          | (2.7 | ) | (0.3 | ) | (0.1 | ) |
| Total                                                                     |       | 18.0                                                                                              |       | 21.3 |   | 5.4 |   | 12.6 |   |
| **Other  income (expenses):**                                             | ** ** | ** **                                                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest expense                                                          |       | (14.9                                                                                             | )          | 37.4 |   | (1.9 | ) | (13.0 | ) |
| Interest income                                                           |       | 3.7                                                                                               |       | 264.3 |   | (0.3 | ) | 4.0 |   |
| Refinancing  expenses                                                     |       | (0.9                                                                                              | )          |   |   |   |   |   |   |
| Foreign exchange  gain (loss), net                                        |       | 3.3                                                                                               |       |   |   |   |   |   |   |
| Other, net                                                                |       | (1.7                                                                                              | )          |   |   |   |   |   |   |
| **Income  from continuing operations before taxes and minority interest** | ** ** | ** **                                                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Specialty  Chemicals                                                      |       | 16.7                                                                                              |       |   |   |   |   |   |   |
| Performance  Additives                                                    |       | (4.0                                                                                              | )          |   |   |   |   |   |   |
| Titanium Dioxide  Pigments                                                |       | (2.3                                                                                              | )          |   |   |   |   |   |   |
| Advanced  Ceramics                                                        |       | 3.2                                                                                               |       |   |   |   |   |   |   |
| Specialty  Compounds                                                      |       | (2.4                                                                                              | )          |   |   |   |   |   |   |
| Electronics                                                               |       | 4.6                                                                                               |       |   |   |   |   |   |   |
| Corporate costs                                                           |       | (8.3                                                                                              | )          |   |   |   |   |   |   |
| Total                                                                     |       | 7.5                                                                                               |       |   |   |   |   |   |   |
| Income tax  provision                                                     |       | 3.7                                                                                               |       |   |   |   |   |   |   |
| Income from  continuing operations before minority interest               |       | 3.8                                                                                               |       |   |   |   |   |   |   |
| Minority  interest in continuing operations                               |       | (1.1                                                                                              | )          |   |   |   |   |   |   |
| Net income from  continuing operations                                    |       | 2.7                                                                                               |       |   |   |   |   |   |   |
| Income from  discontinued operations, net of tax                          |       | (16.0                                                                                             | )          |   |   |   |   |   |   |
| Gain on sale of  discontinued operations, net of tax                      |       | 115.7                                                                                             |       |   |   |   |   |   |   |
| Minority  interest in discontinued operations                             |       | 2.9                                                                                               |       |   |   |   |   |   |   |
| Net income                                                                |       | $                                                                                                 | 105.3      |   |   |   |   |   |   |   |
| **Adjusted  EBITDA:**                                                     | ** ** | ** **                                                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Specialty  Chemicals                                                      |       | $                                                                                                 | 16.9       |   | 32.9 | % | $ | 3.2 |   | $ | 13.7 |   |
| Performance  Additives                                                    |       | (0.7                                                                                              | )          | (2.1 | ) | 1.0 |   | (1.7 | ) |
| Titanium Dioxide  Pigments                                                |       | 1.5                                                                                               |       | 7.2 |   | 1.9 |   | (0.4 | ) |
| Advanced  Ceramics                                                        |       | 5.2                                                                                               |       | 22.0 |   | 2.4 |   | 2.8 |   |
| Specialty  Compounds                                                      |       | 0.8                                                                                               |       | 11.0 |   | 0.2 |   | 0.6 |   |
| Electronics                                                               |       | 0.8                                                                                               |       | 9.3 |   | 0.3 |   | 0.5 |   |
| Corporate costs  and eliminations                                         |       | (1.1                                                                                              | )          | (8.9 | ) | (0.3 | ) | (0.8 | ) |
| Total Adjusted EBITDA                                                     |       | $                                                                                                 | 23.4       |   | 17.6 | % | $ | 8.7 |   | $ | 14.7 |   |

 

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(a)   The foreign exchange effect was calculatedbased on the change in the applicable rate, primarily the euro, to the U.S.dollar exchange rate for the applicable period.

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***Three months ended March 31, 2007 compared to three monthsended March 31, 2006***

**Overview**

Net sales increased $72.0million in the first quarter of 2007 compared with the same period in the prioryear driven by strong demand in a number of our segments, particularly in ourSpecialty Chemicals segment, and the positive impact of currency changes.   See further discussion by segment below.

We also had increasedoperating income and Adjusted EBITDA in the first quarter of 2007 compared withthe same period in the prior year primarily due to the sales increases notedabove. Operating income and Adjusted EBITDA were negatively impacted by higherraw material costs in most businesses, particularly from the impact of highercopper costs in our Timber Treatment Chemicals business in our Performance Additivessegment, higher zinc and other raw material costs in our Specialty Chemicalssegment and higher zinc costs in our Titanium Dioxide Pigments segment. Inaddition, higher selling, general and administrative expenses primarily relatedto increased sales volumes and higher energy costs had an unfavorable effect onoperating income and Adjusted EBITDA.

Net income fromcontinuing operations increased $2.7 million in the first quarter of 2007compared with the same period in the prior year primarily due to the reasonsnoted above. This was partially offset by higher interest expense recorded inthe first quarter of 2007 compared to the same period in the prior year due toa decrease in mark-to-market gains on our interest rate and cross-currencyhedging instruments.

Income from discontinuedoperations, net of tax and minority interest, increased $102.6 million in thefirst quarter of 2007 compared with the same period in the prior year primarilydue to the recording of a gain of $115.7 million (net of taxes) on the sale ofGroupe Novasep in the first quarter of 2007, partially offset by income fromoperating the business and the tax benefit recorded in the first quarter of2006 related to the favorable treatment on the sale of Rohner AG.

Net income increased$105.3 million in the first quarter of 2007 compared with the same period inthe prior year primarily due to the reasons noted above.

**Netsales**

*SpecialtyChemicals*.   Net sales for our Specialty Chemicalssegment increased $39.8 million over the prior year, primarily on higher volumesand selling prices. The impact of currency changes of $13.6 million also had afavorable impact on net sales. Net sales in the Surface Treatment business werefavorably impacted by growth in most markets and all regions, particularly inEuropean automotive, general industrial and aerospace applications. In the FineChemicals business, increased volumes of lithium products and higher lithiumspecialties volumes to the pharmaceutical industry had a favorable impact onsales.

*PerformanceAdditives*.   Net sales for our PerformanceAdditives segment increased $2.3 million over the prior year due to thepositive impact of currency changes of $5.7 million, as well as higher sellingprices of $6.1 million. Higher construction volumes in Europe in our ColorPigments and Services business also had a favorable impact on net sales. Theincrease in net sales were partially offset by lower volumes of ACQ products inour Timber Treatment Chemicals business, lower construction volumes in NorthAmerica in our Color Pigments and Services business and lower volumes to theoilfield and carbonless paper markets in our Clay-based Additives segment.

*TitaniumDioxide Pigments*.   Net sales for our TitaniumDioxide Pigments segment increased $7.9 million over the prior year due to thepositive impact of currency changes of $9.6 million, as well as higher sellingprices for functional additives. This was partially offset by lower volumes oftitanium dioxide products in anatase and rutile grade, as well as functionaladditives.

*AdvancedCeramics*.   Net sales for our Advanced Ceramicssegment increased $12.8 million over the prior year primarily due to thepositive impact of currency changes of $7.9 million and increased volumes. Theincreased volumes were due to higher volumes in most businesses, particularlyin mechanical systems, Piezo, cutting tool and medical applications, partiallyoffset by lower selling prices of $2.2 million.

*SpecialtyCompounds*.   Net sales for our Specialty Compoundssegment increased $6.4 million over the prior year primarily due to highervolumes resulting from an acquisition made in October 2006 in the wire andcable business and the positive impact of currency changes of $2.5 million.This was partially offset by lower selling prices of $1.2 million.

*Electronics*.  Net sales for our Electronics segment increased $2.8 million over the prioryear primarily due to the positive impact of currency changes of $1.9 millionand increased volumes in our Electronic Chemicals businesses in all regions onsales to the printed circuit board and semiconductor markets.

**Grossprofit**

Gross profit increased$31.2 million over the prior year primarily due to the sales increases notedabove, in particular selling price increases, productivity improvements and thepositive impact of currency changes of $13.4 million. This was partially offsetby raw material cost increases, particularly from the impact of higher coppercosts in our Timber Treatment Chemicals business in the

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Performance Additivessegment, higher zinc costs in the Titanium Dioxide segment, and higher zinc andother raw material costs in the Specialty Chemicals segment, and higher energycosts. Gross profit as a percentage of net sales was 32.3% in the first quarterof 2007 versus 31.2% in the first quarter of 2006.

**Selling,general and administrative expenses**

Selling, general andadministrative expenses, or SG&A, increased $14.2 million over the prioryear primarily due to the impact of currency changes of $8.0 million.  Higher SG&A costs were also recorded in anumber of our segments related to increased sales volumes. SG&A expenses asa percentage of net sales were 19.4% in the first quarter of 2007 and 2006.

**Restructuringcharges, net**

We recorded $4.5 millionof restructuring charges in the first quarter of 2007 primarily related tofacility closure costs in the Electronics segment. We recorded $1.2 million ofrestructuring charges in the first quarter of 2006 for miscellaneous restructuringactions in the Specialty Chemicals, Performance Additives and Electronicssegments for miscellaneous headcount reductions and facility closures. See Note12, “Restructuring Liability,” for further details.

**Gain onsale of assets**

We recorded gains of $4.8million and $0.5 million for the three months ended March 31, 2007 and 2006,respectively, related to asset sales.  Inthe first quarter of 2007, we sold our United States Wafer Reclaim business andreported a gain of $4.3 million.

**Operatingincome**

*SpecialtyChemicals*.   Operating income for our SpecialtyChemicals segment increased $16.4 million primarily due to higher sales in boththe Surface Treatment and Fine Chemicals businesses and the positive impact ofcurrency changes of $2.6 million. This increase was partially offset by higherraw material costs of $6.4 million primarily related to zinc and other rawmaterials and higher selling, general and administrative expenses of $3.2million primarily related to the increased sales volumes.

*PerformanceAdditives*.   Operating income decreased $4.8million over the prior year primarily from higher raw material costs of $5.3million, particularly copper costs in the Timber Treatment Chemicals business,higher depreciation and amortization costs of $4.5 million primarily due to theViance, LLC joint venture formed in January 2007 and the lower sales volumesnoted above.  The above decreases inoperating income were partially offset by increased construction volumes inEurope in our Color Pigments and Services business, higher selling prices andan inventory write-up reversal charge of $0.8 million recorded in the firstquarter of 2006.

*TitaniumDioxide Pigments*.   Operating income for ourTitanium Dioxide Pigments segment increased $0.2 million over the prior yeardue to the positive impact of currency changes of $1.0 million and higherselling prices for functional additives, partially offset by lower volumes oftitanium dioxide products in anatase and rutile grade, as well as functionaladditives, and higher energy and raw material costs of $1.2 million and $0.9million, respectively.   Higherdepreciation and amortization costs of $1.3 million also had an unfavorableimpact on operating income.

*AdvancedCeramics*.   Operating income for our AdvancedCeramics segment increased $3.8 million over the prior year primarily due toproductivity improvements and increased sales in most businesses, particularlyfrom increased volumes in mechanical systems, piezo, cutting tool and medicalapplications. Currency changes of $1.6 million also had a favorable impact onoperating income. This increase was partially offset by lower selling price of$2.2 million and increased depreciation and amortization costs of $1.4 million.

*SpecialtyCompounds*.   Operating income decreased $0.2million due to the impact of lower selling prices of $1.2 million, increaseddepreciation and amortization costs of $0.7 million and higher costs associatedwith an acquisition made in October 2006. This decrease was partially offset by higher sales volumes and lower rawmaterial costs of $1.8 million primarily related to price declines for PVCresin.

*Electronics*.  Operating income increased $3.0 million over the prior year primarily due tohigher volumes in our Electronic Chemicals businesses in all regions on salesto the printed circuit board and semiconductor markets and gains on asset salesof $4.8 million recorded in the first quarter of 2007 primarily from the saleof our U.S. Wafer Reclaim business in February 2007.  This was partially offset by higherrestructuring costs of $2.9 million primarily related to facility closurecosts.

**Otherincome (expenses)**

*Interestexpense*.  Interest expense increased $14.9 millionin the first quarter of 2007 compared to the same period in the prior year. Thefirst quarter of 2007 and 2006 included losses of $2.8 million and gains of$10.7 million, respectively, representing the movement in the mark-to-marketvaluation of our interest rate and cross-currency hedging instruments as well as$2.4 million and $2.3 million, respectively, of amortization expense related todeferred financing costs. The remaining increase of $1.3 million was primarilydue to higher interest rates.

*Interestincome*.  Interest income increased $3.7 million inthe first quarter of 2007 compared to the same period in the prior yearprimarily related to interest earned on the net cash proceeds received from thesale of Groupe Novasep in January 2007.

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*Refinancingexpenses*.   In March 2007, we expensed $0.9 millionrelated to the fourth amendment of the senior secured credit agreementresulting in a 50 basis point reduction on our new tranche G term loans.

*Foreignexchange gain (loss), net*.   In the first quarterof 2007, we had foreign exchange gains of $0.4 million compared to foreignexchange losses of $2.9 million recorded in the same period in the prioryear.  In the first quarter of 2006, theeuro strengthened from the beginning of the quarter to the end of the quartercausing a loss related to the unhedged portion of our euro-denominated debt atone of our U.K. subsidiaries. The change from the prior year is primarilyrelated to lower euro-denominated debt levels at our U.K. subsidiaries.

*Other,net*.   For the first quarter of 2006, we recorded$1.6 million of income in connection with the correction of an immaterial errorrelated to a previously unrecorded asset in the Titanium Dioxide Pigmentssegment.

**Provisionfor income taxes**

The effective income taxrate for the first quarter of 2007 was 42.1%. We recorded an income taxprovision of $22.0 million for the first quarter of 2007. The effective incometax rate compared to the federal statutory rate was negatively impacted by anincrease in the valuation allowance related to U.S. operations. The effectiveincome tax rate for the first quarter of 2006 of 40.8% was impacted by foreignrate differentials offset by the U.S. valuation allowance.

**Minority interest in continuing operations**

Minority interestrepresents the minority interest portion of the Viance, LLC joint venture thatwas completed 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 2007 was $29.2 million ascompared to net income from continuing operations of $26.5 million for thefirst quarter of 2006 for the reasons described above.

**Incomefrom discontinued operations, net of tax**

Income from discontinuedoperations, net of tax decreased to $0.5 million for the first quarter of 2007compared to income of $16.5 million for the first quarter of 2006 due to incomeearned from the segment in the first quarter of 2006 and the tax benefitrecorded in the first quarter of 2006 related to the favorable treatment on thesale of Rohner AG.  As noted above, theGroupe Novasep segment was sold on January 9, 2007.

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

Gain on sale ofdiscontinued operations, net of tax was $115.7 million for the first quarter of2007 as a result of the sale of Groupe Novasep.

**MinorityInterest in discontinued operations**

Minority interest in discontinuedoperations represents the minority interest portion of Groupe Novasep’s netincome for the first quarter of 2007 and 2006.

**Netincome**

Net income for the firstquarter of 2007 was $145.3 million as compared to net income of $40.0 millionfor the first quarter of 2006 for the reasons described above.

**AdjustedEBITDA**

*SpecialtyChemicals*.   Adjusted EBITDA for our SpecialtyChemicals segment increased $16.9 million primarily due to higher sales in boththe Surface Treatment and Fine Chemicals businesses and the positive impact ofcurrency changes of $3.2 million. This increase was partially offset by higherraw material costs and higher selling, general and administrative expenses asdiscussed above in operating income.

*PerformanceAdditives*.   Adjusted EBITDA for our PerformanceAdditives segment decreased $0.7 million over the prior year primarily fromhigher raw material costs and lower sales volumes, partially offset by higherselling prices and the positive impact of currency changes of $1.0million.  See discussion above inoperating income for further details.

*TitaniumDioxide Pigments*.   Adjusted EBITDA for ourTitanium Dioxide Pigments segment increased $1.5 million over the prior yeardue to the positive impact of currency changes of $1.9 million and higherselling prices for functional additives. Excluding the impact of currency changes, Adjusted EBITDA was lowerprimarily from lower sales volumes and higher energy and raw materialcosts.  See discussion above in operatingincome for further details.

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*AdvancedCeramics*.   Adjusted EBITDA for our AdvancedCeramics segment increased $5.2 million over the prior year primarily due toproductivity improvements, increased sales and the positive impact of currencychanges of $2.4 million. This increase was partially offset by lower sellingprices.  See discussion above inoperating income for further details.

*SpecialtyCompounds*.   Adjusted EBITDA increased $0.8 millionprimarily due to higher sales volumes and lower PVC resin raw materialcosts.  This was partially offset bylower selling prices and higher costs associated with an acquisition made inOctober 2006.

*Electronics*.  Adjusted EBITDA increased $0.8 million over the prior year primarily due tohigher volumes in our Electronic Chemicals businesses in all regions on salesto the printed circuit board and semiconductor markets and the positive impactof currency changes of $0.3 million.

*Corporate*.  Adjusted EBITDA loss at Corporate increased $1.1 million primarily due tohigher Corporate costs to meet the requirements of being a public company.

*Discontinuedoperations*. Adjusted EBITDA from discontinued operationsdecreased $14.1 million over the prior year primarily due to the sale of theGroupe Novasep segment on January 9, 2007.

***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)**                                         | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Net income                                                            |       | $                                | 145.3      |   | $ | 40.0 |   |
| Income from  discontinued operations, net of tax                      |       | (0.5                             | )          | (16.5 | ) |
| Gain on sale of  discontinued operations, net of tax                  |       | (115.7                           | )          | — |   |
| Minority interest  in discontinued operations                         |       | 0.1                              |       | 3.0 |   |
| Net income from  continuing operations                                |       | 29.2                             |       | 26.5 |   |
| Income tax  provision                                                 |       | 22.0                             |       | 18.3 |   |
| Minority  interest in continuing operations                           |       | 1.1                              |       | — |   |
| Income from continuing operations before taxes and minority  interest |       | 52.3                             |       | 44.8 |   |
| Interest expense  (a)                                                 |       | 54.7                             |       | 39.8 |   |
| Interest income                                                       |       | (5.1                             | )          | (1.4 | ) |
| Depreciation and  amortization                                        |       | 53.2                             |       | 43.7 |   |
| Restructuring  and related charges                                    |       | 4.5                              |       | 1.2 |   |
| CCA litigation  defense costs                                         |       | 0.1                              |       | 0.3 |   |
| Systems/organization  establishment expenses                          |       | 0.9                              |       | 1.9 |   |
| Cancelled  acquisition and disposal costs                             |       | 0.1                              |       | 0.6 |   |
| Cost incurred  related to debt modifications                          |       | 0.9                              |       | — |   |
| Inventory  write-up reversal                                          |       | —                           |       | 0.8 |   |
| Gain on sale of  assets                                               |       | (4.8                             | )          | (0.5 | ) |
| Foreign exchange  (gain) loss                                         |       | (0.4                             | )          | 2.9 |   |
| Other                                                                 |       | (0.2                             | )          | (1.3 | ) |
| Total Adjusted  EBITDA (b)                                            |       | $                                | 156.2      |   | $ | 132.8 |   |

 

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(a)         Includes losses of $2.8 million andgains $10.7 million for the three months ended March 31, 2007 and 2006,respectively, representing the movement in the mark-to-market valuation of theCompany’s interest rate and cross-currency hedging instruments.

(b)        This amount does not include $1.8million and $15.9 million for the three months ended March 31, 2007 and 2006,respectively, of Adjusted EBITDA from the former Groupe Novasep segment whichwas sold on January 9, 2007. Total Adjusted EBITDA including these amounts was$158.0 million and $148.7 million for the three months ended March 31, 2007 and2006, respectively.

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**Liquidityand Capital Resources**

**CashFlows**

*Unlessotherwise noted, all amounts below which are denominated in currencies otherthan the U.S. dollar are converted at the Friday, March 30, 2007 exchange rate.*

*OperatingActivities*.   Net cash provided by operatingactivities was $70.7 million and $47.6 million for the three months ended March31, 2007 and 2006, respectively. Net cash from operating activities increasedin 2007 primarily from lower cash interest expense and higher operating income,partially offset by higher operating working capital.

*InvestingActivities*.  Net cash provided by investingactivities was $463.3 million for the three months ended March 31, 2007. Netcash used in investing activities was $43.1 million for the three months endedMarch 31, 2006. Net cash from investing activities increased in 2007 primarilydue to the proceeds from the sale of the Groupe Novasep segment and theproceeds received from the formation of the Viance, LLC joint venture in thePerformance Additives segment. For the three months ended March 31, 2006, netcash used in investing activities was primarily comprised of capitalexpenditures.

*FinancingActivities*.   Net cash used in financing activitieswas $66.6 million and $62.2 million for the three months ended March 31, 2007and 2006, respectively, and was comprised of scheduled payments for long-termdebt.

**Liquidity**

Our primary source ofliquidity has been and will continue to be cash generated from the operationsof our subsidiaries. In addition, the following events are also sources ofliquidity:

·                  On January 2,2007, our wholly-owned subsidiary and Rohm and Haas Company formed Viance, LLC,a joint venture company. We received cash proceeds of $76.6 million and usedapproximately $1.0 million to pay fees and expenses associated with thistransaction. A total amount of $9.0 million from both parties wasdesignated as a working capital contribution to the joint venture. Theremainder was used for general corporate purposes.

·                  On January 9,2007, we sold our Groupe Novasep subsidiary. We received net cash proceeds of$426.2 million in the first quarter of 2007. We expect to incur additionalprofessional fees of approximately $2.9 million related to this sale.

·                  On April 13,2007, we provided notice that we have elected to redeem our outstanding 10 5/8%Senior Subordinated Notes due 2011 in the aggregate principal amount of $273.4million on May 15, 2007.  In connectionwith this expected repayment, redemption premiums of $14.5 million and accruedand unpaid interest of $14.5 million to the redemption date will be paid. Weentered into the fourth amendment of our senior secured credit agreement onMarch 23, 2007 to, among other things, permit the redemption any time on orafter May 15, 2007 of our outstanding 2011 Notes without a concurrent term loanrepayment.

We expect the interest savings associated with the reduction of debt tolargely offset the historic cash flow from the Groupe Novasep subsidiary.

·                  On February 12,2007, we completed the sale of our United States Wafer Reclaim business forapproximately $11.0 million in cash and long-term notes receivable. Theproceeds were used for general corporate purposes.

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 or other sources, and we may not have access tothese sources for a variety of reasons. See Item 1, “Business,” andItem 1A, “Risk Factors” in our 2006 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 2007 and the foreseeable futureto make required payments of principal and interest on our debt and fund ourworking capital and capital expenditure requirements. We are taking actions toreduce costs and exit unprofitable businesses, in part to improve our long-termliquidity.  We expect this to furtherimprove our short and long-term liquidity. If our cash flow from operations andborrowings under our revolving credit facility are insufficient to fund ourcurrently existing liquidity requirements, we may be forced to use other meansavailable to us, such as reduce or delay capital expenditures and seekadditional capital. We may not have adequate capital for future acquisitions, businesscombinations or similar transactions.

As of March 31, 2007, wehad actual total indebtedness of $2,785.5 million.  As of March 31, 2007, the revolving creditfacility under the senior secured credit facilities provided for additionalborrowings of up to $222.7 million, after giving effect to $27.3 million ofletters of credit issued on our behalf. As of March 31, 2007, there were nooutstanding borrowings under the revolving credit facility.

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As of March 31, 2007, wehad cash and cash equivalents of $491.4 million primarily from the net cashproceeds received from the sale of Groupe Novasep in January 2007.

*Seniorsecured credit facilities*.  The senior securedcredit facilities, as amended, consist of:

·                  tranche A-1 termloans in an aggregate principal amount of €32.3 million (or $43.1 millionat March 31, 2007) and tranche A-2 term loans in an aggregate principal amountof €140.6 million (or $187.7 million at March 31, 2007), each maturing onJuly 30, 2011 and bearing interest at Adjusted EURIBOR plus 2.25%;

·                  tranche E termloans in an aggregate principal amount of $1,122.1 million at March 31, 2007,maturing on July 30, 2012 and bearing interest at the Company’s option ofeither (i) Adjusted LIBOR plus 2.00% or (ii) ABR plus 0.75%;

·                  tranche G termloans in an aggregate principal amount of €269.3 million (or $359.6 million atMarch 31, 2007) maturing on July 30, 2012 and bearing interest of AdjustedLIBOR plus 2.25%; and

·                  a revolvingcredit facility in an aggregate principal amount of $250.0 millionmaturing on July 30, 2010, bearing interest at the Company’s option ofeither (i) Adjusted LIBOR plus 2.25% or (ii) ABR plus 1.00%. As ofMarch 31, 2007, we had no borrowings outstanding under this facility and hadoutstanding letters of credit of $27.3 million that reduced our availabilityunder the credit facility.

The U.S. dollarequivalents of term loans denominated in euros are shown based on the exchangerate on Friday, March 30, 2007 of €1.00 = $1.3354. In each case, theinterest rates per year are subject to step-downs determined by reference to aperformance test. Adjusted LIBOR is the London inter-bank offered rate adjustedfor statutory reserves. ABR is the alternate base rate, which is the highest ofCredit Suisse’s prime rate and the federal funds effective rate plus 0.5%.Tranche A-1 and A-2 term loans are payable in January and July of eachyear at escalating percentages of the original principal amount. Tranche Eand tranche G term loans are payable in January and July of each year atamounts equal to 0.5% of the principal amount of the former tranche D termloans and tranche F term loans, respectively, with the remainder due atthe final maturity date.

The Company’s borrowingsand the borrowings of Rockwood Specialties Limited under the senior securedcredit facilities are guaranteed and secured by assets and pledges of capitalstock.

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 documents relatedto certain indebtedness and to enter into sale leaseback transactions. Inconnection with the fourth amendment of our senior secured credit agreement,substantially all of the baskets relating to the above restrictions were reset.

*2011Notes and 2014 Notes*.   The Company’s 2011 Noteshad an aggregate principal amount of $273.4 million at March 31, 2007, andmature on May 15, 2011 and the 2014 Notes have an aggregate principalamount of €375.0 million ($500.8 million at March 31, 2007) in the case of theEuro notes and $200.0 million in the case of the U.S. Dollar notes, and matureon November 15, 2014. In connection with the IPO, $101.6 million, or 27%,of the 2011 Notes were redeemed. Interest on both the 2011 Notes and 2014 Notesis payable semi-annually on May 15 and November 15. Interest on the2011 Notes accrues at the rate of 10.625% per year, and interest on the 2014Notes accrues at the rate of 7.625% in the case of Euro notes and 7.500% in thecase of U.S. Dollar notes. Certain of our domestic subsidiaries guarantee the2011 Notes and 2014 Notes on a senior subordinated unsecured basis.  As noted above, we provided notice that wehave elected to redeem our outstanding 2011 Notes on May 15, 2007.

The 2011 Notes and 2014Notes contain various affirmative and restrictive covenants. The restrictivecovenants limit our ability, and the ability of our restricted subsidiaries,to, among other things, incur or guarantee additional indebtedness (asdescribed below under “Covenant Compliance”), pay dividends or make otherequity distributions or repurchase capital stock, make investments or otherrestricted payments, create liens, transfer or sell assets, restrict dividendsor other payments to us, engage in transactions with affiliates, and merge orconsolidate with other companies or sell substantially all of our assets.

*Covenantcompliance.*   In addition to the affirmative andrestrictive covenants, the senior secured credit agreement contains thefollowing financial covenants that are determined based on our Adjusted EBITDA,which reflects management’s interpretations thereof:

·                  a maximum totalleverage ratio: for the twelve-month period ended March 31, 2007, net debt(total debt plus capital lease obligations, minus cash up to a maximum of$100.0 million) to Adjusted EBITDA must be less than 5.75 to 1; for suchperiod, our ratio equaled 4.58 to 1; and

·                  a minimuminterest coverage ratio: for the twelve-month period ended March 31, 2007,Adjusted EBITDA to cash interest

37

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expense (interest expense, net excluding deferred debt issuance costamortization and the movements in the mark-to market value of our interest rateand cross-currency interest rate derivatives) must be at least 1.75 to 1; forsuch period, our ratio equaled 3.02 to 1.

Please see Item 2,Management’s Discussion and Analysis of Financial Condition and Results ofOperations—“Definition 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 defaults could result in a default under the seniorsecured credit agreement and the lenders could elect to declare all amountsborrowed immediately due and payable. Because the indentures governing the 2011Notes and the 2014 Notes define an event of default to include, among otherthings, a default under any other debt obligation in excess of $35.0 millionthat could cause the acceleration of such obligation, any acceleration underthe senior secured credit agreement would also result in a default under theindentures governing these notes, which could lead to the note holders electingto declare the principal, premium, if any, and interest on the then outstandingnotes immediately due and payable. The senior secured credit agreement containsa similar cross default provision for indebtedness in excess of$30.0 million, therefore, a default under the indentures governing the2011 Notes and 2014 Notes or other indebtedness may likewise cause the lendersto declare the principal and interest on the outstanding senior secured creditfacilities immediately due and payable.

The indentures governingthe 2011 Notes and 2014 Notes prohibit us from incurring additional debt,subject to certain permitted incurrences, unless the fixed charge coverageratio, which is the ratio of Adjusted EBITDA (as defined therein excludingcertain adjustments permitted under the senior secured credit agreement) tofixed charges (as defined therein), for the most recently ended four fiscalquarters is at least 2.00 to 1. In addition, the indentures prohibit us frommaking restricted payments (such as dividends or other equity distributions,repurchases of capital stock or restricted investments), subject to certainpermitted payments, unless, among other things, the fixed charge coverage ratiofor the most recently ended four fiscal quarters is at least 2.00 to 1. For thefour-fiscal quarter period ended March 31, 2007, the fixed charge coverageratio equaled 3.02 to 1. This covenant is a material term of the indenturesgoverning the 2011 Notes and 2014 Notes.

We were in compliancewith all of the above covenants as of March 31, 2007 and December 31,2006.

Given our use of AdjustedEBITDA (see “Special Note Regarding Non-GAAP Financial Measures” for thedefinition of Adjusted EBITDA and management’s uses of Adjusted EBITDA) as aliquidity measure, the following table presents a reconciliation of net cashprovided by operating activities to Adjusted EBITDA:
|                                                                                                                        | ** ** | **Three months ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                             | ** ** | **March 31,**               | ** ** |
| **($ in millions)**                                                                                          | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Net cash  provided by operating activities from continuing operations                                                  |       | $                                | 69.1       |   | $ | (5.8 | ) |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions                |       | 25.0                             |       | 78.5 |   |
| Current portion  of income tax provision                                                                               |       | 12.1                             |       | 10.9 |   |
| Interest  expense, net, excluding amortization of deferred financing costs and  unrealized losses/gains on derivatives |       | 44.4                             |       | 46.8 |   |
| Restructuring  and related charges                                                                                     |       | 4.5                              |       | 1.2 |   |
| CCA litigation  defense costs                                                                                          |       | 0.1                              |       | 0.3 |   |
| Systems/organization  establishment expenses                                                                           |       | 0.9                              |       | 1.9 |   |
| Cancelled  acquisition and disposal costs                                                                              |       | 0.1                              |       | 0.6 |   |
| Cost incurred  related to debt modifications                                                                           |       | 0.9                              |       | — |   |
| Inventory  write-up reversal                                                                                           |       | —                           |       | 0.8 |   |
| Bad debt  provision                                                                                                    |       | (0.6                             | )          | (0.6 | ) |
| Gain on sale of  assets                                                                                                |       | (0.1                             | )          | (0.5 | ) |
| Other                                                                                                                  |       | (0.2                             | )          | (1.3 | ) |
| Total Adjusted  EBITDA                                                                                                 |       | $                                | 156.2      |   | $ | 132.8 |   |

 

***Contractual Obligations***

The Company is obligatedto make future payments under various contracts such as debt agreements(including scheduled cash interest payments), operating lease agreements, andunconditional purchase obligations. A discussion of these contractualobligations is included in the Company’s 2006 Form 10-K. As noted above,the Company provided notice that it has elected to redeem its outstanding 2011Notes in the aggregate principal amount of $273.4 million on May 15, 2007. As aresult, this amount has been classified as a current liability as of March 31,2007. In addition, the Company adopted FIN 48, “*Accountingfor Uncertainty in Income Taxes—An Interpretation of FASB StatementNo. 109,*” in the first quarter of 2007. As a result of theimplementation of FIN 48, the Company recognized a $1.0 millionincrease in the liability for unrecognized tax benefits. The total amount ofunrecognized tax benefits as of March 31, 2007 was $44.7 million andhave been classified as non-current income tax liabilities in the condensedconsolidated balance sheets (see Note 9, “Income Taxes,” for furtherdetails). Except for the reclassification of the 2011 Notes and the adoption ofFIN 48, there have been no other significant changes to these contractualobligations as of March 31, 2007.

***Capital Expenditures***

Rockwood’s capitalexpenditures in the first quarter of 2007 consisted primarily of replacementsof worn, obsolete or damaged equipment as well as investments in new equipment,mostly for our Advanced Ceramics, Specialty Chemicals and Titanium Dioxide Pigmentssegments.

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For the three monthsended March 31, 2007 and 2006, our capital expenditures, excluding capitalleases, were $47.3 million and $37.2 million, respectively. Capitalexpenditures for each of our reporting segments is provided in the followingtable:
| ** **                         | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
|------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|-----------------|------------|---------------|------------|------------------|------------|
| ** **                         | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
| **($ in millions)**      | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **Electronics** | ** ** | **Corporate** | ** ** | **Consolidated** | ** ** |
| Three months  ended March 31, 2007 |       | $        | 15.4       |            | $     | 7.1          |       | $       | 12.3       |          | $     | 8.7             |       | $        | 1.4        |             | $     | 1.8 |   | $  | 0.6 |   | $  | 47.3 |   |
| Three months ended March  31, 2006 |       | 10.3          |       | 5.8             |       | 10.4         |       | 5.3          |       | 1.8           |       | 1.7             |       | 1.9           |       | 37.2             |       |
|                                    |            |               |            |                 |            |              |            |              |            |               |            |                 |            |               |            |                  |            |  |  |  |  |  |  |  |  |

 

We may incur future costsfor capital improvements and general compliance under Safety, Health andEnvironmental (“SHE”) laws. For the year ended December 31, 2006, our capitalexpenditures for SHE matters totaled approximately $35.3 million, excludingcosts to maintain and repair pollution control equipment. For 2007, 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.

***Foreign currency related transactions***

As of March 31, 2007,based on the Friday, March 30, 2007 exchange rate of €1.00 = $1.3354,$1,164.0 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**

See Note 8, “Long-TermDebt,” for guarantees related to contract completion, regulatory compliance andproduct performance.

**Commitmentsand Contingencies**

See Note 13, “Commitmentsand Contingencies,” for a discussion of the Company’s Commitments andContingencies.

**CriticalAccounting Policies and Estimates**

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

·                  the fair valuesof assets acquired and liabilities assumed in business combinations;

·                  the use andrecoverability of inventory;

·                  the valuation ofdeferred tax assets;

·                  the amount ofunrecognized tax benefits in accordance with FIN 48;

·                  impairment ofgoodwill, property, plant and equipment and other intangible assets; and

·                  the useful livesof 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 theCompany’s 2006 Form 10-K. There have been no significant changes to thesecritical accounting policies and estimates as of March 31, 2007.

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**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,” “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:

·                  ourbusiness strategy;

·                  competitivepricing or product development activities affecting demand for our products;

·                  fluctuationsin interest rates, exchange rates and currency values;

·                  availabilityand pricing of raw materials;

·                  fluctuationsin energy prices;

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

·                  changesin the general economic conditions in North America and Europe and in otherlocations in which we currently do business;

·                  technologicalchanges affecting production of our materials;

·                  ourhigh level of indebtedness;

·                  governmentaland environmental regulations and changes in those regulations;

·                  hazardsassociated with chemicals manufacturing;

·                  risksassociated with negotiating, consummating and integrating acquisitions;

·                  risksassociated with competition and the introduction of new competing products,especially in the Asia-Pacific region; and

·                  risks associatedwith international sales and operations.

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

**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 ofthe Company’s market risk is included in the Company’s 2006 Form 10-K. Therehave been no significant changes to these market risks as of March 31, 2007.

**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, 2007 and concluded that our disclosurecontrols and procedures are effective. In connection with this evaluation, ourmanagement did not identify any change in our internal control over financialreporting that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting during our first quarterof 2007.

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**PART II – OTHER INFORMATION**

**Item1.  Legal Proceedings.**

We are involved invarious legal proceedings, including commercial, product liability,intellectual property and environmental matters of a nature considered normalto our business. However, we do not believe that there is any individual legalproceeding that is likely to have a material adverse effect on our business orfinancial condition. We cannot predict the outcome of any litigation or thepotential for future litigation.

**Item1A. Risk Factors.**

A discussion of theCompany’s risk factors is included in the Company’s 2006 Form 10-K.  Therehave been no significant changes to these risk factors as of March 31, 2007.

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

None.

**Item3.  Defaults upon Senior Securities.**

None.

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

None.

**Item5.  Other Information.**

None.

**Item6.  Exhibits.**
| 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 10,  2007 |
|   |                         |   |
|   |                         |   |
|   | ROCKWOOD HOLDINGS, INC. |
|   |                         |
|   |                         |
|   | By:                          | /s/ ROBERT J. ZATTA |   |
|   |                         | Robert J. Zatta |
|   |                         |  Senior  Vice President and Chief Financial Officer |
|   |                         |  Date: May 10,  2007 |

 

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